SMEs rely on overdrafts as banks fail to offer options

Small and medium sized businesses are relying on expensive bank overdrafts to finance short-term needs due to failure by banks to develop friendly products, Financial Sector Deepening (FSD) has said.

Data from Central Bank of Kenya shows businesses are paying an average of 15.7 per cent monthly for overdrafts that are usually repayable within 30 days while paying 15.5 per cent per annum for long-term debt.

“The development of other important SME finance products, such as factoring (getting cash for invoice) and financial leasing, has stalled over the last few years. Developing such products is expected to lower transaction as well as borrowing costs for SMEs and reduce the reliance on collateral by drawing on a more diverse set of information,” said FSD in a report released on Thursday.

The Bill Gates funded non-governmental organisation noted lending to SMEs constituted 23.4 per cent of the industry loan book as at the end of 2013 compared to 20.9 per cent in 2011 indicating banks were warming to the SMEs.

As at December 2013, banks had loaned the small and medium sized businesses Sh332 billion up from Sh225 billion in 2011 and Sh133 billion in 2009.

Growth of the Kenyan economy has seen previously struggling small businesses flourish, forcing them to seek additional funds from banks.

Previously, they had relied on funding from family and friends and friendly credit terms by suppliers to support their growth as banks gave them a cold shoulder.

Donors have come in to support banks through credit lines and partial guarantees to encourage them to lend to SMEs. In 2011, the government also made attempts to help the sector by creating a Sh3.8 billion revolving fund which, however, did not take off.

African Development Bank (AfDB) launched a guarantee fund, headquartered in Nairobi, to support small-and micro-businesses unable to access credit due to lack of security.

Banks have, however, identified the sector as key to their growth and are setting up departments to specifically serve SMEs. Their concentration has, however, been on long-term loans that can be backed by assets neglecting the area of working capital.

FSD has also questioned the sustainability of donor cash channelled through banks for onward lending to the businesses.

“Given that the market for SME finance is relatively vibrant, the question is what gap donors are filling. Inevitably there is bound to be overlap in the donors’ involvement,” said FSD.