“This pandemic will change a lot of things in terms of how people approach crises in the future,” Citi’s chief executive for Kenya and east Africa, Martin Mugambi, tells Euromoney.
Already working with the central bank to offer loan extensions and restructurings to personal borrowers and small and medium-sized enterprises affected by Covid-19, Kenya’s banks are also trying to tackle the health crisis with direct aid.
“The regulator asked banks to put together a fund to buy ventilators or buy equipment and banks are going to respond to that, probably by way of a fund,” says Mugambi.
“By different metrics, it will be a very coordinated response. This is not viewed as a government-only problem, but one in which the private sector is engaged, as are the banks.”
Even when the crisis comes to an end, digital money as a payment channel will remain strong- Martin Mugambi, Citi
The Kenya Banking Association is gathering bank contributions of KSh1 billion ($9.4 million) that will be channelled into Kenya’s Covid-19 Emergency Response Fund set up by the Kenyan president.
Citi will contribute to the fund.
Citi is also reviewing its local corporate social responsibility policy in order to better direct its spending, as well as working with associations such as AMCAM to work out what it can do as a group.
“We’re looking at private-sector activities that would be formally rolled out, or the specific purchase of equipment or medical accessories,” he says.
The Citi foundation has also pledged $2.5 million in relief support across EMEA, including working towards funding relief efforts in the Democratic Republic of Congo, South Africa, Cameroon, Zambia, Lebanon and Egypt.
Alongside direct aid, the bank is working hard to support its clients. Baseline growth in Kenya is estimated to fall from 6.2% to 3.4%, with SMEs and the informal economy expected to suffer the most.
“We have very definite plans to support our customers, including the government of Kenya, through the cycle,” says Mugambi.
“Whether it is helping them take advantage of the low oil prices, provide working capital or liquidity support, we are doing our part on the business side to support our customers through this cycle.”
Kenyan banks will also allow personal borrowers who get into difficulty to extend their loans for up to a year, as well as offering other restructuring arrangements.
Stimulus measures introduced by the central bank, which include cutting the benchmark lending rate by a larger-than-expected 100 basis points and reducing the amount of cash banks are required to hold as reserves, should go some way to alleviating pressure on the banks.
“Our focus is to support our customers through the cycle,” Mugambi says. “Our view is that the pandemic will come to an end and there will probably be a strong V-shaped recovery. Our balance sheet remains strong. We are well positioned to weather the storm.”
Around 65% of Citi’s Kenyan lending is to subsidiaries of multinationals, 20% to local corporates and 15% to banks.
“We expect very few requests for loan restructurings and forbearance, and those will probably come from our local corporates,” he says.
“We don’t expect a wholesale deterioration of our portfolio, in fact we expect we will be able to support the subsidiaries of our multinational clients and their supply chains by making sure they are well funded,” he says.
Citi has interbank and dollar clearing facilities with around 12 of Kenya’s top tier banks, which are largely well capitalized, so lending limits will not change.
The bank is also helping customers deal with the devaluation of the Kenyan shilling and to take advantage of lower oil prices.
The decision by Kenya’s parliament in November to lift an interest rate cap that has hampered credit growth is more important than ever as the country’s SME sector faces unprecedented challenges.
And Kenya’s banks have a huge role to play helping SMEs weather the downturn, as they draw on overdraft and working capital facilities to pay employees and manage overheads.
“Banks are increasingly driving credit growth through risk-based lending and which is in turn gradually driving up credit extension into the real economy,” says Mugambi.
“It is not only the right business to do, but it also creates jobs and makes a dent in reducing unemployment. Credit extension to SMEs needs to be sustained and given to SMEs.”
Lending to SMEs was stifled by banks’ inability to appropriately price risk, so rather than extend credit at lower rates as the government had intended, bank lending dried up.
Credit extension to the private sector is around 7.7% of bank lending and the intention is to grow that to 15%, says Mugambi, but it grew at just 6% at the beginning of this year.
“Demand for credit will certainly increase, as you can imagine,” he says. “Banks have a responsibility to continue extending credit through this cycle and this follows a pragmatic conversation between the industry and the regulator on the same.”
The crisis also highlights the importance of digital and mobile banking, and will accelerate its adoption says Mugambi. Already 50% of Kenya’s GDP is transacted through mobile channels, but with cash itself seen as a potential health risk, Kenya’s president is urging the population to use mobile payments more.
“Use of mobile money as a non-cash payment has consistently grown at a strong pace and we’ve seen the utilization of mobile channels increase,” says Mugambi. “Even when the crisis comes to an end, digital money as a payment channel will remain strong.”
Kenya’s central bank is working to bring digital lenders under its supervision. Regulating the industry will help crack down on predatory lending practices and control the pricing of credit.
“Parliament has commissioned a study of all the digital lenders in the industry, which will inform legislation that will potentially regulate the digital lenders as part of the Banking Act,” he says. “Once the digital lenders are supervised by the central bank, I think a lot will adjust their business models.”
As calls for debt relief across Africa increase and while the Kenyan government is seeking emergency assistance from the IMF of up to $350 million and $750 million from the World Bank, Mugambi does not expect Kenya will itself default on its debt.
“I do not see Kenya defaulting on any of its obligations, my belief is that Kenya will continue to service its debt.”
Last week the World Bank disbursed $50 million in immediate funding to Kenya.