Survey: SMEs hardest hit by piling debt

Small enterprises accounted for 60 per cent of the beneficiaries followed by micro-enterprises (25 per cent). and medium enterprises (15 per cent). [iStockphoto]

One in every six borrowers among small businesses in the country has defaulted on a loan in the past eleven months, a new survey has established, revealing tough times for the small and medium enterprises (SMEs) hit by the harsh economy

The Financial Sector Deepening (FSD) survey, which has the backing of the Central Bank of Kenya (CBK), shows that micro and small enterprises who form the bedrock of the country's economy are the worst-hit by the debt crisis, dealing a blow by the new Kenya Kwanza government to prop up the low-income businesses and grow jobs.

SMEs constitute 98 per cent of businesses in the country and have an annual job creation of 30 per cent of all new jobs.

The survey says the majority of the small businesses are living in a debt cycle but many of those affected subsequently die a natural death.

SMEs experience a myriad of challenges including inconsistent cashflows arising from high cost of doing business which may negatively impact on their profitability and market linkages, which in turn limit their ability to grow. To counter this, MSEs take loans to remain afloat.

"However, with persistent harsh economic conditions, these businesses tend to default their loans by either paying late, miss a payment or pay less amount than expected," says the FSD Kenya study published recently.

"The survey results indicate that 60.7 percent of MSEs defaulted on their loans in June 2023 compared to 42.8 percent in October 2022."

The rate of default is high among female owned businesses.

The CBK data paints a picture of small traders who are taking loans that they are unable to service.

The report also captures businesses that are struggling to stay afloat and others whose operations have grounded to a halt following failure by the national and county governments as well as private sector customers to settle their dues. The share of loan defaults increased to Sh577 billion as of June this year, pointing to a cash crunch in the economy that could set up thousands of borrowers for property seizures, separate CBK data shows.

Timely loan repayment plays a critical role in maintaining a good credit score and enhancing borrowing credibility. When MSEs repay loans without default, they can apply for more loans to support their businesses.

The latest FSD survey on indebtedness was backed by the KNBS, Financial Sector Deepening Trust Kenya and CBK data.