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January 18, 2019

Scaling SMEs amidst interest caps

Nairobi City
Nairobi City

The capping of interest rates was prompted by the need to make finance affordable, especially to small and medium enterprises.

While the economy had fairly good levels of access to credit, affordability was not, with some SMEs paying as much as over 20 per cent in interest rates.

This means most SMEs spent a big ratio of their income on interest payments and this limited their ability to expand operations.

That the interest rate capping has not achieved its intended purpose is not in doubt. Recent calls for the reversal of the capping law points at increasingly lower access to credit.

Official data shows that credit growth to the private sector has slowed and SMEs are the most affected.

Instead, banks now gravitate towards lending to safer borrowers such as government and large corporations rather than smaller, risker borrowers.

This is because banks do not have the option to price risk above the official maximum rate, currently at 14 per cent.

That said, the problem of access to affordable credit for SMEs remains unresolved.

Getting informal and small businesses to scale up is critical to job creation and economic growth and access to affordable credit is a major constraint.

With the current youth bulge and increasing unemployment, job creation remains at the top of the policy agenda.

Whether or not to reverse the interest rate capping needs to be evaluated in the context of the impact on the job creation agenda.

That banks continue to push for the removal of interest rate capping is indicative that structural constrains to affordable credit are yet to be fully identified and addressed.

As recently pointed out by the CDC Group, the UK’s development finance institution in their “Developing Business to Scale in Sub-Saharan Africa”, banks and lenders need patience in order to be catalysts of business expansion.

The banks’ high appetite for mass-market savings and mobile lending is unfortunately not matched by dynamism in lending to SMEs.

The banking model of short-term, high interest lending is at variance with the government policy agenda to create jobs and achieve inclusive and transformative economic growth.

The model does not take into account that it takes time to grow a business.

The CDC Group report concludes by pointing out that solutions to “ease of doing business” need to rise above the formal content of regulations and instead address the implementation on the ground.

Often times, there is the risk that regulatory solutions gloss over the realities of the political economy.

The solution to the interest rate capping dilemma must look at the realities facing SMEs and the need to scale-up operations for job creation.

Government is seeking fresh thinking on how to generate inclusive economic growth and banks need to take their rightful place on the table. Banks are part of the solution.

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