Unlocking credit for SMEs with financial tools

Working capital financing enables SMEs to complete orders because the contract term is short and easy to monitor. FILE PHOTO | NMG 

By SAM WAWERU

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Summary

• Not only do small firms have more difficulty accessing finance, but they are more adversely affected by this strain than larger firms.
• SMEs are particularly in need of bank services because they lack the cash flow to make large investments and often face obstacles accessing capital.
• Working capital financing enables SMEs to complete orders because the contract term is short and easy to monitor.

A thriving SME sector is often considered a sign of a healthy economy as a whole. SMEs are a fundamental part of the economic growth narrative and they play a central role in sustaining growth, supporting innovation and promoting prosperity.

The SME sector today employs about 85 per cent of the Kenyan workforce and is a key lever in the enhancement of the country’s global competitiveness.

Despite the sector’s enormous growth over the years, it is strongly restricted in accessing the capital that it requires to grow and expand, with nearly half of SMEs citing access to finance as a major constraint.

Especially elusive to SMEs are short-term and working capital loans. Not only do small firms have more difficulty accessing finance, but they are more adversely affected by this strain than larger firms.

SMEs are particularly in need of bank services because they lack the cash flow to make large investments and often face obstacles accessing capital.

Short-term and working capital loans in particular help SMEs grow incrementally. Banks can provide short-term working capital to such SMEs to purchase supplies, pay employees, and meet obligations to clients.

Working capital financing enables SMEs to complete orders because the contract term is short and easy to monitor.

While banks are keen on supporting the sector, they are often hampered especially by the lack of adequate information to make lending decisions and the perceived risks associated to the sector.

This challenge has in part been addressed by global players such as the European Investment Bank (EIB) which has partnered with local financial institutions to provide capital and technical assistance to reduce the barriers for local institutions to operate in the SME sector.

EIB recently signed a credit line of Sh2.2 billion with HF Group’s banking subsidiary, HFC Limited under the EIB’s East and Central Africa Private Enterprise Finance facility.

The new funding will be channelled towards financing the working capital and expansion of HFC’s SME customer base.

In addition, HFC will benefit from EIB funded technical assistance program aimed at strengthening capacity in line with its business strategy.