BARRIERS

Small traders in Kenya still shy away from bank loans – survey

Tough conditions set by commercial banks have seen small businesses turn to informal credit channels like mobile lending apps

In Summary
  • 33 per cent of avoid taking loans from commercial banks despite being in need of credit
  • Last year, CBK, in draft Kenya Banking Sector Charter compelled commercial banks to increase loans to small businesses by 20 per cent.
The informal sector is the largest source of new jobs
The informal sector is the largest source of new jobs

High-interest rates, collateral requirements, and complex application procedures deter small businesses in Kenya from accessing credit, according to a new report on SMEs.

The SME Competitiveness Report 2019 by the International Trade Centre, Ministry of Trade and Kenya National Chamber of Commerce and Industry (KNCCI) released yesterday shows that 33 per cent small traders avoid commercial bank loans despite their need for credit.

‘’Companies indicated that this was either because their application was rejected or they opted not to apply due to high-interest rates, collateral requirements or complex application procedures,’’ says the report.

 
 

Tough conditions set by commercial banks have seen small businesses turn to informal credit channels like mobile lending apps, which though less bureaucratic are more expensive, charging interests of up to 180 per cent per annum.

Speaking at the launch, Trade CS Peter Munya asked banks to come up with more attractive products tailored for small business.

‘’Small businesses account for 80 per cent of new jobs created every year. Banks should come up with products that can bolster growth for these drivers of the economy,’’ Munya said.

Banks regards SMEs as risky portfolios hence stricter scrutiny before lending or shy away completely, opting to invest in less risky segments like government papers.

Last year, Central Bank of Kenya, in draft Kenya Banking Sector Charter compelled commercial banks to increase loans to small businesses by 20 per cent.

“Each institution to evaluate its existing processes to promote lending to MSMEs (Micro, Small and Medium Enterprises), as well as document the initiatives that the institution is undertaking to promote access to finance for MSMEs,’’ the charter read.

This year, however, the regulator softened its stand, allowing banks to have a free hand in determining amounts to lend to the sector.

 
 

Despite low uptake in commercial loans, the study that sampled 893 firms in Kenya since 2017 found out that most small business in the country manages their finances quite well.

At least 81per cent of such businesses have detailed knowledge of the loan process, 82 per cent have good ability to manage their cash flow to execute payments, and 89 per cent own a bank account.