Capital Markets

Lenders shun SMEs despite state guarantee

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Parliament buildings in Nairobi. FILE PHOTO | NMG

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Summary

  • Banks continue to shun small businesses, disbursing only Sh296.4 million since the government launched a Sh3 billion loan guarantee scheme.
  • Parliament Budget Office (PBO) said banks selected under the scheme loaned out the paltry sum between October last year and April 2021.

Banks continue to shun small businesses, disbursing only Sh296.4 million since the government launched a Sh3 billion loan guarantee scheme.

Parliament Budget Office (PBO) said banks selected under the scheme loaned out the paltry sum between October last year and April 2021.

Lenders have not been keen to loan the private sector given the uncertainties of Covid-19 on the economy let alone small businesses which they feel pose a higher threat.

The government sought to reassure banks by offering to cover for defaults but lenders are still rejecting loan applications by small and medium enterprises (SMEs) as default rates remain elevated at 14 percent of their total loan book.

“The operationalisation of the Credit Guarantee Scheme in October 2020 has resulted in the disbursement of Sh296.4 million loans as of the end of April 2021. This indicates that the disbursement under the scheme has been slow,” the PBO said.

Over 90 percent of the private sector constitutes Micro, Small and Medium Enterprises (MSME). However, the proportion of the MSME loan portfolio to the total banking sector loan book stands at 20.9 percent.

As of December 2020, the Kenyan banking sector’s gross loans and advances accounted for Sh3.1 trillion with only Sh638.3 billion for small businesses.

During the period, Sh234.7 billion MSME loans were restructured largely due to the adverse impact of the Covid-19 pandemic.

A study by the Central Bank of Kenya (CBK) showed a quarter of small businesses seeking loans were turned away by lenders last year on the fallout of the Covid-19 pandemic that sparked fear of defaults leading to risk averseness.

The CBK study showed that banks turned away 28 percent of small businesses while microfinanciers declined 96 percent of the loan applications made to them.

The pandemic disrupted business on state-imposed lockdown measures, curfew, and cessation of movement leading to losses, cash flow problems, and even collapse of some businesses.