With the current period of macro-economic uncertainty facing many African economies beginning with political uncertainties, debt sustainability constraints and changes in risk pricing parameters, many governments are confined in terms of how much capital they can access in international markets.
Many have turned to domestic borrowing. Local banks perceive public debt to be safer than lending to the private sector, so they allocate a greater share of their loan portfolio to public rather than private sector clients. This results in private sector businesses, like SMEs, being crowded out of the lending market, and often unable to access affordable financing for their business needs.
Improved access to financing for the SME Sector is important to boost growth and continue to create jobs for the millions of young Kenyans entering the workforce each year.
One of the organizations that is supporting Kenya’s private sector to access affordable credit for growth is the European Investment Bank. The multilateral bank, which is owned and governed by the 27 EU Member States, operates globally under its specialized arm, EIB Global.
EIB Global is not able to directly support SMEs since they mostly need relatively small loans, but through the use of intermediaries such as local banks and financial institutions, it can direct its support to this sector. EIB Global does this by lending money to a local bank, such as Equity Bank or Co-operative Bank. The credit comes with favorable terms including longer tenures and more affordable rates. The local banks are then expected to lend the money to local SMEs, passing along the same favorable terms.
One example of an SME that has benefited from the EIB partnership with local banks is Equity Afia – Donholm branch, a medical franchise network that operates in Nairobi’s Eastlands area.
“We started with just a few clinics,” said Dr. Anthony Kinyanjui who runs Equity Afia clinics in Eastlands, Nairobi. “Despite the high population in Eastlands and the potential for growth, we weren’t able to expand. Our biggest obstacle to expansion was access to affordable capital,” said Kinyanjui.
This changed when an opportunity for funding from the European Investments Bank (EIB) through Equity Bank was presented. “We had looked at the different options that were available for the financing of our business. The opportunity to be funded by the EIB came in handy,” said Kinyanjui.
“We were able to expand to every estate in the Eastlands area in Nairobi. With this expansion, I am now able to go to the people and offer them quality health care that is affordable.” He has also been able to create jobs within the areas that he serves. “We started with one clinic having only 4 to 5 staff and expanded to a network having 150 workers within Eastlands,” said Dr. Kinyanjui.
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When Bizna Kenya looked at the funding model that benefited Kinyanjui’s medical
business, we found out that Equity Afia is one of many public and private entities that have benefited from European Investment Bank support within the country and the larger African continent.
For instance, in 2023, the EIB provided more than EUR 3.2 billion (Sh. 604.8 billion) for public and private investment across the continent. Out of this amount, EUR 1.1 billion (Sh. 158.4 billion) was used to support the private sector. Since 2008, the EIB has provided more than EUR 22 billion (Sh. 3.16 trillion) for long-term investment across Africa.
It is this support that has reached private businesses with a huge impact on their
surrounding communities such as Equity Afia in Kenya. The EIB has so far invested over EUR 1.6 billion (Sh. 230.4 billion) in different projects over the years since its first project in Kenya in 1976. Out of this amount, close to EUR 700 million (Sh. 100.8 billion) has been used to support small and medium enterprises in the private sector such as Equity Afia through intermediated lending to local banks.
The EIB has worked with lenders including Equity Bank, the Co-operative Bank, the African Export-Import Bank, TDB – Eastern and Southern Africa Trade and Development Bank, and the Ecobank Transnational Incorporated as the main
financial intermediaries. Over the last five years, the EIB has provided more than €534 million (Sh. 76.89 billion) for private sector investment across Kenya in partnership with Kenyan businesses, banks, financial partners and microfinance institutions. “Beyond the upgrade of key infrastructure, our work has helped to reinforce Kenya’s attractiveness as an investment destination,” the EIB said in a statement to Bizna Kenya. “By financing local banks and private equity funds, we have supported thousands of micro, small and medium businesses, the backbone of the economy, in all sectors.”
Data analysis from the European Investment Bank shows that since 1976, 60 main projects have benefited from financing. According to Thomas Östros who is the EIB vice-president overseeing the Eastern Africa region, the main projects that have been financed by EIB have included the Lake Turkana Wind Farm which is Africa’s largest wind farm and the Olkaria geothermal projects with KenGen.
Since launching its operations in Kenya, the largest chunk of investment by the EIB has gone to the energy sector with 60 per cent of all investment activity. For
instance, in December 2023, the EIB and the Central Bank of Kenya inked a partnership deal to support CBK’s efforts in mobilizing funding for green projects in the country.
“Barriers remain that hold back the full engagement of banks in climate-dedicated finance. It is hindered by the lack of long-term funding that matches the economic life of green investments, the higher perceived risk of climate investment and limited experience of how to originate and monitor climate finance,” said Östros, whose areas of oversight include the financing of energy, health and life sciences.
“This new technical best practice partnership with the Central Bank of Kenya builds on the European Investment Bank’s long-standing partnership with Kenyan financial institutions to increase the impact of climate finance and unlock investment that better protects infrastructure and business from climate change.”
According to economic analyst Ephantus Korir, the intermediated lending approach is designed to ensure that financing supports the intended beneficiaries. “If you look at the highlighted sectors, most of them are within the local economic sphere occupied by the majority of Kenyans. This includes the MSMEs sector.
The partnership with local banks allows local financial institutions to expand their lending portfolio, thus providing greater access to credit for a larger number of businesses. The loans provided by the EIB are usually of much longer tenures and are provided at affordable interest rates due to blending facilities from the European Union.
The loans are mostly focused on less focused sectors such as women/youth investing and climate action or agriculture (which are considered very risky). In addition to the financing support, the partnership provides technical assistance for capacity building to both the financial intermediary and the final beneficiaries so that their businesses are sustainable for the long term.
The ripple effect is that the impact of the financing is almost instantaneous on the population,” Korir says. “For example, if the EIB partners to facilitate electricity connectivity under the LMC, the benefits of this financing will be felt across tens of thousands of homes that were hitherto in darkness,” Korir adds that this focus on impacting the end user and the partnership with MSMEs oriented local intermediaries is one of the main reasons why the EIB system of financing in Kenya has proven to be effective.
(Embed the EU/EIB & Equity Afia videos in the article)