SMEs getting loans despite cap on interest rates

Banks continue to extend credit to small and medium-sized enterprises despite the cap on interest rates.

A study by ICEA Asset Management found that much of the private sector credit growth in manufacturing and trade - where SMEs are highly represented - was not affected by the Banking Amendment Act, 2016 which put a ceiling on loan charges.

The law put a ceiling on the interest rate charged by banks at no more than four per cent of the Central Bank Rate, currently at nine per cent.

“This indicates that lenders in the region have a higher credit appetite for these segments... indicating financiers’ willingness to extend credit to this vital driver of regional economies,” said ICEA Lion Asset Management’s head of research, Judd Murigi, when he launched the report on private sector credit share.

Before cap

Credit flows to trade and manufacturing, noted the report, had remained fairly constant at Sh40 billion to Sh50 billion in 20 months before and after the cap.

“In contrast, credit flows to real estate and private households have halved since the introduction of the rate cap, while the transport and communications sector has seen a Sh35 billion decline in private sector credit flows since September 2016,” said Mr Murigi.

A 2016 survey found micro, small and medium-sized enterprises in Kenya to have a high concentration in the service sector, with most operating in wholesale and retail trade, and repair of motor vehicles and motorcycles.

“Wholesale and retail trade, repair of motor vehicles and motorcycles accounted for more than half of licensed (57.1 per cent) and unlicensed (62.9 per cent) businesses,” read the report.

Other sectors with many MSMEs were accommodation and food service activities.

Largest sector

Agriculture, the country’s largest economic sector, only received five to seven per cent of private sector credit over the past two years.

The Central Bank of Kenya and the International Monetary Fund have in the past said that the capping of interest rates had reduced credit to SMEs.

The ICEA report indicated that private households received the most credit in the second quarter of 2018, taking up 40 per cent of total credit.

It also showed that microfinance institutions and saccos had eaten into commercial banks’ share of credit to households.