Rate capping has made it more difficult for lenders to price for risk. FILE PHOTO | NMG
In the past year, an increasing number of Kenyan banks have given small and medium enterprises (SMEs) a wide berth, citing the rate caps as the key reason for this move.
Rate capping has made it more difficult for lenders to price for risk. In response, many lenders have opted for risk-free government securities over riskier SME borrowers.
Lending to government has helped many banks shore up their numbers at a time when margins have come under intense pressure due to rate caps.
However, it is important to note that lenders have a good reason to shy away from lending to SMEs due to the inability to price for the risk. Banks therefore need to figure out innovative ways of working with SMEs despite the rate cap.
SMEs are a strategic customer segment with a lot of potential for growth. Overlooking them could dampen a bank’s long-term growth prospects, considering they contribute 45 per cent to Kenya’s GDP and employ 80 per cent of the work force.
A bank that is not serious about SMEs is essentially not thinking about the future. Against this argument, the objection may be raised that current market conditions do not allow for increased lending to SMEs.
This, however, is not entirely true. If anything, current market conditions present an opportunity for lenders to consolidate their position in the SME segment.
There are many disgruntled SMEs in the market who can be converted into loyal customers by banks that put in the necessary effort.
Furthermore, many SMEs have taken measures to tighten up compliance and credit ratings in order to qualify for loans in the wake of the rate caps. This lessens the level of risk that a bank assumes when lending to such SMEs.
These considerations informed our decision as NIC Bank to ramp up lending to SMEs. As at July this year, we had increased lending to SMEs 14 per cent year on year, reflecting our bullish convictions about the sector.
One of the key learnings that we have picked up when dealing with SMEs is that you have to provide end-to-end solutions in order to retain them. You need to walk with them through every step of their journey and provide additional value beyond a credit facility.
Training, for instance, is a key value-add that banks can provide to SMEs. There is currently a deficiency of essential business skills such as cash flow management, branding and compliance among SMEs.
This partly explains their high failure rates. It is estimated that 70 per cent of Kenyan SMEs fail within the first three years of existence, according to a 2016 study commissioned by Invest in Africa (IIA) and Strathmore University. Bridging these knowledge gaps will help lower SME failure rates and allow banks to offer more long-term financing to SMEs.
As a bank, you don’t need to build in-house training capacity in order to equip SMEs with business skills. Lenders can ink strategic partnerships with business schools and training institutions to provide this service.
Banks also need to avail more robust digital solutions for SMEs in order to improve speed and convenience. Loan processing and other basic transactions are typically lengthier for SMEs than for larger businesses.
Digital solutions, which can for example allow for mobile phone lending solutions, will help substantially improve the banking experience for SMEs.
Presently, most mobile phone loans in the banking sector are targeted at consumers and not SMEs. Digital platforms, especially internet and mobile based, also present an opportunity for banks to aggregate data on SMEs.
Robert Kibaara is director of Retail Banking at NIC Bank.
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