Kenya gets Sh168bn economy boost on improved credit access

Increased access to finance through digital revolution especially by the small and medium-sized enterprises (SMEs) has pushed economic growth by 0.45 percentage points annually, equivalent to an additional Sh168 billion in 10 years.

Access to credit has also eased due to a 65 per cent fall in transaction costs enabled by digital technology in the past decade, according to a new report authored by International Monetary Fund (IMF) resident representative Armando Morales, former Central Bank of Kenya (CBK) Governor Njuguna Ndung’u, and CBK-owned Kenya School of Monetary Studies research head Lydia Ndirangu.

Though the preliminary study, released by the IMF, covers the period 2006 to 2013, when SMEs access to credit brought about Sh116 billion to the economy, inclusion of 2014 and 2015 brings the total to Sh168 billion over the review period.

The full study is however termed as “forthcoming.”

“All these channels are expected to be significant in Kenya given that country’s substantial increase in access to credit by small and medium-sized enterprises—from 25 to 33 per cent between 2006 and 2013. Our preliminary results show a reduction in transaction costs of 65 per cent during 2006–13, with an annual contribution to gross domestic product (GDP) growth of about 0.45 percentage point,” said the three scholars.

The authors estimated the growth from the reduction in transaction costs and increase in financial inclusion which has enabled even the poor to have access to a mobile money account through which they can store and transfer value.

Mobile money has pushed financial inclusion to 75 per cent of adult Kenyans.

In the 10-year period, the GDP has more than tripled in size from Sh2.03 trillion in 2006 to Sh6.22 trillion last year.

Though real GDP growth has stayed just above 5.0 per cent in the past five years compared to 6.4 per cent in 2006, the economy is three times bigger thereby benefiting the SME sector.

The writers said that Kenya was a good example of the potential benefits of financial inclusion and noted that additional funds had been channelled to entrepreneurs while the cost of transactions was cheaper and talented people could raise funds for business.

“First, it [financial inclusion] generates additional funds channelled to entrepreneurs. Second, lower transaction costs help improve the efficiency of contracts. Finally, more efficient allocation of funds in the financial system allows talented people without resources to become entrepreneurs,” said the authors.

The authors said that financial inclusion made saving easier and enabled accumulation and diversification of assets, boosting economic activity in the process.

The report noted that banks have had to bear high costs to provide financial services to the poor while market segmentation, low technological development, informality, and weak regulation increase the costs of doing business.

“In Kenya, and in Africa more broadly, markets are heavily segmented according to income, niche, and location, and their sophistication, level of development, and formality or informality reflect that segmentation,” said the report.