Africa Logistics Properties West Warehouse that’s targeting SMEs at Tilisi Logistics Park in Limuru Kiambu County on October 28, 2020.
What you need to know:
- Small outfits have always been the poster-boy for Kenyan banks for years, helping lenders attract cheap loans from development finance institution for onward lending.
- Despite the attention, small firms say they have a problem approaching local lenders who benefit from the onward loan facilities.
- The government introduced preconditions that stipulates that targeted SMEs must have an annual turnover of not more than Sh100 million and a workforce of between 51 and 250 workers.
- SME’s who have no idea about book keeping, inventory management, cash flow are already using applications that can help them extract this data
As Kenya gears up for post Covid recovery the small business has become an obsession of policy makers, banks and international development finance institutions. But this has not always been the case.
Small outfits have always been the poster-boy for Kenyan banks for years, helping lenders attract cheap loans from development finance institution for onward lending.
If reports are anything to go by, 36,706 small businesses have benefited from KCB’s Tujiajiri programme, 215,000 youth benefited from Absa’s Ready to work, Stanbic Bank has connected 28,000 SMEs through Enterprise Direct Cooperative Bank has onboarded 71,464 MSMEs on a new offering that seeks to support resilient businesses through financial and non-financial services and while Equity Bank has disbursed 12.6 billion to 26,588.
Despite the attention, small firms say they have a problem approaching local lenders who benefit from the onward loan facilities.
Following the announcement of the government SME credit guarantee scheme, there is renewed interest in Kenya’s small businesses as banks sign up to provide credit and the government bets all its chips in the sector for recovery.
The SME guarantee fund proposed by the government would give Sh10 billion while the European Union Sh11.7 billion (100 million euros) which will cover the risk for banks extending loans to SMEs reducing the fear of defaults.
Structural problems
But whether the money will get to the small businesses is a question that remains to be answered given structural problems that have denied small businesses money are yet to be confronted.
Even the government realises that banks will not just open purse strings as a result of the guarantees which they fear may even offer moral hazard where businesses will default knowing there is a guarantee in the first place.
The government introduced preconditions that stipulates that targeted SMEs must have an annual turnover of not more than Sh100 million and a workforce of between 51 and 250 workers.
Through the Public Finance Management (Amendment) Bill, 2020 Treasury also said it will not fully guarantee loans given to small and medium enterprises and that they will be required to provide collateral for the money that include assets such as machinery and other property.
Banks fear exposure to nondescript businesses crouched in unknown locations whereas most small businesses prefer hiding in plain sight to keep the taxman away. While there are about 7.41 million MSMEs in Kenya, only 1.56 million are licensed.
Kenya’s Micro, Small and Medium Enterprises (MSMEs) make up a big chunk of the economy, contributing approximately 40 per cent of the GDP but the majority falling in the informal sector.
The suggestion by the capital markets regulator for small businesses eyeing billions from the state funded credit guarantee scheme to be forced to list as part of pre-conditions for access of the funds talks to the thinking that SMEs must move into formal space, even gradually.
Stakeholder engagement and participation
CMA director of policy and regulation Luke Ombara said this will give banks comfort they can get their money back by addressing the problem of transparency and governance.
“We are in the process of making a proposal to consider provision for mandatory listing by MSMEs qualified to access funds from the Governments Credit Guarantee Scheme as a measure of promoting corporate governance and transparency in the use of proceeds for business growth, subject to stakeholder engagement and participation,” Mr Ombara said.
However SMEs are bound to view this shift to formal space as bureaucratic, and a ploy to lure them to the taxman.
“This is putting hurdles on top of hurdles. SMEs require fast cash and introducing bureaucracy will turn them away. Subjecting them to bureaucracy will force them to continue operating in the informal space,” Kenya National Federation of Jua Kali Association CEO Richard Muteti said.
SME’s who have no idea about book keeping, inventory management, cash flow are already using applications that can help them extract this data
The evolution of mobile money transfer technology like Mpesa that is shifting money into the formal space which has even been improved by products like Paybill numbers Lipa na Mpesa and the new Pochi la Biashara are a treasure trove of data that can help banks make lending decisions.
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