SMEs shun banks, turn to family for start-up cash

Most entrepreneurs said accessing loans from banks remains difficult, forcing them to deal with micro-finance institutions. PHOTO | FILE
Most entrepreneurs said accessing loans from banks remains difficult, forcing them to deal with micro-finance institutions. PHOTO | FILE 

Majority of small businesses in Kenya consider commercial banks as inappropriate sources of finance, choosing instead to use family resources as start-up or growth capital, a newly released report says.

The Kenya National Bureau of Statistics (KNBS) says in a newly-released report that 80.6 per cent of establishments use family or own funds as the main source of start-up capital while another 4.2 per cent of business owners get loans from family or friends to start their businesses.

The survey, which polled 50,000 Micro, Small and Medium Enterprises (MSMEs), found that banks finance only 5.6 per cent of MSMEs, while investment groups or chamas account for 1.4 per cent of the small business financing.

Co-operative societies, which offer lower interest rates than banks, were found to account for an even smaller portion of the start-up financing at 0.4 per cent while government funding accounts for a paltry 0.1 per cent.

The report, which KNBS has described as the most comprehensive on the MSMEs sector in 17 years, makes nonsense of the role that the various government-backed kitties such as women and youth funds are making in the area of enterprise development.

The findings also debunk the notion that Kenyan banks have recently expanded their engagement with small businesses.

“The report shows there is very little financial access for the MSMEs,” said Micro and Small Enterprises Authority (MSEA) chief executive officer Patrick Mwangi during the report’s launch.

“Government funds, including Uwezo and Youth Fund, have negligible impact at one per cent as a source of funding to MSMEs. The financing schemes are not working or having the desired impact and should therefore be restructured,” said Ndiritu Muriithi, chief economist at Metropol Corporation.

Most entrepreneurs said accessing loans from commercial banks remains much more difficult, forcing them to deal with micro-finance institutions.

High interest rates and lack of collateral topped the list of reasons most small businesses avoid bank loans, the study found, confirming the recent outrage that saw Parliament enact a law to tame the cost of loans.

Other business people said they deliberately avoided indebtedness while others thought loans are too much trouble not worth going through.

The report amplifies calls for a rethinking of strategies that the government is using in an attempt to spur entrepreneurship and urges banks to re-engineer their products to tap into the growing small businesses market.

“In Kenya, the common approach of extending credit to MSMEs is based on collateral. This approach has its limitations and is not feasible for most of the MSMEs as some start with no tangible assets,” the report says.

It adds that collateral oriented lending should be de-emphasized and new creative and innovative strategies adopted.

While admitting that small businesses operate in a difficult environment, Devolution and Planning secretary Mwangi Kinjuri said the government would champion initiatives that support the growth of MSMEs.

“These initiatives will include tax incentives, direct government interventions through financial institutions, credit guarantee schemes and other forms of subsidised financing.”

Despite the tough environment for the small businesses, the survey’s findings still confirm them as the engine of Kenya’s economic growth and development.

The report says the total number of persons engaged in the sector stands at approximately 14.9 million.

Besides, the MSMEs contribute 28.5 per cent of the total economy with the value of their output estimated at Sh1.6 trillion compared to Sh5.6 trillion for the whole economy.

Wholesale and retail trade and repair of motor vehicles and motorcycles account for more than half of the total persons working in MSMEs while manufacturing, accommodation and food service activities accounted for 11.8 per cent and 11.1 per cent of all persons engaged in MSMEs, respectively.

The survey was jointly conducted by the Institute for Development Studies of the University of Nairobi (IDS-UON), the African Centre for Economic Growth (ACEG), the Kenya Institute for Public Policy Research and Analysis (KIPPRA), Micro and Small Enterprises Authority (MSEA), KREP and other stakeholders.

Its aim was to better understand the “magnitude, dynamics, and various factors that can promote or hinder enterprises creation, growth and development in Kenya.”

In total, about 50,000 MSMEs were sampled for the survey, targeting licensed businesses. 

A further 14,000 households were sampled, targeting to capture household based enterprises which are largely unlicensed. 

The sizes of MSMEs are categorised into micro (1-9 employees), small (10-49 employees) and medium (50-99 employees) sized establishment.
MSMEs reported a gross turnover of Sh784.2 billion in the month prior to time of the survey out of which licensed businesses generated Sh706 billion while unlicensed businesses sold goods and services worth Sh78.2 billion.

Licensed MSMEs pay a monthly average of Sh33.8 billion in taxes.