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Banks now warming up to 'risky' SMEs for survival

By Patrick Alushula | Sep 19th 2017 | 4 min read
By Patrick Alushula | September 19th 2017

Barclays Bank is set to lend Sh130 million in the next six months from a Sh300 million kitty dedicated to SMEs. Photo: File, Standard

Banks are warming up to small businesses through tailored products meant to woo them from the grip of shylocks.

From large banks to small ones, unique products are being developed to woo Small and Medium-sized Enterprises (SMEs). Though many banks are still uneasy to commit their money to SMEs, some progress is being made.

With most banks having posted a drop in their net profits in six months to June 2017 and a dip interest income, they are cautiously beginning to warm up to a sector they had left at the mercy of Shylocks and microfinances.

George Bodo, an investment analyst says launching SME products may not be sustainable for many lenders. “I don’t find any sustainability in banks launching SME-focused products because banks have already withdrawn them from their shelves, especially the unsecured and semi-secured products,” he says.

Economic growth

Since SMEs don’t usually have the fixed assets that banks require as collateral with Financial Sector Deepening noting in its latest report,  that it is hard for small businesses to get financed. “SMEs are the key to unlocking Kenya’s economic growth but without finance, they’re languishing. Stuck in the grey area between the formal and informal sector, SMEs are perceived as risky,” noted the report.

Credit to the private sector was growing at 4.7 per cent by September last year has more than halved to 2.1 per cent in May then to 0.84 in June as banks reduced lending to key sectors.

However, credit survey by Central Bank of Kenya (CBK) show that about 22 commercial banks indicated that interest rate capping had negatively affected lending to SMEs.

“Interest rate capping has compelled banks to increase their risk mitigation measures. As a result, this has locked out potential customers below certain risk thresholds on existing products standards,” notes CBK.

Banks price their loans based on the borrowers risk and interest rate capping has seen lenders focus more on those companies that demonstrate their ability to repay credit.

“We have seen in 11 months lending to SMEs drop by as much as Sh13 billion, which is a substantial setback for the economy,” says KBA.

However, beyond these pessimistic statistics are many banks opening up their arms to micro, small and medium enterprises (MSMEs) and SMEs.

According to data from Kenya National Bureau of Statistics, Kenya has a about 1.7 million MSMEs of which many do not survive beyond two years. The International Finance Corporation estimates that SMEs in Kenya have an annual credit gap of over $6 billion (Sh630 billion).

Initially, SMEs that approached banks for credit were either given the loan at high interest rate since they carry high risks or were denied the same due to opaque business plans.

According to KenolKobil Managing Director David Ohana, high interest rates only serve to kill many small businesses. “There is no business in Kenya today where you can put money and repay 20 per cent unless if you cut corners,” said Ohana.

With interest rates capped and lenders competing on volumes of quality loans given out, they are choosing to help MSMEs rise above poor book keeping and weak cash flow management practices to make them loanable.

Access capital

KBA has partnered with Kenya Institute of Management to develop a curriculum for MSMEs dubbed ‘Inuka Enterprise Development’. The Sh100 million project is meant de-risk SMEs to enable them access capital.

The free training will see about 2,000 MSMEs benefit in the first year.The same programme will be rolled out next month. It is open to businesses with turnover of up to Sh250 million. It is promising to lend each MSME up to Sh10 million.

Such a move will be a continuation of the agreement that banks had signed with CBK to commit part of their loan book to small businesses. This was prior to the capping of interest rates.

KBA Chief Executive Habil Olaka told Financial Standard that the drive to make SMEs loanable has not been slowed by capping of interest rates.

“The controls on rates did complicate matters but only in regards to the proposed lending of Sh30 billion at 14.5 per cent for SMEs. With Parliament choosing to cap interest rates, this proposal was nullified,” said Olaka.

CBK Governor Dr Patrick Njoroge recently said banks have developed new business models in quest to have lower interest rates founded on disciplined behaviour in the credit market.

Banks are also finding ways to warm up to small businesses despite the cap. In July, Barclays Bank through the financing model dubbed ‘Enterprise and supply Chain Development programme said SMEs that supply goods and services to large corporates will only be required to prove existence of valid contract with established firms to access credit.

“SMEs will only be required to have contracts to supply goods and services to given companies. We want to depart from traditional lending procedures of ‘bring the collateral’ first,” said BBK Director James Agin.

BBK is set to lend Sh130 million in the next six months out of the Sh300 million it has dedicated to the programme over one year.

This targets SMEs that have been in business for at least two years.

About 50 SMEs are being targeted for a start. In addition, SMEs will enjoy training to help streamline their businesses in areas such as record keeping and finance management.

In June, Standard Chartered Bank increased funding to SMEs by 30 per cent with at least Sh10 million annual turnover and having been in business for a least three years. In October last year, National Bank launched a Sh2 billion revolving fund for SMEs while KCB rolled out a five-year Sh50 billion youth entrepreneurship programme to nurture and support small businesses the same year.

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