Fix the small business challenge, not bank interest rates
What you need to know:
We might think we are trying to fix an SME access to credit problem, except the problem isn’t just about access to credit. The mover of the Bill, Jude Njomo, spoke of “impossible” borrowing rates facing small businesses. KBA, with an eye for the public optics, issued a response aimed at SMEs
According to press reports, President Uhuru Kenyatta will make a decision on the interest rates Bill today (Friday).
Don’t worry if you missed this. With headlines around Jubilee’s jamboree and Cord’s consternation even as the Joint Select Parliamentary Committee (JSPC) sorts out — also by today — our IEBC imbroglio in preparation for 2017, our “peculiar political habits” continue to occupy our minds.
In the meantime banks, through the Kenya Bankers Association (KBA), have — no doubt after much moral persuasion — made a counter-offer to that Bill’s proposals. So there’s a promise to immediately cut lending rates by one per cent, even as business models are “refined”. That is, a cut to 17 per cent from 18 per cent. No mention of savings/deposit rates. Then we have the real “goodies”.
A Sh30 billion fund will be created to support small and medium-sized enterprises (SMEs). One third of this fund will be directed at women and youth entrepreneurs. Technical assistance of Sh100 million will be offered to these SMEs. And lending rates will not exceed 14.5 per cent. Lovely, right?
Actually, SMEs already form a significant proportion of overall bank lending, rising from Sh113 billion in 2009 to Sh225 billion in 2011 and eventually Sh322 billion in 2013.
This finding emerged from a joint World Bank-Central Bank of Kenya-FSD (Financial Sector Deepening) Kenya survey of bank financing of SMEs published in 2015. In percentage terms, the numbers are 19.5, 20.5 and 23.4 per cent of total bank lending in those years. One imagines that this upward trend would show higher proportions today.
The real point is that, in the four years covered by the survey (2009-2013), lending to SMEs grew by a simple annual average of Sh52 billion. In perspective, what does this new Sh30 billion fund represent that is additional to, or different from, the (expected) normal growth in SME financing?
In “market share” terms in 2013, Tier 2 banks accounted for 46 per cent of total lending to SMEs, according to the survey. By comparison, Tier 1 and Tier 3 banks accounted for 36 per cent and 18 per cent. In terms of exposure, SME lending accounted for 16, 33 and 45 per cent of loan portfolios of Tier 1, 2 and 3 banks respectively.
To generalise in simple terms, Tier 2 banks made the most lending to SMEs, but Tier 3 banks were the most exposed, hence reliant, on SME lending.
What are we trying to fix here
Given these observations, what did the survey say about interest rates? Lending rates for Tier 1 banks ranged from 17.5 per cent to 20.5 per cent for microenterprises/SMEs (MSMEs) and 15.6 per cent for large enterprises.
For Tier 2 banks, the comparative rates were 16.4 per cent to 18.5 per cent for MSMEs and 16.2 per cent for large enterprises, while respective numbers at Tier 3 level were 17.1-23.5 per cent (MSMEs) and 14.8 per cent for large enterprises. Expectedly, (least risk) large enterprises get the lowest rates across the board.
Again, without “over-crunching” numbers, and given these different proportions (and therefore market and customer segmentations) across the different levels of banks, how does KBA’s “one-size-fits-all” response counter Parliament’s “one-size-fits-all” proposal?
Mostly, but what are we trying to fix here? Is it low deposit rates that are a disincentive to saving? Or house borrowing rates in a country with less than 30,000 mortgage account holders (out of 8.5 million loan accounts of which 7.8 million are personal accounts)? Is it about hidden, and less hidden, charges that hit our personal accounts? Value for money in bank services? Could it be about lending to SMEs, or MSMEs, long seen as a future growth driver in Kenya?
We might think we are trying to fix an SME access to credit problem, except the problem isn’t just about access to credit. The mover of the Bill, Jude Njomo, spoke of “impossible” borrowing rates facing small businesses. KBA, with an eye for the public optics, issued a response aimed at SMEs.
There is, correctly, a wider SME growth and development problem that needs fixing here. An alphabet soup of SME funds — targeting women, youth and disadvantaged group — exists in our national framework.
Forget the National Youth Service, think Youth Enterprise Development Fund, Women’s Enterprise Fund and Uwezo Fund. Add the Micro and Small Enterprises Authority. Factor in Youth Empowerment Centres. All created, despite the duplication and fragmentation, in the last 10 years.
Then add in the range of development partner initiatives, which focus not simply on finance, but empowerment. One example is the World Bank’s recently launched Sh15 billion Kenya Youth Empowerment and Opportunities Project. Throw in the private sector, like KCB’s ambitious five-year, Sh50 billion 2jiajiri initiative.
Don’t forget the Access to Government Procurement Opportunities (AGPO) initiative that was the subject of two recent Cabinet meetings.
Then recall one big promise made in the Jubilee manifesto, to create a super-entity supporting women, youth and SMEs titled Biashara Kenya, which would have merged our current mélange of initiatives and helped us think more clearly about SME financing.
To quote from the subsequent Report of the Presidential Task Force on Parastatal Reforms, “Biashara Kenya’s mandate is to empower Youth, Women and the SMEs that provide a livelihood to the majority of Kenyans. It is designed to be the Government’s principal agency for developing and financing SMEs and integrating small businesses into the supply chains of larger domestic, regional and global enterprises.
The report continues “In its activities it is expected to go beyond SME financing to encompass investments in youth, women and small enterprises… provision of secure business locations; credit and capacity building; (and) access to information, labour, capital and markets”.
This may be an unfair treatment of the Bill, but one suspects if Biashara Kenya had been formed in June 2014 as envisaged, we would be having a different policy — and SME — discourse than the one we are having in the background of our permanent political cacophony.
