How microcredits have revolutionised business financing in Kenya

The economic philosophy of the microcredit system was developed by a Bangladeshi economist Muhammad Yunus whose “microcredit” idea revolved around the extension of loans to impoverished unbanked borrowers, to allow them to become self-sufficient.

Since the year 2000, microfinance in Africa has become a lifeline for low-income earners, who are largely in the informal sector.

Despite its strategic role, the informal sector, largely characterized by Micro, Small and Medium Enterprises(MSMEs) has faced a lack of access to trade capital and growth financing.  MSMEs in Kenya have experienced challenges accessing finance amidst unfavorable business and regulatory environments.

In addition, these enterprises also face internal constraints related to talent gaps, lack of entrepreneurial skills and weak managerial capacities.

These constraints usually manifest in a concentration of MSMEs in activities that require low resources, in terms of capital, skills and financing.

According to the International Monetary Fund (IMF), low-income people and MSMEs are unattractive to the mainstream financial systems because they are considered uneconomical to serve or too difficult to reach.

Lack of access to financial tools, therefore, prevents these vulnerable groups from being able to progress financially and improve their economic standing.

A report by  Kenya National Beaurea of Statistics (KNBS) indicates that the overall credit advanced by commercial banks and non-banking Micro financial institutions at the end of December 2022 increased by 12.3 per cent to Sh6.218.2 trillion, largely driven by credit advanced to the MSMEs.

Nonbanking Microlenders offering installment payment terms and hire purchases for instance, have enabled the majority of the underbanked customers especially the youth,  women and persons with disabilities acquire a broad range of products and services ranging from solar lanterns, solar home systems and solar inverters, motorbikes, tuk-tuks, mobile phones, cars and other business assets at friendly terms without demanding collateral as has been the tradition.

These facilities have helped increase the access to credit by low earners in our society by allowing them instant access to products while building ownership over time through flexible micro-payments.

These firms have optimized payments and settlement of securities and back-office functions by reducing costs and enabling direct business-to-business (B2B) transactions, bypassing conventional intermediaries.

Non-banking microfinancing firms have replaced many conventional financial services offered by the banking and financial sectors, such as retail banking, foreign exchange, wealth management, investment advice, stockbroking, spread-betting, corporate banking and lending, and loan brokerage.

Through digital lending, these firms have enabled youth and women-led MSMEs to grow and compete even in the most turbulent business environment as seen currently during this economic depression and even during the Covid-19 Pandemic.

They have also played a big role in the growth of human capital by making the labor force to be more productive.

According to the World Bank, financial inclusion is one of the critical drivers of poverty reduction and economic growth in emerging markets and developing economies as identified by the G20.

Studies indicate that a lack of adequate government support is hindering the development of the MSME sector in the country.

There is a need for the state to create an enabling environment, including playing an active role in the development of a vibrant MSME loan market.

Otieno Panya is a Lecturer and Supply Chain Management Consultant

Jomo Kenyatta University of Agriculture and Technology (JKUAT)