Banks have been on the spot for pricing credit out of reach of small businesses and, with the rate cap coming into effect, tightening credit standards and locking out riskier borrowers such as SMEs.
Strathmore Business School and IIA research shows that SMEs list access to finance, lack of linkage with big businesses and limited corporate governance as the major barriers to their growth.
Majority of small businesses in Kenya are still struggling to raise capital from banks in spite of the rate capping law which came into effect last year.
Strathmore Business School don David Mathuva says research by the institution and Invest In Africa (IIA) shows that the high cost of credit remains a key challenge for small establishments.
“Even with the rate caps, refinancing of credit from financial institutions remains a challenge,” Dr Mathuva told the Business Daily on the sidelines of a data validation forum on a study to establish challenges that small businesses face.
Banks have been on the spot for pricing credit out of reach of small businesses and, with the rate cap coming into effect, tightening credit standards and locking out riskier borrowers such as SMEs.
The Banking (Amendment) Act 2016, which came into force on September 14, sets the maximum lending rate at four percentage points above the Central Bank Rate (CBR). Banks were fiercely opposed to the law.
The law also sets minimum returns payable by banks on customer deposits at 70 per cent of the CBR. The CBR is currently set at 10 per cent, meaning that banks are barred from charging interest on loans above 14 per cent.
The Strathmore and IIA research shows that SMEs list access to finance, lack of linkage with big businesses and limited corporate governance as the major barriers to their growth.
Thirty seven per cent of the 274 SMEs polled across Nairobi, Nakuru and Mombasa said that the high cost of financing was the single largest challenge they face when looking for capital, followed by lack of access to financial markets at 19 per cent.
“Money from family members and personal savings remain the most popular sources of capital and finance. This rivals banks as a source of capital,” the report reads in part.
Kenya Private Sector Alliance (Kepsa) chief executive officer Carole Kariuki however said efforts to ease access to the cost of credit would be given a boost through the planned creation of a State run fund, dubbed Biashara Bank, aimed at providing credit to businesses.
Majority of the SMEs studied are family-owned independent businesses with one to five branches, a turnover in excess of Sh500,000 and have an average age of nine years.
The views of the Strathmore don mirror data from the Treasury which shows credit growth slowed down to the lowest level in a decade last year, partly due to banks becoming reluctant to lend under the rate cap regime.
The Treasury data indicates that lending to businesses and homes grew just 4.3 per cent in the year to December, down from 20.6 per cent in a similar period in 2015.
The 4.3 per cent credit increase is below what the Central Bank of Kenya (CBK) says is ideal loan growth of 12 to 15 per cent which is required to support economic growth and job creation.
Additional loans to the private sector fell to Sh94.6 billion last year compared to Sh335 billion in 2015, prompting the Treasury to cut this year’s growth forecast.
The 2016 credit growth is slower than that recorded in the 2007/2008 tumultuous election period which recorded a low of 7.5 per cent.
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