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Central bank says drop in SME loans risks jobs, growth

A Barclays Kenya official assists a Barclays customer during the lender's SME campaign open day in Eldoret on June 17, 2016. PHOTO | FILE | NMG
A Barclays Kenya official assists a Barclays customer during the lender's SME campaign open day in Eldoret on June 17, 2016. PHOTO | FILE | NMG 

The Central Bank of Kenya (CBK) has warned that the decline in lending to small enterprises since the introduction of the legal cap on loan rates threatens jobs and economic growth.

Latest CBK data shows bank lending to micro, small and medium size enterprises (MSMEs) fell by 5.7 per cent between August and April, even as lending to big business and individuals starts to pick up.

Total bank lending to MSMEs stood at about Sh233 billion in August, meaning that the slowdown has seen it fall by an equivalent of Sh13 billion to Sh220 billion.

“Although the smaller banks have increased SME lending, the bigger banks have recorded a reduction. There are 1.7 million MSMEs in Kenya, and therefore it is a concern since this is where job creation is and the output for economic growth will take place,” said CBK governor Patrick Njoroge yesterday.

“There has also been a tightening of credit standards, which has led to lower volumes of loans going to customers perceived as risky borrowers.”

SMEs are considered to be among the riskiest borrowers by banks, due to a relatively high level of failure after start-up. They, however, employ millions of Kenyans, who have been unable to access the limited pool of formal jobs.

The economy created 747,300 new informal sector jobs in 2016, up from 713,600 a year earlier. About 85,600 formal jobs were created, from 128,000 in 2015 and 134,200 in 2013 — reflecting a falling trend.

The CBK has projected the economy to grow by 5.7 per cent this year, while the International Monetary Fund forecasts growth to come in at 5.3 per cent, down from 5.8 per cent in 2016.

While there has been a sustained fall in credit to SMEs in the wake of rate caps, other segments of the economy are beginning to record growth in credit access, with the governor saying that the contraction in credit growth for the private sector, in general, has bottomed out.

Between February and April this year, the manufacturing sector recorded a Sh13.8 billion or 4.9 per cent growth in gross loan volume to Sh293.4 billion, while real estate recorded a growth of 3.4 per cent or Sh12.6 billion to Sh380 billion during the period.

Personal or household loans grew by Sh8.8 billion or 1.5 per cent to Sh614 billion.

The period between August and April saw a 23.4 per cent rise in the number of loan applications, even as the value dropped by 18.3 per cent—meaning that the average amount in a loan application has fallen.