By John Oyuke
Kenyan banks lead counterparts in East Africa in lending to small and medium enterprises (SMEs) as regional institutions increasingly shift focus to exploiting the potential in the retail segment.
A survey by the African Development Bank (AfDB) of the East African banking sector has found Kenya has the highest SMEs exposure, at 50 per cent, Uganda 42 per cent, Tanzania 37 per cent and Zambia with only 18 per cent.
Exposure by banks in the region to SMEs as measured by proportion of SME loans to total lending is at 37 per cent on average.
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The survey found that many banks are eager to do business with small and medium-sized enterprises with the institutions surveyed in Kenya, Tanzania, Uganda and Zambia view SMEs as ‘highly profitable’.
The report, Bank Financing to Small and Medium Enterprises in East Africa: Findings of a Survey in Kenya, Tanzania, Uganda and Zambia, has been published by the Chief Economist’s office of the AfDB.
It finds ‘that the SME segment is a strategic priority for the banks in the region’ and the enterprises are generally considered a profitable business prospect and provide an important opportunity for cross selling.
The banks view the lending market to SMEs as large, not saturated and with a positive outlook.
There are obstacles, however, to the banks doing more business with SMEs. They are not just related to the nature of SMEs, but also macro-economic and regulatory factors and the legal and contractual environment.
The survey also notes the lack of a more proactive government attitude towards the SME sector, some areas of prudential regulation and some bank-specific factors.
However, banks have learned to adapt to their environment and have adapted through innovation and differentiation.
The regional multilateral development bank concludes that ‘this trend should be encouraged through reforms to soften the negative impact of those obstacles which are hindering the further involvement of banks with SMEs’.
The report notes earlier research found out that SMEs on average contributed 60 per cent of total formal employment in the manufacturing sector in various countries.
However, SMEs in Africa are lagging behind other parts of the world when it comes to access to finance.