New credit rating model ropes in informal sector

By JAMES ANYANZWA

NAIROBI, KENYA: Plans are underway for informal and unorganised businesses to secure credit from formal financial institutions such as commercial banks.

This follows the development of a credit rating system for the business units.

Mr Sam Omukoko, the managing director of Metropol Credit Reference Bureau (CRB), said the rating system seeks to help small businesses, most of which are unregistered and lack proper accounting records, secure credit from formal institutions, as well as reduce incidences of tax evasion.

“We have developed a credit rating system to identify the risks of small businesses. This is necessary because if you have a good rating, commercial banks will not ask you for collateral and may reduce their interest rates and appraisal fees,” Mr Omukoko said.

“This programme is going to change the way business is done in the country in addition to bringing the cost of doing business down.”

Omukoko said 80 small businesses in Nairobi have already been rated. The target is to reach 500,000 businesses by December.

Among the businesses being targeted are unregistered businesses, registered businesses whose owners do not keep accounting records, and registered businesses with some makeshift form of bookkeeping.

Others include businesses that are registered but whose proprietors keep unaudited books of accounts, and those that are registered and keep audited books of accounts.

“This credit rating system is intended to empower SMEs to enable them borrow from commercial banks,” Omukoko said.

Among the institutions that have embraced the system, he said, are Equity Bank, Kenya Commercial Bank and Century Microfinance Bank.

Once rated, small businesses can borrow between Sh10,000 and Sh500,000, depending on their size, at competitive rates.

There are about 7.5 million SMEs in Kenya and the sector’s contribution to Gross Domestic Product stands at about 40 per cent. It also provides about 80 per cent of the total employment in the country and contributes more than 92 per cent of new jobs created every year.

However, a large number of SMEs lack creditworthiness and management capacity, so they have trouble securing funds for their business activities, which include procuring raw materials and products, and investing in equipment.

SMEs are also viewed as insecure and costly businesses to deal with because they often lack the required collateral or capacity to absorb large amounts of money from financial firms.

But the Government has identified micro, small and medium enterprises (MSMEs) as one of the key drivers of Vision 2030. Therefore, the sector is expected to play an effective role as an engine for economic growth, poverty eradication and unemployment creation, and is crucial in meeting projected development objectives.

[email protected]