Personal Finance

Nurturing sustainable business growth by empowering SMES to borrow responsibly

smes

SMEs are an important pillar of Kenya’s economy. PHOTO | SHUTTERSTOCK

Self-employment can be a rewarding path to economic independence, particularly for the young, unemployed population, despite the inherent challenges. According to a 2019 survey by Statista, a global data and business intelligence platform based in Germany, Kenya accounted for slightly more than 49 percent of the total self-employed individuals in Africa. Neighbouring countries like Uganda and Tanzania boasted even higher percentages.

While these statistics may have shifted during significant global events like Covid-19, one constant challenge remains: maintaining newly established small businesses due to poor financial skills. This situation is exacerbated by difficulties faced while trying to access credit, especially through traditional banking channels.

In response to this predicament, new business models have emerged, offering microfinancing at flexible repayment on daily, weekly and monthly terms. Some models even enable entrepreneurs to obtain financing for assets, like motorcycles, which then serve as collateral for the loan.

This new credit system has given rise to relatively new business models, such as lease-to-own and pay-as-you-go, gaining popularity among young entrepreneurs with limited capital to start their businesses.

As we continue to register this positive growth, it is crucial to prioritise responsible borrowing. The government and the private sector must take up this challenge, ensuring individuals make well-informed financial decisions and comprehend factors like interest rates, risk management, and regulatory considerations before committing to loans.

In the private sector, financial service providers must play their part by ensuring customers grasp these principles guided by regulations set by the government.

Firstly, customers need to be empowered to understand the impact of borrowing and the complete loan journey, from initiation to final repayment.

Borrowers and customers should be educated about the importance of financial discipline, ensuring loan instalments are paid on time and setting aside funds for ‘rainy days’.This not only prevents defaults but also cultivates a savings culture as a way of life.

Financial literacy for small businesses provides the right knowledge to make informed decisions about savings and insurance coverage, thus protecting their livelihoods and ensuring financial stability for their families, even during difficult times.

Secondly, for there to be a sustainable impact, the sector must partner with the government to promote financial inclusion and literacy through policy and regulatory frameworks.

In addition to consumer protection measures, policymakers should facilitate education and confidence-building initiatives for those currently excluded, coordinating, establishing standards and curricula, and possibly co-funding private sector efforts.

Lastly, holistic financial inclusion isn’t solely about opening bank accounts for everyone; it is about ensuring all individuals and businesses, regardless of size or formality, have access to affordable and appropriate financial services.

This empowers them to manage their finances wisely, invest in their futures, and weather economic storms. In this regard, financial literacy plays a pivotal role.

Mr Kaneps is the founder and CEO of Watu Credit.