Kenya's SMEs crippled by bad debt as State buys ‘air’

Central Bank of Kenya Governor Dr. Patrick Njoroge

Bad loans have doubled over the past three years as small businesses struggle to make payments when the Government is not settling their dues.

Central Bank of Kenya Governor Patrick Njoroge said non-performing loans (NPLs) have risen from 6.1 per cent of total loans in 2015 to a record high of 12.36 in April this year.

“Deterioration of asset quality is affecting certain sectors. Delayed payments is a big issue because of pending bills by the Government,” he said at the Moody’s Annual East Africa Summit in Nairobi on Wednesday.

Bank sources say the State may be holding up to Sh200 billion owed to small and medium enterprises even as it pays a select few for supplying ‘air’ to National Youth Service-like schemes.

The latest report by Controller of Budget shows the devolved units alone had accumulated debts totalling Sh100 billion by end of 2014/15.

While businesses have struggled to pay debts at the expense of their working capital, some are falling apart and closing shop resulting in elevated defaults and listing by credit reference bureaus.

According to the CBK, the delays have resulted in so many defaults such that 10 per cent of the nation’s bad loans (Sh28 billion) are as a result of late payments by the State.

“Actually, about 10 per cent of banks’ NPLs relate to these delayed payments by the Government and the private sector. That is substantial...a bit of a Catch-22. It is a big issue,” said Dr Njoroge in an earlier interview.

Despite the delays, Kenya Revenue Authority still wants to slap the SMEs with a 20 per cent penalty whenever they make late tax payments and impose a monthly interest.

The owner of a small business, Dorcas Maina, says that firms which do honest business with Government but have no connections to rush their payments usually go for months or even years before they are paid.

KRA requires the businesses to declare taxes when the transaction occurs but they still have to wait before the actual income hits their pockets.

This will force the SMEs to go into their pockets to settle the tax to avoid penalties - and pay the same Government that has withheld their funds.