Micro-financiers hit SMEs with up to 32pc interest rates

Kenya’s diaspora remittances have continued to grow with projections indicating a new record high for 2023. FILE PHOTO | POOL

Microfinance banks (MFBs) are charging small businesses up to 32 percent interest rates on loans despite insisting on collateral, with the Central Bank of Kenya (CBK) warning that such high rates will hurt growth.

CBK survey report on micro, small and medium enterprises (MSMEs) access to credit shows MSMEs raised the average interest rate charged to these businesses to 27 percent at the end of last year compared with 15.5 percent charged by commercial banks.

MFBs charged small businesses between 20 percent and 21 percent on average compared to 2020 where charges ranged from 12.3 percent to 22 percent, pointing to the increased cost of accessing loans by small businesses.

“The highest reported rate was charged on micro enterprises at 32 percent and the lowest at 10 percent,” said the CBK.

Most of the small businesses tapping the loans were in trade, real estate, transport and communication. The CBK says term loans and bank overdrafts accounted for more than 90 percent of the MSME loan portfolio.

“Owing to the high cost of these facilities, they are not appropriate for long-term business developmental needs and do not support growth,” says CBK.

According to the regulator, while these typical products can be useful to finance short-term needs of MSMEs such as working capital and modest growth, they are available mostly to well-established medium enterprises and exclude start-ups.

The high-interest rates are despite the CBK survey showing the micro-lenders were requiring MSMEs to post collateral that covers between 83.06 percent and 91.38 percent of the loan value.

MSMEs also made up 59.5 percent of microfinance banks’ source of funding compared with 14.9 percent for banks but the high deposit holdings are failing to help them in securing better rates.

The small businesses were taking an average of 27 months to repay loans as at December 2022, slightly lower than 30 months in 2020.

There were 1.18 million active MSME loan accounts in the banking industry as of December last year, valued at Sh783.3 billion, rising from 915,115 accounts worth Sh638.3 billion in 2020.

Commercial banks and mortgage finance companies disbursed Sh750.3 billion while MFBs disbursed Sh32.98 billion.

The CBK data shows 216,951 accounts valued at Sh90.4 billion or 11.5 percent of total outstanding MSMEs loans were classified as non-performing, being an improvement from 2020 when Sh98.7 billion or 14.6 percent of the overall portfolio was in default.

However, the reduced default rate did not translate into reduced interest rates.

A total of 18,105 MSME loans valued at Sh9.6 billion were written off last year, with commercial banks and MFBs, writing off Sh9.1 billion and Sh510 million, respectively.

Loans from MFBs were last year averaging Sh27,928, Sh483,061, and Sh4 million for micro-, small, and medium enterprises, respectively.

This compares to Sh23,000 (micro), Sh400,000 (small) and Sh4.5 million (medium) in 2020.

Commercial banks were lending an average of Sh112,849, Sh2.8 million and Sh8.2 million for micro, small and medium enterprises respectively against Sh86,000, Sh2.9 million and Sh7.7 million in 2020.

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