SMEs face better times ahead with low interest rates

In economics, we say that all business activities are somehow interconnected at the macro-economic level. Consequently, prudent economic management is important for the growth of business ventures and investments in any country.

At the beginning of the month, the Monetary Policy Committee reduced the base lending rate for banks from 18 per cent to 16.5 per cent after maintaining it for the first half of the year.

The base lending rate is the interest rate that the central bank releases to banks to use in setting their cost of loans.

The banks are expected to offer loans at rates that are higher or equal to the base lending rate. It is an economic tool used to manage inflation and the supply of money in the economy.

A high inflation rate would devalue the currency while the opposite is also true.

The maintenance of the high base lending rates at 18 per cent has managed to restore the shilling’s strength, manage inflation and create a stable economic environment. On the flipside however, a high lending rate means little access to credit which results into stunted economic growth.

You must understand that credit is very important to any economy. I can borrow Sh50 from a bank and use it to make Sh100 from selling oranges, I then take it to the matatu operator, he uses it to make Sh200, he takes it to the hotelier, the hotelier uses it to make Sh400 and the hotelier takes it to the butcher who uses it to make Sh800. This is what we call the multiplier effect and access to credit contributes to it in a major way.

The change in the base lending rate is minimal, but significant. We are yet to get to where we need to be. However, this is a step in the right direction for local businesses.

With a minimised base lending rate, lower inflation rates and a stable currency, SMEs face better days ahead.

Mr. Odhiambo is the managing consultant of Elim Consulting.
wodhiambo@elim-consult.com