Kenya lags behind sub-Saharan Africa in credit provision to small and medium-sized businesses (SMEs), highlighting the funding challenges facing local entrepreneurs, a new report shows.
The report, ‘The Mobile: Deeping Financial Inclusion But at a High Cost’ shows that the total credit as a percentage of the gross domestic product (GDP) stands at 29 per cent which is lower than the sub-Saharan Africa average of 48 per cent.
The report by Egyptian investment bank EFG Hermes shows that while Kenya is ahead of Rwanda (21), Ethiopia (18), Uganda (15) and Tanzania at 14 per cent, it is significantly behind South Africa that stands at 148 per cent, painting a not so flatering picture of the funding troubles the country’s small businesses face.
The credit freeze on Kenyan SMEs comes on the back of interest rate capping that was enacted through the Banking Act in September 2016.
The law capped the lending rate at four points above the Central Bank of Kenya base rate to commercial banks, which is currently at nine per cent — meaning banks cannot charge more than 13 percent interest on loans.
The rate cap has seen banks reduce their loans to Kenya’s estimated 1.56 million registered and 7.41 million unregistered SMEs. The lenders have since turned their focus to government securities, which are less risky.
The report further shows that the global average of credit made available to small businesses as a percentage of the GDP is 104 percent while in North America it is 192 percent.
In a working paper, the International Monetary Fund (IMF) says the introduction of interest rate caps led to a nearly 10 per cent fall in credit provision by banks to SMEs on increasing lending to large corporates and households.
“We find that the law on interest rate controls has had the opposite effect of what was intended. Specifically, it has led to a collapse of credit to micro, small, and medium enterprises, shrinking of the loan book of the small banks, and reduced financial intermediation,” the IMF says in its latest report ‘Do Interest Rate Controls Work? Evidence from Kenya’.
The IMF adds that the interest rate capping led to a sharp decline in bank credit to SMEs for expansion, with trade and agriculture as the two hardest-hit SME sectors, deepening their existential crisis that is already dogged by high salaries, water and electricity bills.
The Kenya National Bureau of Statistics (KNBS) data at the end of 2017 show that the sector employed an estimated 14.9 million people and contributed Sh3.371 trillion or 33.3 per cent of the GDP.
In 2017, the KNBS said that nearly 400,000 micro, small and medium enterprises die before their second birthday despite the sector being the country’s biggest employer.
Most of the SMEs continue to rely on the owners, family and friends for funding which is not enough for them to remain competitive in the market.
While the small businesses continue to endure credit freeze, they also face an all-too-familiar problem in delayed payments for services and goods provided to the national and county governments.
Kenya Private Sector Alliance chief executive Carole Kariuki in January said most SMEs have been plunged into cash-flow problems leading to staff layoffs and salary delays, auctioning by banks and closures.
Despite the prolonged payment delays, there is no law to compel the government to promptly pay SMEs that have done business with State agencies piling more woes on the country’s biggest employer.
However, a legislative proposal has recently been made to requiring that suppliers be paid within 60 days.
The KNBS says 29.6 per cent of the SMEs close business due to a lack of operating funds amid increased expenses, falling income and losses incurred.
Experts have in the past called for a reduction in the number of licenses or their integration to ease the financial burden for SME, besides making licensing faster and more efficient.