Ideas & Debate

Lenders must drop ‘risky’ rating of SMEs

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KBA chief executive speaks during a media briefing at the Hilton Hotel in Nairobi on March 22, 2017. Since the capping of interest rates, banks are stashing cash from retail savings into the risk-free government securities, thus diverting essential credit from businesses. PHOTO | SALATON NJAU | NMG

Since the capping of loan interest rates last year, the banking sector has shunned lending to what they describe as high risk businesses, especially SMEs. Indications are that banks are stashing cash from retail savings into the risk-free government securities, thus diverting essential credit from businesses.

Banks say the trend is likely to continue unless interest capping laws are reversed .The latest audited reports also indicate that even with interest capping, banks continue to make fairly good profits.

Last week, the Treasury introduced M-Akiba to connect retail savers direct with government bond market.

Although not explicitly admitted by the Treasury, this strategy may be intended to dilute banks’ participation in the bond market, and probably push them back to their core business of lending.

My interest here is in SMEs which populate all the economic sectors with an estimated GDP contribution of about 33 per cent and 84 per cent of national employment.

SMEs are critical cogs in business value chains in the supply of inputs and distribution of outputs. SMEs interface with Kenyans in nearly all aspects of their lives. For sustainable national economic growth, SMEs should have access to affordable credit.

SMEs are unfortunately caught up in the middle of the ongoing interest rate regulatory changes. Without capping, interest rates charged to SMES are quite high and mostly unaffordable.

When the interest rates are capped, credit to SMEs is certainly more affordable but access is curtailed by onerous “fail-safe” lending conditions set by banks.

Whichever way, businesses are in a stranglehold and cannot grow. That this critical segment of our economy is labelled by banks as “risky’ should be a large enough concern to elicit a national debate.

How to strengthen SMEs to become credible low-risk borrowers should be a subject pre-occupying not only banks, but the government, tax authorities, and larger companies whose value chains depend on SMEs.

I believe it is smart business for banks to recognise long term business opportunities in SMEs and nurture them to create a strong and high quality future lending base.

Banks should proactively partner with other interested groups (larger businesses, business academia, and business associations, etc.) to mentor and up-skill laggard SMEs to improve their business models, corporate governance and financial accountability.

But how should this be achieved? I see a graduated quality-based credit rating and certification system for SMEs based on achievable criteria defined by the lenders. There are business schools and corporate governance experts in Kenya who can mentor, coach, qualify and certify SMEs to levels of business competence acceptable to credit providers.

This can motivate SMEs to professional self-improvement to increase access to credit and other business opportunities.

The critical success factor is a wide group of SMEs who are qualified and certified as responsible businesses and borrowers acceptable to banks. This is a win-win approach for banking, business and the economy in general. It is a proactive initiative that the banking association should be organising, and participating in resourcing.

Thrust and approach

The bond market alternative the banks are pursuing is a speculative option that is not sustainable in the medium to long term. All over the world banking success is anchored on strong and trusting partnerships with large, medium and small businesses.

I am also of the opinion that banks should modify their lobby thrust and approach. They need to genuinely support the current interest capping law, and gradually push for selected value adding enhancements and modifications.

Gradualism ultimately delivers intended results.

Any formula-based law or regulation is a dynamic tool that can and should be occasionally modified to reflect lessons and experiences learned.

By following this approach, the banks will sound more responsive to the general mood and needs of the nation and the business fraternity.

At an appropriate time in the future, when majority of businesses have professionalised their management systems, and consumer protection and competition laws have sufficiently matured, then we can safely and comfortably revert to free market interest rates.