Politics & Policy
The total value of MSME’S output is estimated at
KSh 3.37 billion against a national output estimated at
KSh 9.97 billion in 2015. Moreover, a staggering 80 per
cent of the small business ventures derive their capital
by borrowing from family and friends or receiving grants,
and only 5 percent acquired finance through banks.
This has stirred debate on the banking fraternity’s
role in enhancing the growth of the economy, arising
from inhibitive charges despite existing appetite for
credit. To encourage greater bank-led financing, the
Central Bank of Kenya increased its focus on MSME
lending through specific initiatives and programs, aimed
at bridging the gap of credit flow to this sector.
In the 3 years leading up to 2016, the total value of
loans applied for by the SME sector totaled KSh 707.3
billion out of which KSh 644 billion received accreditation
representing a 91 percent success rate. Credit availability
to this sector has marginally increased over the years and
compares favorably to other regional economies, but at
what cost?
When interest rates are high, banks charge more
on loans, which means businesses take more from their
earnings and channel it towards loan repayment. This
inadvertently presents the possibility where a business
may decide against expansion activity or even result in
staff reduction measures.
From another perspective, high lending rates disrupt
consumption patterns of a particular demographic. For
instance in 2016, the personal /household portfolio was
the largest benefactor of loan products and stood at
KSh 585 billion. When customers have to part with an
increased interest margin for loan repayment, it means
the increased likelihood of a reduction in their purchasing
power, which means businesses in the economy are
impacted twice.
Giving credence where due, existing data indicates
that significant progress has been made within the
financial sector, where lending to SMEs from domestic
banks has been steady and remarkable, but more can be
done.
Internal restructuring of the businesses
Proper inventory from small enterprises
Many enterprises in the SME sector remain
unregistered and unlicensed. This means that financial
service providers have insufficient data at their disposal
to work with. Businesses will need to adopt scientific
inventory mechanisms.
A credit guarantee scheme
provides third-party credit risk
mitigation to lenders through
absorption of a portion of the
lender’s losses on the loans made
to SMEs in case of default.
This mechanism should capture business
information in terms of actual numbers, business
changes, employment, gender, and age of owners, sector
and subsectors. This specificity of analytics could help
the bank develop a comprehensive background on the
business and could aid in access to finance
Government-SME Partnership
If the government is keen on expanding the
economy, the small medium /private sector is a key player
towards any economic sustainability goal in existence.
It is from these SMEs that sprout export-products-
geared businesses. It is imperative for any government
to facilitate growth in this sector especially by promoting
production of high value goods and services, while
monitoring progress in the sector.
One such initiative is the public guarantee scheme,
developed by World Bank, aimed at helping governments
implement public credit guarantee schemes. A credit
guarantee scheme provides third-party credit risk
mitigation to lenders through absorption of a portion of
the lender’s losses on the loans made to SMEs in case of
default.
This scheme aims at substituting the need for SMEs
to have collateral and in its place the government acts
as the chief guarantor for the loans taken by the SMEs.
Eligible financial institutions under the scheme which
include commercial banks, and selected Saccos comprise
the avenues through which the loans would be disbursed
to the SMEs in a timely manner at affordable interest
rates.
The SME sector worldwide is a major contributor
to socio economic development of a country especially
in emerging markets. Therefore it is incumbent upon
governments to ensure growth in this sector by providing
appropriate facilitation. TB
NOVEMBER 2017 • THINK BUSINESS | 11