Experts fault State for SMEs credit crunch

Winnie Ngumi
Ms Winnie Ngumi (in red), Mr Mukesh Desai and Ms Leah Wambui, who were among the guests who attended the Kenya Top 100 Mid-sized companies’ Survey 2019 presentation at KPMG offices in Nairobi on September 12, 2019. PHOTO | SALATON NJAU 

Heavy government borrowing from commercial banks is to blame for the biting credit crunch facing Small and Medium Enterprises (SMEs), experts have said.

Head of debt advisory at audit firm KPMG East Africa Nigel Smith said that banks, driven by the interest rate capping law introduced in 2016, have opted to lend to the government, which is less risky compared to SMEs.

Mr Nigel spoke during a forum for the 2019 Top 100 Survey for mid-sized companies, carried out in partnership with the Business Daily.

He said lack of detailed business plans had further pushed banks away from funding the SME sector.

Since the introduction of the interest rate cap at four percentage points above the Central Bank lending rate in 2016, banks cut down on credit to SMEs, leaving them to heavily rely on owners, family and friends for funding.


“Globally, obtaining sufficient credit is a major problem for SMEs but I do not believe that the interest rate capping in Kenya is the sole problem affecting local SMEs. The government has an insatiable desire to borrow and this is being funded from local banks. Why would a bank lend to an individual or a firm at 13 percent when they can purchase 364-day Treasury Bills at 9.5 percent return, taking only sovereign risk?” Mr Nigel posed.

Local banks have in three years to July amassed Sh1.509 trillion worth of Treasury bills and bonds, equivalent to 54.1 percent of the government’s total domestic debt in the period, underlining their appetite for the risk-free government loans.

SMEs have in return grappled with a credit crunc,h leaving them at pains to run their day-to-day operations including salary payments with many folding up in the constrained financial environment.

Data by the Kenya Bureau of Statistics (KNBS) in 2017 showed that nearly 400,000 SMEs die before their second birthday, mainly on funding struggles.

Despite the credit constrains, SMEs remain the country’s biggest single employer, hiring an estimated 14.9 million people as at end of 2017, according to the KNBS.