EIB banking on new business in East Africa

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Offering credit to East African banks might not be many people’s idea of traditional development aid. Yet promoting private small and medium enterprise, alongside funding for infrastructure projects that will help develop local businesses, lies at the heart of the new strategy for Africa.

Dating back to the Cotonou Agreement, signed in 2000 by the EU and 78 African, Caribbean and Pacific states in Benin, the strategic goals are changing with the EU focusing much more on increasing stability and resilience by supporting economic development programmes to defuse migration pressures.

The Luxembourg-based European Investment Bank (EIB) lends €700m per year to banks and financial sector firms across sub-Saharan Africa. The bank, which is jointly owned by the EU’s 28 countries, has been active in East Africa since the 1960s and has had a regional bureau in Nairobi since 2005.

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The EIB-backed lending has however changed over the years. In 2016, 49% of EIB-backed lending in Africa supported private sector investment by small and medium sized businesses.

“There is clearly a fairly large appetite,” says Catherine Collin, the bank’s regional representative in East Africa, of the credit lines in euros, dollars or local currency that the EIB and its partners are offering to local banks.

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Alongside the credit, the EIB offers technical assistance programmes for banks and the local entrepreneurs who are the intended recipients of funding, alongside programmes improve financial literacy.

“We were asked by EU member states to target more the training needs of final beneficiaries,” says Collin.

Thriving agribusinesses

In 2015, the EIB began a €80m credit line earmarked for agribusinesses, as well as firms operating in the energy, manufacturing and service sectors. Three additional credit lines, totalling €170m, for small business lending across Kenya, Tanzania, Uganda and Rwanda, as well as the Democratic Republic of Congo and Mauritius, were approved last December by the EIB’s Board.

“It’s not just money that is going to local banks’ liquidity. The money is meant to support local SMEs, and we monitor as best as we can that this is the case,” says Collin.

“It’s not subsidised. These are priced according to market and risk assessment, and the only soft element is the technical assistance that we offer.”

That said, part of the attractiveness of borrowing from the EIB lies in its Triple-A credit rating, which allows it to undercut the rates offered by commercial banks.

The value of development finance institutions, such as the EIB, is as market-makers. Their large capital base and access to cheap credit allows them to “prime the pump”, taking risks that commercial lenders will not take.

“We can’t go over 7 years for local currency, which is already quite long in these markets. We are AAA rated and we usually pass on the benefit of our lower funding costs to our clients,” says Collin.

Interest rate cap and political uncertainty

However, the region’s economic waters have become choppier.

In September 2016, Kenyan President Uhuru Kenyatta signed a Banking Bill imposing a cap on interest rates on loans at no more than 4% above the central bank lending rate.

Collin says that the rate cap has hurt local banks and that the EIB has seen a lower appetite for small business lending in Kenya.

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“Local commercial banks cannot reflect and price the risk attached to SME lending,” she says, adding that “there is less appetite from the banks since this. There have also been a few bank failures in the region recently.”

Three major Kenyan lenders collapsed in 2016 – Chase, Dubai Bank and Imperial Bank – amid accusations of fraud and weak supervision. Neighbouring Uganda also saw several high-street lenders go into receivership.

“Until last year, we had been surfing on a nice wave,” says Collin.

“Things have become a bit harder because of the interest rate cap and political uncertainty. The political situation has an impact. As soon as it affects the economy it affects us. You can’t force people to lend.”

“Local banks are in a ‘wait and see’ position,” adds Collin.

Despite the political uncertainty, the EIB’s mandate is likely only to get larger in the near future.

The Bank will be at the heart of the Juncker Commission’s External Investment Plan – set to be a hot topic at next week’s EU-African Union summit in Côte d’Ivoire – to ramp up private sector investment and the involvement of European companies in the region.