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High interest rates not good for SMEs in Kenya

By Kiprono Kittony | November 13th 2015 at 00:00:00 GMT +0300

NAIROBI: Although Kenya has been able to produce some of Africa’s corporate champions like Safaricom, Bidco and Kenya Commercial Bank (KCB), the concept of a multibillion-shilling homegrown brand is still a relatively recent arrival on the Kenyan business landscape.

Small and Medium-Sized Enterprises (SMEs) and the informal sector have always been, and still are, the backbone of the economy.

They comprise nearly 90 per cent of all businesses in the country and account for a total of 82 per cent of total job opportunities.

Therefore, for the sake of the overall economy, developments that fundamentally redefine the Kenyan business environment need to be assessed on the basis of the impact they have on SMEs and the informal sector.

One such development that has not escaped the attention of the Kenya National Chamber of Commerce and Industry (KNCCI) is high interest rates.

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Interest rates have increased astronomically this year. Commercial bank lending rates have in recent weeks risen to highs of 27 per cent from 19 per cent at the beginning of the year.

The primary effect of higher interest rates is that the cost of servicing existing debts increases while the incentive to take on new credit declines.

Although this situation (higher cost of debt and lower appetite for debt) impacts all businesses, it is the smaller businesses that bear the full brunt.

Small businesses typically operate on lean budgets and are often compelled to turn to credit as the only finance option for day-to-day operations or expansion. In comparison, bigger corporations have huge cash reserves and can comfortably avoid debt if prevailing interest rates are too high.

Cheap credit is therefore critically important for the survival and prosperity of SMEs and other businesses in Kenya’s informal sector.

If Kenya is to achieve sustainable economic growth, the primary focus should be on providing SMEs and informal businesses with constant support and helping them to transition into corporate giants.

The broader economic environment should therefore be reflective of this objective. Sadly, this is not the case as evidenced by the rising interest rates, which are spiralling out of control by the day.

In light of the prevailing high interest rates, SMEs and informal businesses now need an SME fund that can offer an alternative source of cheap credit. How this will be done, however, is still up for debate.

Similarly, there is a need to solve the problem of high interest rates once and for all. This entails broadening our vision and looking beyond the role that the Central Bank of Kenya (CBK) plays.

CBK only addresses monetary policy and its measures are primarily reactionary. It does not have the tools or mandate to address structural economic issues, which may nonetheless have a great role in precipitating high interest rates.

One structural issue that is undisputedly the genesis of high rates is the widening current account deficit. The gap between imports and exports increased by 62 per cent in the second quarter of the year, leading to more financial outflows and compelling CBK to raise interest rates in order to stabilize the shilling.

Rising interest rates are therefore linked in an inextricable way to declining exports and rising imports.

The economy needs to be restructured, particularly with regard to increasing exports. We have to go back to the basics of business and fully understand that any business cannot survive, let alone prosper, without a sustainable and robust market. In the same way, exports cannot pick up if we do not engage other countries with a view of creating new markets or expanding existing ones.

The real solution to the current account deficit—as well as the resultant weak shilling and the attendant high interest rates—lies in putting more emphasis on economic diplomacy.

We need to reconfigure our relations with our foreign partners and shift them to a more economic footing.

Only through such measures can we grow exports, increase financial inflows into the economy, prop up the shilling and consequently put a permanent, fair and unanimously acceptable ceiling on interest rates.

Low and predictable interest rates will greatly favour SMEs and informal businesses, which are currently crushing under the weight of usurious interest rates.

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