New corporate lending conditions introduced with eased terms for entrepreneurs
The Central Bank of Kuwait has updated its guidelines for local banks, finance, and investment companies regarding corporate lending. The amendments introduce new conditions to ensure that loans are aligned with the nature of the activity being financed, the cash flows designated for repayment, and a comprehensive assessment of potential risks. These changes aim to enhance financial oversight and ensure that lending practices remain sustainable and well-structured.
The sources indicated that the amendment to the credit and financing policy aims to regulate and streamline loans granted to companies. The Central Bank has emphasized to banks and financing companies the importance of including specific financial data for clients in the financing application as follows.
- Modern financial center.
- A statement of cash flows for a future period of activity.
- Details of the expected inflows and outflows for the period of the required facility/financing.
- Two audited budgets for the last two years for legal entities.
Furthermore, the sources indicated that the new regulatory instructions will apply to all credit cases, including new financing requests, loan approvals, renewals, and increases. However, they noted that for legal entities, an exemption applies, requiring the submission of audited financial statements for the last two years are attached:
A) Companies that have not issued financial statements due to the recent commencement of their operations.
B) Small and Medium Enterprises (SMEs) as defined by Law No. 98 of 2013, which established the National Fund for the Care and Development of Small and Medium Enterprises. It is essential that the credit and financing policy includes appropriate regulations that align with the specific needs and characteristics of SME financing.
In this context, the Central Bank has urged banks and financing companies to develop alternative methods for evaluating projects in the SME sector. These alternatives must ensure that financing granted to entrepreneurs aligns with the nature of the activity being funded and its cash flows designated for repayment. The Central Bank emphasized that these directives are part of its broader efforts to foster a supportive business environment that enhances the ability of small and medium enterprises to access appropriate financing.
Moreover, the sources explained that the amendment to the credit request clause in the new regulatory framework aims to streamline and regulate corporate credit and financing policies. This adjustment is designed to minimize default risks while ensuring a steady repayment of installments without compromising financial stability.
The Central Bank has instructed banks and financing companies to revise their credit and financing policies accordingly, obtain approval from their Boards of Directors, and submit the updated policies to the regulatory authority for review and feedback.
The sources emphasized that financing small and medium enterprises (SMEs) is a key priority for the Central Bank, financial institutions, and business owners alike, given its crucial role in economic development and societal progress.
The SME owners primarily rely on banks as their main source of funding. However, some banks remain hesitant to lend to certain projects due to concerns over their ability to meet banking requirements, reflecting a cautious approach to risk management in this sector.
The sources indicated that recent market changes and the investment restrictions they have introduced have made it necessary to reassess the regulations governing loans for small and medium enterprise (SME) owners. This approach is not unique to the Central Bank of Kuwait; the National Fund for Small and Medium Enterprises Development had already suspended new loans to entrepreneurs since the onset of the COVID-19 pandemic in 2020. The suspension remains in effect until the Fund’s Board of Directors finalizes a new credit policy that both safeguards public funds and fulfills the Fund’s core mission.
Alternatives to Financing Entrepreneurs
One alternative that banks may adopt to facilitate credit for small and medium enterprise (SME) owners, without relying on continuous financial statements for more than a year, is the use of an assessment points system. This approach evaluates the entrepreneur’s financial responsibility and business activity by analyzing available data, such as account statements that reflect the accuracy of declared financial transactions.
Additionally, it involves assessing sales activity based on transaction volume and purchases, as well as measuring debt-to-capital and debt-to-sales ratios to gauge the financial health of the business.
The courcses noted that given the relatively small scale of entrepreneurial activities, the modest financing requirements, and the large number of businesses in this sector, the Central Bank has decided not to enforce standard credit conditions for these enterprises.
Source: Al Rai
