Since the capping of loan interest rates
last year, the banking sector has shunned lending to what they describe
as high risk businesses, especially SMEs. Indications are that banks
are stashing cash from retail savings into the risk-free government
securities, thus diverting essential credit from businesses.
Banks
say the trend is likely to continue unless interest capping laws are
reversed .The latest audited reports also indicate that even with
interest capping, banks continue to make fairly good profits.
Last week, the Treasury introduced M-Akiba to connect retail savers direct with government bond market.
Although
not explicitly admitted by the Treasury, this strategy may be intended
to dilute banks’ participation in the bond market, and probably push
them back to their core business of lending.
My
interest here is in SMEs which populate all the economic sectors with an
estimated GDP contribution of about 33 per cent and 84 per cent of
national employment.
SMEs are critical cogs in
business value chains in the supply of inputs and distribution of
outputs. SMEs interface with Kenyans in nearly all aspects of their
lives. For sustainable national economic growth, SMEs should have access
to affordable credit.
SMEs are unfortunately caught up
in the middle of the ongoing interest rate regulatory changes. Without
capping, interest rates charged to SMES are quite high and mostly
unaffordable.
When the interest rates are capped, credit to SMEs is
certainly more affordable but access is curtailed by onerous “fail-safe”
lending conditions set by banks.
Whichever way,
businesses are in a stranglehold and cannot grow. That this critical
segment of our economy is labelled by banks as “risky’ should be a large
enough concern to elicit a national debate.
How to
strengthen SMEs to become credible low-risk borrowers should be a
subject pre-occupying not only banks, but the government, tax
authorities, and larger companies whose value chains depend on SMEs.
I
believe it is smart business for banks to recognise long term business
opportunities in SMEs and nurture them to create a strong and high
quality future lending base.
Banks should proactively
partner with other interested groups (larger businesses, business
academia, and business associations, etc.) to mentor and up-skill
laggard SMEs to improve their business models, corporate governance and
financial accountability.
But how should this be
achieved? I see a graduated quality-based credit rating and
certification system for SMEs based on achievable criteria defined by
the lenders. There are business schools and corporate governance experts
in Kenya who can mentor, coach, qualify and certify SMEs to levels
of business competence acceptable to credit providers.
This can motivate SMEs to professional self-improvement to increase access to credit and other business opportunities.
The
critical success factor is a wide group of SMEs who are qualified and
certified as responsible businesses and borrowers acceptable to banks.
This is a win-win approach for banking, business and the economy in
general. It is a proactive initiative that the banking association
should be organising, and participating in resourcing.
Thrust and approach
The
bond market alternative the banks are pursuing is a speculative option
that is not sustainable in the medium to long term. All over the world
banking success is anchored on strong and trusting partnerships with
large, medium and small businesses.
I am also of the
opinion that banks should modify their lobby thrust and approach. They
need to genuinely support the current interest capping law, and
gradually push for selected value adding enhancements and modifications.
Gradualism ultimately delivers intended results.
Any
formula-based law or regulation is a dynamic tool that can and should
be occasionally modified to reflect lessons and experiences learned.
By
following this approach, the banks will sound more responsive to the
general mood and needs of the nation and the business fraternity.
At
an appropriate time in the future, when majority of businesses have
professionalised their management systems, and consumer protection and
competition laws have sufficiently matured, then we can safely and
comfortably revert to free market interest rates.
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