Kenyan SMEs less likely to get funding than African peers
Making clothes. High bank interest rates and collateral requirements are some of the factors leading to difficulties in Kenyan SMEs accessing bank funds. Fredrick Onyango
Micro, small and medium-sized businesses in Kenya are less likely to get financing from banks compared to their counterparts in other African countries, a new study has shown.
The Organisation for Economic Co-operation and Development (OECD), in a report released last month, said fewer businesses in Kenya get bank financing compared to 38 other African nations. Kenya trails Rwanda, Uganda and Tanzania, among East African countries. Others doing better than Kenya include Botswana, Egypt, Ethiopia, Ghana, Nigeria, and Zambia.
The report shows that 15.5 per cent of Kenyan firms use bank finance for investment compared to 19.8 per cent in the region. It also shows that 78.4 per cent of Kenyan firms use internal finance for investment compared to 73.5 per cent of regional firms. Bankers and analysts said Kenyan firms are affected by high interest rates and also have fewer options to get financing. They are also not transparent in business records, probably due to the preference of keeping businesses within families.
“In many respects, Kenyan firms find it more difficult than their regional peers to access finance. This is an area that will need to be strengthened if Kenyan enterprises are to continue contributing significantly to economic activities in the country,” says the OECD study.
The study shows that 86.1 per cent of Kenyan firms are required to have collateral compared to 73.2 per cent of firms in the region while collateral values needed for a loan average 120.8 per cent compared to 109 per cent required for companies in the region.
“Credit worthiness of the micro, small and medium enterprises sector still remains low. High bank interest rates, operation and administrative cost of finance, and the requirement of collateral could be some of the factors leading to difficulties in accessing finance by Kenyan firms,” said Ms Carole Kariuki, the chief executive officer Kenya Private Sector Alliance (KEPSA). She said proposed new regulations by the Central Bank of Kenya (CBK), to peg interest rates on a specific reference rate, would help bring down the high rates.
According to CBK, net loans in the banking sector have increased to Sh949.1 billion as at the end of March this year from Sh495.4 billion in 2007, but the bulk of the loan accounts were held by private households. CBK governor, Prof Njuguna Ndung’u, said that while deposit accounts had increased by three and a half times since 2007, loan accounts had lagged making the cost of accessing credit high.
He said that deposit accounts had increased to over 14 million from approximately four million, but there are only about two million loan accounts.
Data
“When we broke down the data in loan accounts we found that over 1.4 million of the two million loan accounts are held in personal and household sectors and we would want to make sure that the firms hold more of these accounts because they can invest,” said Prof Ndung’u.
Ms Kariuki said there was need for innovation, diversification and flexibility by banks to encourage the small businesses sector to access finances, adding that banks could also adopt technologies that would lower administration costs of financing. The OECD study shows that fewer Kenyan firms (49.5 per cent) compared to 60.4 per cent in the region undergo an audit, an indication that support the fact that the firms are not transparent and do not disclose enough information about their businesses. “I would like to see business owners realising that there is a value to keeping proper books of accounts,” said Isaac Awuondo, the chief executive of Commercial Bank of Africa.
