Small credit window squeezes SMEs

Many small and medium enterprises in Kenya find it difficult to penetrate the export market because of unpredictable foreign exchange and the perception that the business is too risky to be financed by commercial banks.

Insurance firm Africa Trade Insurance Agency (ATI) says it has developed a solution for crippling defaults, usually encountered by exporters who sell on credit.

The ATI credit risk insurance cover provides protection for exporters against losses arising from non-payment by overseas buyers.

The cover also protects exporters as it is often used as a financing tool whereby the exporter approaches ATI for insurance cover.

“In the event that the exporter’s buyers default, ATI would then pay the claim proceeds directly to the bank. This product, therefore, gives banks a lot of comfort to finance exporters’ working capital, since the key risk has been taken care of” says Humphrey Mwangi, ATI’s acting chief underwriting officer.

Golden opportunity

ATI has an arrangement with one of the world’s largest credit information providers, to conduct credit assessment on proposed buyers that ATI’s clients sell to.

Besides pre-shipment finance, ATI says banks can also finance the exporter’s receivables by relying on the ATI credit insurance policy as collateral.

This way, they substitute the exporter’s credit risk with ATI’s own risk.

The hurdles in export business could cripple most SMEs that are now eyeing the export market to grow profits and expand their businesses.

Several surveys including a recent one by the Japan International Cooperation Agency says local manufacturers and SMEs have a golden opportunity to produce and market products across the east African states.

The JICA survey says lucrative markets existed in processed dairy products, detergent and hand-made kitchen and households items that Kenya could sell to her neighbours in Uganda, Tanzania, Rwanda and Burundi.

The Kenya National Federation of Jua Kali Associations says its members continue encountering problems in securing funding to finance export businesses because some banks are thinly spread in regional markets.

Some banks such as Barclays and KCB have since formed business clubs for small and medium entrepreneurs that organise seminars to educate customers on cross-border trade.

Barclays Bank recently facilitated travels by some entrepreneurs to enable them gain experience and business contacts outside the borders.

Such opportunities, the financial institutions say, would help resolve some of the problems associated with the export of merchandise from Kenya.

But local entrepreneurs say some banks with limited regional reach are making it difficult for traders to secure credit to facilitate export businesses.

“Some financial institutions which do not have regional presence are very cautious when it comes to lending to the small and medium enterprises venturing into cross-border trading” says Mr Richard Muteti, the chief executive of the Kenya National Federation of Jua Kali Associations. “Some banks look down upon SMEs as those businesses that are not able to transact sophisticated businesses.”

But business organisations such as the Kenya Private Sector Alliance say some SMEs are shying away from seeking credit because the funds are high due to the risk associated with the export business.

The high risk associated with the export business has also resulted to high cost of insurance, say entrepreneurs. This, they say, has contributed to the difficulties encountered by local businesses in attempts to break into export markets.

SMEs say they cannot access credit because financial institutions perceive export business as risky especially when goods are freighted by sea.

Pirate attacks in the sea have raised the cost of insurance on transit goods and some exporters now believe it is not the best channel for transporting goods.

According to the Kenya Shippers Council (KSC), businesses in the east African region paid out Sh2 billion every month to cover the cost of piracy over the last 18 months

Among the new charges that shipping lines have introduced to ensure pirates do not drive them out of business are those for container handling that have risen by between 34 and 150 per cent compared to rates before October 2009 and bulk cargo freight rates, which have gone up between five and 150 per cent.

Voyage time has increased from an average of 12 days to 30 days.

The problems of exporters are compounded by the fact that local insurance firms are not interested in covering export goods because of increasing theft and pilferage.

Several cases of theft of goods on transit have been recorded on highways such as the Nairobi-Nakuru stretch where robbers have attacked truckers.