MSMEs poised to drive banks sustainability agenda

A woman pays using Visa card after buying clothes in s a second-hand store. [Getty Images]

Micro, small and medium enterprises (MSMEs) have been positioned by players in the banking sector as the reliable pathway for financial institutions to drive and achieve their sustainability agenda.

These businesses, which form the majority in the country, also happen to be common with youth, women and persons living with disabilities (PWDs).

As such, financial institutions that intentionally invest in these businesses, stand to not only achieve their sustainability agenda, through financial inclusion but also be resilient in the current economic challenges.

A look at some of the sustainability reports launched by banks this year shows lending to MSMEs as a key performance indicator (KPI).

For example, KCB Group has green lending as one of the KPIs used to track sustainability activities in 2022, where tailored products for SMEs, MSMEs, vulnerable groups, the underbanked, women and persons with disabilities formed the social aspect of this indicator.

Equity Group Holdings has a four-pronged approach to sustainability namely: transforming the lives and livelihood, driving sustainable finance to youth, and women MSMEs, enhancing risk management and focusing on internal processes.

“(When you go through the report) you will see there is a substantial amount of money that goes into sustainable finance. There, we are not only looking at climate mitigation that a lot of people looking are but also climate adaptation and resilience being a key part of that,” said Equity Group Holdings Director for Sustainability Reshma Shah during the launch of the report.

According to the bank’s 2022 sustainability report, Sh223.1 billion has been disbursed to MSMEs under the Young Africa Works Programme, 406,421 MSMEs trained in entrepreneurship and 2.41 million women and youth trained in financial education.

Equity Group Holdings Chief Executive James Mwangi said the Group’s flagship product ‘Fanikisha’ - a Swahili word for make it possible, is one of the platforms the bank has in place targeting women. “No wonder, 54 per cent of Equity customers are now women,” said Mwangi.

Equity Bank Kenya emerged winner of the best bank in the retail MSME category in the just held 2023 Sustainable Finance Catalyst (SFI) awards held annually by the Kenya Bankers Association (KBA).

Cooperative Bank came second and KWFT third in this category. The awards are meant to celebrate financial institutions that encourage sustainable finance practices in the sector.

Financial Sector Deepening (FSD) Kenya Chief Executive Tamara Cook who graced the award ceremony said banks struggle to reach small businesses with the most effective solutions.

She said any bank that can figure out to constructively serve any MSME with credit is better placed to reach its entire portfolio.

This works also for the agricultural sector, where most agribusinesses are MSMEs. She noted that lending to this sector is a contribution of the bank to the entire economy of the country.

“Most banks rely on credit models that are available and the reality is there is more data on men than women. But any bank that has figured out how to effectively train their credit scoring towards women is going to be better placed to offer credit to everyone,” she said.

Sustainable advances

Absa Bank Kenya also has its eyes locked on women as the institution unveiled a target during the launch of its sustainability report in October to increase sustainable advances to Sh120 billion in three years.

Absa Chief Executive Abdi Mohamed said about 20 per cent of the bank’s loans and advances are potentially eligible for sustainable finance.

“This year alone, we have advanced Sh60 billion in sustainable finance comprising green finance as well as inclusive finance which is another important component of our sustainability agenda. That is helping SMEs, women-led businesses, the youth agenda and ensuring more people are included in the financial services sector,” he said.

“You will continue to see us significantly expanding our investments in this space as we scale our support for sustainable development across all the economy sectors like agriculture, manufacturing and energy.”

Mr Mohamed spoke of the Sh15 billion sustainability-linked loan advanced to Safaricom, the country’s leading telco, noting Absa was among the four banks and emphasised that the lender will seek to play a role at the highest level and to SMEs.

“So going to the highest level in terms of the corporate sector but also a lot of lending and support to SMEs and smaller businesses,” he said. “Our ambition is to double this figure (Sh60 billion) to more than Sh120 billion in the next three years. You should expect to see a lot bolder activities from ourselves in the days ahead.”

KBA Chief Executive Dr Habil Olaka noted that in recent years, the macroeconomic environment has brought out significant challenges associated with the effects of climate change which has affected businesses.

“Indeed, one of the factors attributed to this trend includes a low level of investment in climate adaptation measures. This trend continues to expose many communities and enterprises to vulnerability,” he said.

These climate-related challenges are exacerbated by geopolitical tensions.

He lauded the alignment of sustainability to emerging demands, recognising the realities of climate change and its implication to the economy and the banking sector by extension, which is the financier of sustainability.

“KBA has been deliberate to support the industry (banking) in its resolve to look beyond financial returns and address the wider emerging socio-economic environmental concerns,” said Dr Olaka.

Kenya has 7.4 million SMEs according to the Kenya National Bureau of Statistics (KNBS). However, the country is believed to have 18 million MSMEs, according to the State Department for MSMEs, the majority of whom have no form of formal registration and hence cannot access finance from banks.  

According to the 2022 Survey Report on MSME Access to Bank Credit by the Central Bank of Kenya (CBK), MSMEs are cited as the key source of funding for banking, accounting for 14.9 per cent and 59.5 per cent of total customer deposits held in commercial banks and microfinance banks respectively.

As of December 2022, there were 1.18 million active MSME loan accounts in the banking industry, with a total value of sh783.3 billion.

This was a 29 per cent increase from 915,115 active loan accounts valued at Sh638.3 billion as of the last MSME lending survey in December 2020. “Of the 1.18 million MSMEs loan accounts in the banking industry as of December 2022, 216,951 accounts valued at Sh90.4 billion were classified as non-performing. This amounted to 18.3 per cent of total MSME loan accounts and 11.5 per cent of the total value of outstanding MSME loans,” CBK survey reads.

It adds that non-performing loans (NPLs) also made up 17.5 per cent of total banking industry NPLs as of December 2022 which stood at Sh515.7 billion.

The survey shows collateral requirements continue to be a major consideration for banks in extending credit to MSMEs, with lenders requiring MSMEs in all categories to post collateral that is of sufficient value to substantially cover the full credit exposure.

“A majority of MSMEs do not possess the types of assets that are typically accepted by banks as collateral. Collateral requirements continue to be a major barrier for MSMEs in accessing formal credit,” the survey states.