Content for the following post was provided by World Council's Technology and Innovation for Financial Inclusion (TIFI) Project team. TIFI is a USAID-funded project.
Given how the COVID-19 pandemic is ravaging economies, Kenya’s financial and insurance sector, which includes Savings and Credit Cooperatives (SACCOs), is not immune.
SACCOs’ Asset and Liability Management (ALM) strategies are going to be severely tested. They are going to face cash liquidity challenges. One of the ways SACCOs can mitigate this and stay afloat is to borrow from commercial banks.
In the wake of COVID-19, the Kenyan government has tried to put monetary and fiscal measures in place to stabilize the financial sector. For SACCOs planning to borrow from commercial banks, it is important to understand new actions surrounding the country’s monetary policy. That includes
Kenya’s recent monetary policy changes in response to COVID-19 and how SACCOs can capitalize on the new changes to make borrowing decisions that ensure their financial stability.
Monetary policy changes
To cushion the economy from the COVID-19 pandemic, the Kenya Monetary Policy Committee (MPC) lowered the Central Bank Rate (CBR) from 8.25% to 7.25%. It also reduced the Cash Reserve Ratio (CRR) from 5.25% to 4.25%, providing Ksh.35.2 billion as additional cash liquidity to banks to directly support borrowers that are adversely affected by the pandemic.
The MPC expects these monetary policy actions will support emergency measures announced by the Central Bank during a meeting with commercial banks on March 16, 2020. The goal is to mitigate the economic effects of the coronavirus pandemic on bank borrowers whose loan repayments were up to date as at March 2, 2020. As part of the measures:
- Banks will seek to provide relief to borrowers on their personal loans based on their individual circumstances arising from the pandemic.
- To provide relief on personal loans, banks will review requests from borrowers for extension of their loan for a period of up to one year. To initiate this process, borrowers should contact their respective banks.
- Medium-sized enterprises and corporate borrowers can contact their banks for assessment and restructuring of their loans based on their respective circumstances arising from the pandemic.
- Banks will meet all the costs related to the extension and restructuring of loans.
- To facilitate an increased use of mobile digital platforms, banks will waive all charges for balance inquiries. All charges for transfers between mobile money wallets and bank accounts will be eliminated and transaction limits imposed with respect to e-Wallets will be increased.
SACCOs Capitalizing on the Monetary Policy
The monetary policy measures are expected to boost the economy. However, the shortage of imports in the local market and domestic supply bottlenecks may lead to an increase in inflation, which could impact the efficacy of these measures.
SACCOs need to implement parallel measures to reduce the impact of the pandemic on their liquidity immediately, while putting in place measures to accelerate their recovery after the COVID-19 crisis and cushion their institutions against future shocks.
For instance, SACCOs can take advantage of the central bank measures to restructure loan repayments over the next 6 to 12 months. Additionally, SACCOs can recall cash invested with other institutions, avoid capital expenditures, renegotiate supplier contracts and continuously asses their operations for cost reduction opportunities—including shifting to shared or outsourced services.
Over the mid- to long-term however, SACCOs need to embark on reviewing and updating their asset and liability management (ALM) policies to clearly define stakeholder roles, risk policy limits and guidelines. They also need to address policy exemptions and contingency funding plans in order to mitigate risk and take advantage of liquidity reliefs. This will help SACCOs match assets to liabilities with like maturities, laying a strategy for the balancing of their liquidity needs to available options and setting them up for difficult liquidity scenarios that may arise.
Therefore, if there is an option for SACCOs to improve their liquidity through the reliefs from the potential lender banks, SACCOs should strengthen their ALM systems and develop further contingency plans.