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Credit squeeze gives enterprise bad 2018 dreams

Banks have cut lending and instead put money in ‘risk-free’ government papers for assured earnings. FILE PHOTO | NMG
Banks have cut lending and instead put money in ‘risk-free’ government papers for assured earnings. FILE PHOTO | NMG 

Tucked in a slow street deep in Industrial Area of Nairobi city is a small flavoured tea processing company that can easily be mistaken for any other go-down.

Melvins Tea, one of the country’s most famous flavoured beverage brands, is the brain-child of Ms Flora Mutahi a former auditor turned industrialist and also the Chair at Kenya Association of Manufacturers (KMA).

But do not let the accolades blindside you.

Ms Mutahi says 2017 has been one of the most difficult years for small manufacturers like her and other mid-sized companies that rely on credit access to meet their operating capital obligations.

“Lack of access to credit has been affecting industries. With banks able to lend to the government at rates close of the interest rate ceiling of 14 per cent the risk to lend to businesses is much higher,” she told the Business Daily.
“Formal businesses can still borrow, but how about that informal SME that has already been affected by that?”

Rate capping law

Kenya introduced a rate capping law in September 2016 that fixed interest rates on loans at four percentage points above the central bank rate and also imposed a minimum deposit rate of 70 per cent of the benchmark rate.

The law has been partly blamed for exacerbating a slowdown in credit growth to a low of 1.7 per cent in September — it’s lowest in more than a decade — from 25 per cent in mid-2014.

And with this credit squeeze, small business have struggled to get funding for operations and curtailed the ripple effect their good performance have on the job market and other sectors of the economy.

A study by The World Bank in 2014 showed that Kenya’s GDP growth was mainly dependent on credit growth.

The multinational lender said last week that the country’s growth prospects might be hurt by the interest rate capping law, saying it should be reversed and accompanied by policy changes that would increase credit access.

While the aim of the law was to make credit more accessible and help businesses expand by adopting more capital intensive models of production, banks reacted by limiting lending and investing more of their deposits in ‘risk-free’ government papers that are currently fetching a decent yield.

Interest rates on Kenya’s 184- and 364-day Treasury bills have averaged 10.3 per cent and 10.6 per cent this year, making it attractive for commercial banks and ignore lending to businesses.

“I think it is clear that these rates have been problematic to us in many ways. The growth of credit has fallen to where it was 10 years ago,” Central Bank governor Patrick Njoroge said during a media briefing to review monetary policy decision made in November.

Interest income

Interest income from customer loans in the third quarter financial results from banks fell 14 per cent to Sh211 billion from Sh244 billion in similar period a year ago, while profits dipped nine per cent to Sh77 billion from Sh84 billion attributed a slowdown in credit growth.

Such dismal performance may sound harmless and insignificant until you look at the impact it has had on small and medium enterprises (SMEs) in the country, which, according to Dr Njoroge, are the engine that helped the economy to weather strong headwinds in drought and prolonged electioneering.

Both the World Bank and the International Monetary Fund (IMF) have chimed banks calls for the reversal of the rate caps.

The IMF warned against the continued use of interest caps claiming that it has reduced economic growth in the country and has made credit more inaccessible to businesses.

The fund called for removing the caps, saying that although the short term effects are manageable, they cause a greater risk financial stability in the long run.

Enabling environment

Studies in other countries have always advocated for an enabling environment for banks to compete in pricing their loans as an alternative to capping.

This, they say, expands access to finance and provide a wider range of products to borrowers and enable small businesses to grow, increasing economic activity.

“SMEs are the growth engine of the country. So going into 2018 and forward what you’ll tend to find is that our GDP growth targets may not be achieved,” said KAM’s Ms Mutahi.