KCB Retailer Finance: Features, Eligibility, Application, and More
Retail businesses have a vital economic role that drives consumer spending and contributes to job creation. However, it’s no secret that these businesses often face challenges managing their finances, particularly inventory management. Luckily, KCB Retailer Finance steps in as a valuable solution for this.
KCB Bank is arguably one of the most reputable financial institutions in Kenya. The bank launched retailer finance as a viable option for retailing SMEs. The financial product enables businesses to expand and, consequentially, see rising profit margins.
In this article, I’ll guide you through KCB retailer finance, its features, the eligibility criteria, and how to apply for this loan. We’ll also check out the terms and conditions you must remember.
1. Overview of KCB Retailer Finance
KCB Retailer Finance is a financial product by KCB Bank that offers the unique financing needs of retailers to stock up their business. You effectively overcome financial constraints and grow your operations with KCB retailer finance.
At its core, retailer finance provides capital and financial resources to retailers to support their business activities. The financing aim to help retailers optimise their cash flow, invest in inventory, upgrade their equipment, and enhance their overall competitiveness in the market.
The key aspect of KCB Retailer Finance is providing collateral-free working capital loans. Retailers can use the loan to cover their day-to-day operational expenses. With access to working capital, retailers can smoothen the flow of operations, seize business opportunities, and sustain their growth trajectory.
Target Audience for the Retailer Finance
The target audience for KCB retailer finance is primarily businesses operating in the retail sector, ranging from small and medium-sized enterprises (SMEs) to large retail chains. This encompasses various types of retailers, including but not limited to:
No.1: Independent Retailers
KCB Retailer financing targets small, locally owned retail businesses operating as single stores or small chains. The financing supports them irrespective of whether they specialise in specific product categories or serve niche markets.
No. 2: Franchise Retailers
KCB Retailer Finance: Features, Eligibility, Application, and More
Retail businesses have a vital economic role that drives consumer spending and contributes to job creation. However, it’s no secret that these businesses often face challenges managing their finances, particularly inventory management. Luckily, KCB Retailer Finance steps in as a valuable solution for this.
KCB Bank is arguably one of the most reputable financial institutions in Kenya. The bank launched retailer finance as a viable option for retailing SMEs. The financial product enables businesses to expand and, consequentially, see rising profit margins.
In this article, I’ll guide you through KCB retailer finance, its features, the elig
2. Chapter Objectives
Describe the underlying goal of bank
management
Discuss how banks manage liquidity
Evaluate how banks manage interest rate risk
Look at the techniques to manage credit risk
Explain how banks manage capital
3. Goal of Bank Management
The underlying goal of bank management is
to maximize the wealth of the bank’s
shareholders
Maximizing the share price
Agency costs
Investor costs incurred to promote managers’ interest
in serving investors’ interest
Managers need incentives to seek shareholder’s best
interests
Takeover target if stock price undervalued
4. Risks Faced By Banks
Value of
Bank
Credit Risk
Interest Rate
Risk
Liquidity
Risk
Value
Related to
Cash Flows
and
Risk of
Cash Flows
Capital or
Insolvency
Risk
Market
Risk
5. Managing Liquidity Risk
Risk of variability of return impacted by cost
of providing liquidity for deposit outflows
and/or loan demand
Maintain liquid assets and ability to borrow in
financial markets
Securitizing loans provide liquidity
Must forecast future cash flows
6. Managing Liquidity
Use of securitization to boost liquidity
Selling off loans to trustee
Mortgage and automobile loans
Trustee issues securities collateralized by the assets
Loan payments pass through to holders of securities
Securitization turns future cash flows into
immediate cash
Risk level related to guarantee provided to trust
7. Managing Interest Rate Risk
Risk of variability of returns caused by
changing market interest rates
Interest rate risk comprised of price risk and
reinvestment risk
Price risk = variability of returns caused by
varying prices of assets
Security and loan values vary inversely with
changes in market rates
8. Managing Interest Rate Risk
Reinvestment risk = variability of return
caused by changing interest rates on the
reinvested coupon of securities or loans
Reinvestment risk and price risk cause
realized returns to vary from expected
Price risk and reinvestment risk have an
opposite impact on realized return when
market interest rates change
9. Managing Interest Rate Risk
Causes variability in net interest income (NII)
and net interest margin (NIM)
NII = interest income - interest expense
NIM = NII/assets
Varying interest rates impact value of financial
assets, liabilities, and reinvestment returns
Varying interest rates cause repricing of loans,
securities, and deposits impacting NII
10. Measuring Interest Rate Risk
$GAP measurement
Duration measurement
Regression analysis
Benefits and limitations of each
$GAP easily constructed
Duration measure more accurate
Regression depends on future consistent
relationship of variables
11. GAP Measurement
$GAP = rate sensitive or repriceable
assets (RSA) for a time period - rate
sensitive liabilities (RSL)
Measures varied repriceability of
interest-bearing assets, liabilities, and the
cash flows of each
$GAP ratio = RSA - RSL
+$GAP = asset sensitive position
-$GAP = liability sensitive position
12. GAP, Varying Rates, NII AND NIM
+ $GAP - $GAP 0 $GAP
RSA > RSL RSA< RSL RSA = RSL
Interest
Rates
Interest
Rates
Interest
Rates
Net Interest
Income
Net Interest
Income
Stable Net
Interest Inc.
13. Duration Measurement
Adds consideration of cash flow, time
value, and repricing
Duration = sum of discounted, time-
weighted cash flows divided by the price
of security or loan
Duration measures time-weighted
maturity
Duration a better measure of risk than
$GAP
14. Managing Interest Rate Risk
Duration measurement
Captures different degrees of sensitivity to interest
rate changes
E.g. a 10-year zero coupon bond is more interest-
sensitive than a 10-year coupon bond
Shorter maturities; lower duration
Coupon interest and loan payments shorten duration
Duration of each type of bank asset and liability is
determined
DURGAP = DURAS – [DURLIAB x LIAB/AS]
15. Managing Interest Rate Risk
Regression analysis
Estimates the historical relation between interest rates
and bank performance
R = B0 + B1Rm + B2i + u
B2 = interest rate coefficient
Positive coefficient suggests that past performance is
positively affected by rising interest rates
Research suggest the opposite is true
Banks and S&L’s tend to have a negative gap
NII and NIM adversely impacted with increasing interest rates
16. Managing Interest Rate Risk
Determining whether to hedge interest rate risk
Banks often use all three methods
Banks use their analysis of gap with interest rate forecasts
to make their hedging decision
Methods of reducing interest rate risk
Maturity matching of loans and deposits
Using floating-rate loans
Using interest rate futures contracts
Using interest rate swaps
Using interest rate caps
17. Managing Interest Rate Risk
Methods of reducing interest rate risk
Maturity matching
Match each deposit’s maturity with an asset of the same
maturity
Difficult to implement
Lots of short-term deposits
Using floating-rate loans
Often increases credit risk and liquidity risk
18. Managing Interest Rate Risk
Methods of reducing interest rate risk
Using interest rate futures contracts
E.g. sale of T-bond futures by negative GAP bank to hedge
interest rate increase results in a futures gain, offsetting adverse
effects on NII
Hedging locks in NIM and negates benefit of falling rates. What
about futures options?
Using interest rate swaps
Arrangement to exchange periodic cash flows based on specific
interest rates
Fixed loan interest-for-floating for negatively GAP bank to reduce
GAP exposure
Using interest rate caps
19. Managing Credit Risk
Variability of return caused by delayed or
nonpayment of loan/security interest or
principal
Bank assembles portfolio of various types of
loans seeking maximum net return per level of
risk
Loan/security mix varies with desired risk
level and economic conditions
20. Measuring Credit Risk
Calculate Expected Loss Rate Per Type Of
Loan and Total Loan Portfolio
Higher Default Premiums Charged For
Higher Expected Loss Rate
Collateral may reduce expected loss rate
Prime Plus Loan Pricing based on risk
profile
21. Diversifying Credit Risk
Assemble loan portfolio of diverse Borrowers
using portfolio theory:
Varied income or employment
Geographic locations
Industries
Reduce total portfolio credit risk via
diversification
Avoid concentration of loans
Nationwide banking = diversification
22. Managing Credit Risk
Diversifying credit risk
International diversification of loans
May not help if the bank accepts loans from areas with very
high credit risk
LDC’s in early 1980’s; Asian crises, 1997; Argentina, 2001
Selling loans
Problem loans can be removed from the bank’s assets
Selling price reflects expected default risk
Revising the loan portfolio in response to economic
conditions
23. Managing Market Risk
Market risk results from the changes in value
of securities due to changes in financial market
conditions such as interest rates, exchange
rates, and equity prices
Banks have increased exposure to derivatives
and trading activities
Measuring market risk: Banks commonly use
value-at-risk (VAR), which involves determining
the largest possible loss that would occur in the
event of an adverse scenario
24. Managing Market Risk
Measuring market risk
Bank revisions of market risk measurements
When changes in market conditions occur, such as
increasing volatility, banks revise their estimates of
market risk
How J.P. Morgan assesses market risk
Calculates a 95 percent confidence interval for the
expected maximum one-day loss due to:
Interest rates
Exchange rates
Equity prices
Commodity prices
Correlations between these variables
25. Managing Market Risk
Methods of reducing market risk
Reduce involvement in activities that cause high
exposure
Take offsetting trading positions
Sell securities that are heavily exposed to market
risk
26. Operating Risk
Operating risk is the variability of returns that
may result from a failure in a bank’s general
business operations
Processing and sorting information
Executing transactions
Maintaining relationships with clients
Dealing with regulatory issues
Legal issues
Use of insurance, contracts, and other pure
risk management techniques
27. Bank Capital Management
Bank capital = bank net worth
Purpose of bank capital
Absorbs losses on assets
Provides base for leveraging debt
Is a source of funds
Serves to maintain confidence of financial markets
Regulators specify minimum capital per
riskiness of assets
ROE = ROA x leverage measure
28. Management Based on Forecasts
Some banks position themselves to benefit
form expected changes in the economy
If managers expect a strong economy they
may shift toward riskier loans and securities
Inaccurate forecasts have less effect on more
conservative banks
29. Bank Restructuring to Manage Risks
Decisions are complex because they affect
customers, employees, and shareholders
Bank acquisitions
Common form of restructuring
Quick way of achieving growth
Advantages:
Economies of scale, diversification
Managerial advantages
Disadvantages
Purchase price may be too high; selling shareholder benefit
Employee morale
30. Bank Restructuring to Manage Risks
Are bank acquisitions worthwhile?
Studies show that the market reacts neutrally or
negatively to news of a bank acquisition
May be due to:
Intra-market versus out-of-market merger
Pessimism over whether efficiencies will be achieved
Personnel clashes
Price may be too high; selling shareholder capture added value
31. Integrated Bank Management
Bank management of assets, liabilities, and
capital is necessarily integrated
An integrated management approach is also
necessary to manage
Liquidity risk,
Interest rate risk,
Credit risk
Operating risk
Capital or insolvency risk
32. Examples of Bank Mismanagement
Penn Square Bank
Aggressive lending, concentrated in energy loans
Limited diversification
Energy sector problems caused defaults
The bank provided new loans, part of which were
used to pay off old loans, recording them as “paid”
rather than overdue
Could not continue this practice, so the bank failed
in 1982
33. Examples of Bank Mismanagement
Continental Illinois Bank
Provided loans in the energy sector originated by
Penn Square—financial market lost confidence
Bank of New England
Concentrated on real estate loans in 1980s
Overbuilding and reduced economic growth
resulted in defaults
Even though other New England banks were
affected, the Bank of New England was more
exposed because of heavy concentration in real
estate
34. Examples of Bank Mismanagement
Implications of bank mismanagement
Preceding examples should not imply that being
ultraconservative is preferred
In a competitive environment, a bank may fall
behind
A proper balance between risk and return should
be maintained