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CBK warns 75pc of small businesses risk collapse

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CBK Governor Patrick Njoroge. FILE PHOTO | NMG

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Summary

  • SMEs surveyed said without help they would close by the end of June because they lacked credit buffers and other resources to survive the slowdown caused by the Coronavirus.
  • Should small firms be financially distressed, this will deepen job losses given that they account for the bulk of jobs in the country and have in recent years emerged as the biggest drivers of new hiring.

About 75 percent of Kenya’s small and medium-sized businesses face collapse if they fail to get fresh funds from banks or equity partners by end of next month, a Central Bank of Kenya (CBK) survey reveals.

Citing a study conducted in April, CBK Governor Patrick Njoroge on Thursday said the small businesses surveyed had said that without help they would close by the end of June because they lacked credit buffers and other resources to survive the slowdown caused by the Coronavirus.

The impact of social distancing, dusk-to-dawn curfew and closure of businesses like bars and restaurants has impacted on consumer spending, leading to job cuts and unpaid leave for workers as firms race to cut costs.

Should small firms be financially distressed, this will deepen job losses given that they account for the bulk of jobs in the country and have in recent years emerged as the biggest drivers of new hiring.

“There was a survey that was done at end of April and that survey indicated that three quarters do not have cash beyond two months. That means by end of June three quarters of the SMEs are already on the ropes and will be gone because they do not have any cash to keep the lights on,” Dr Njoroge told a virtual news conference.

“I wanted to underscore the urgency of... putting in place the credit guarantee scheme. This is extremely urgent. We cannot do this as business as usual.”

The government will provide guarantees for loans given to Kenya-based small and medium-sized businesses, meaning the government commits to repay banks a share of the loans should the small traders default.

The Treasury has sought MPs’ approval for Sh3 billion as seed capital to kick-start the scheme, which has received a €100 million (Sh11.7 billion) commitment from the European Union.

Dr Njoroge on Thursday said details of the credit guarantee scheme were still being worked on.

Kenya has reported 1,618 confirmed coronavirus cases and 58 deaths.

To limit its spread, Kenya has suspended commercial flights in and out of the country, imposed a dusk-to-dawn curfew and banned public gatherings.

It has also halted movement in and out of counties hit hard by Covid-19, including Mombasa and Nairobi—regions that form key pillars of Kenya’s economy.

Small traders like barbershops, hotels and pubs, which have had to close under coronavirus lockdown measures, have been hit hard by effects of the virus.

“Most businesses would like financial support from the government in form of grants or cheap accessible loans to help them pay salaries,” said Karole Karuga, chief executive of Kenya Private Sector Alliance (Kepsa)—private sector lobby.

More Kenyans are starting to operate small businesses out of the boots of their cars to make ends meet as the coronavirus crisis has hit jobs and the economy.

Boniface Mbugua, who lost his catering job, drives his car to markets to sell food to traders.

John Njenga’s taxi business struggled to get passengers, forcing him to start hawking avocados and bananas from his car.

Despite such entrepreneurship, lending to small businesses has traditionally been seen as presenting more risk of default compared to lending to large, established private firms and government-owned institutions. This has seen some banks opt to insure some or all of their loan portfolios to such small businesses.

The economic fallout brought by the coronavirus has made SMEs’ financial position even more precarious.

Without the government stepping in to shoulder some of the credit risk, banks are unlikely to expand their lending to the small businesses that face the biggest challenge in funding their working capital and expansion projects.

Before the emergence of Covid-19, the number of formal jobs generated by the economy had fallen to a seven-year low in 2019, dimming the hopes of school and college leavers in a year when only 78,400 new formal jobs were reported. However, the decline was counterbalanced by the growth in informal jobs, which rose from 744,000 in 2018 to 767,900 last year, according to the Kenya National Bureau of Statistics (KNBS).

The rise in informal jobs highlights the growing importance of the Jua Kali sector as an employment creation machine in Kenya.