Risks to look out for in 2018- and how to get around them
SEE ALSO :Drop in banks’ profit denies State Sh69bIf there’s one thing that propelled several small and medium enterprises (SMEs) to the next level, it’s credit. Not because loans have been cheap, but because getting one from a financial institution was relatively easy. Cash has been expensive, but accessible. Unfortunately, this era of easy access to credit is fast coming to an end. It started in 2016 when new laws capped the interest rate banks could charge on a loan to no more than 4 per cent above the Central Bank Rate. Banks, faced with legislation that has narrowed their profits, have found it more sensible to hand over money to low-risk borrowers, like the Government and corporates, than to high-risk borrowers, such as households and small businesses. While the uptake of loans has generally gone down across all sectors of the economy, the decline has been particularly steep for SMEs and households. And then at the start of this year, more stringent financial accounting standards came into force. They require banks to make provisions for all bad loans in advance, making the chances of high-riskborrowers getting a loan that much harder.
SEE ALSO :Court blocks destruction of Kwale sugarThe bottom line is if you want to start a business or expand your small company this year, it may be more advisable to look beyond banks for working capital. Further, debt is not the only means of raising capital – you can sell a stake of your business to an investor to get the financing and mentoring you need to expand, for instance. Saccos are another credit option. However, the amount you can access is limited by your savings. Chamas have also become strong savings vehicles, and with table banking catching on, they’ve expanded their offerings to loans. 2. Double taxation in counties The creation of county governments may have helped take resources closer to the grassroots, but it also came with new challenges.
SEE ALSO :Miller sues State over seized sugarOnce you have a clearer understanding of the financial aspects of your business, you’re more likely to make smart money decisions. 3. Shrinking regional market With the signing of the Common Market Protocol, the gates to all East African Community (EAC) member states were flung open. You can now, in principle, live, work or do business in any EAC country using just your national identification card. But while unrestrained movement of products and people across these borders remains in place on paper, there are still obstacles in reality. Some countries aren’t too happy about a borderless region. John Magufuli, Tanzania’s fiery president, recently burnt chicks that had been taken to Tanzania illegally. Further, about 1,125 livestock belonging to Kenyan Maasai herders were auctioned off after crossing into Tanzania in search of pasture. According to global risk consultancy Control Risks, unpredictable policymaking in Tanzania is among the key risks for businesses operating in the region this year. “President John Magufuli’s grip on power is tightening, and his authoritarian style and erratic approach to legislation will further damage investor confidence,” notes the firm in a recent report. Another major threat for those doing business in EAC is the influx of cheap manufactured goods from China and India. With Kenya’s cost of production higher than that in these Asian giants, our goods have been outcompeted across the region. Trade between the EAC and China and India will only deepen, which will likely push Kenyan goods further to the periphery. To survive, borrow from China’s model – first find your market internally and then go regional. Second, research on ways to lower costs of production. What are entrepreneurs in other countries in your line of business doing to lower power costs, for instance? What machinery would help? And in as much as possible, cut out the middleman. 4. Reduced earnings from Government tenders Control Risks lists high debt levels as one of the biggest risks the country faces in 2018. Public debt currently stands at Sh4.5 trillion – or about 56 per cent of the value of goods and services we produce in a year. Institutions such as the World Bank and International Monetary Fund have warned that should Kenya’s debt stock continue growing, the country risks going into debt distress. Over the last five years, the Government has borrowed aggressively to complete a number of infrastructure projects, including railway lines, roads and ports. While these projects have been necessary to improve the country’s attractiveness as an investment hub, they’ve been extremely expensive. On the upside, though, they’ve created new revenue streams for the private sector, which has been supplying things like labour, cement, steel, explosives, paper and so on. But it looks like the party is over. The Government is now required to undertake what economists call fiscal consolidation. These are policies aimed at reducing Government deficits and accumulation of debt. This means the Government will have to reduce spending and increase taxation. Those that should worry the most are entrepreneurs who have come to rely on supplying Government tenders. To avoid stagnating, diversify. You can leverage your experience with the Government to get jobs in the private sector, which has its own line-up of infrastructure projects. 5. More people paying higher taxes The country’s fiscal consolidation will require the Government to increase its earnings. The low-hanging fruit tends to be widening the tax base – which means the State will seek to collect as much tax as it can from as many people as it can reach. It might mean an end to a number of tax exceptions and a more aggressive stance from the Kenya Revenue Authority (KRA) as it seeks to reach the untaxed. The Government has already hinted that it’s putting the final touches on a presumptive tax aimed at getting cash from the informal sector. Presumptive taxation involves the use of indirect means to ascertain tax liability, which differs from the usual rules that are based on a taxpayer’s accounts. Basically, it means businesses might be taxed on the assumption that they will make sales, rather than on the evidence of this. For hard-to-tax segments, like matatus and kiosks, KRA might be granted the power to determine the applicable rate, say 5 per cent of anticipated sales or income. In Uganda, the presumptive tax rate has been 3 per cent since 2014. So, if you’re not the type that renders unto Caesar what is Caesar’s, please make arrangements to do so before you fall into a category that does your business more harm than good. Get registered on iTax and consult an expert to fix your books. With more and more people opting for short consultancies over full-time jobs, you won’t have to break the bank to sort out your financials. ?