How non-banking micro-lenders changed finance

The economic philosophy of microcredit system was developed by Bangladeshi economist Muhammad Yunus, who rooted for extension of loans to impoverished unbanked borrowers to help them to become self-sufficient.

Since 2000, microfinance in Africa has become a lifeline for low-income earners, largely in the informal sector. But despite its strategic role, the informal sector, largely characterised by micro, small and medium enterprises (MSMEs), has faced lack of access to trade capital and growth financing.

MSMEs in Kenya have challenges accessing finance amid an unfavourable business and regulatory environment. Besides, internal constraints related to talent gaps, lack of entrepreneurial skills and weak managerial capacity usually manifest in a concentration of MSMEs in activities that require low resources in capital, skills and financing.

The IMF says low-income people and MSMEs are unattractive to the mainstream financial systems as they are considered uneconomical to serve or too difficult to reach. Lack of access to financial tools thus prevents the group from progressing financially and improving their economic standing.

A Kenya National Bureau of Statistics report shows the overall credit advanced by commercial banks and non-banking micro-finance institutions as at end of 2022 increased by 12.3 per cent to Sh6,218 billion, largely driven by credit to MSMEs.

Installment payments terms and hire purchase, for instance, has enabled most under-banked customers—mainly the youth, women and persons with disabilities—to acquire a broad range of products and services ranging from consumer to business assets at friendly terms and without collateral.

These facilities have increased availability of credit to the low earners by allowing them instant access to products while building ownership over time through flexible micro-payments.

The firms have optimised payments and settlement of securities and back-office functions by reducing costs and enabling direct business-to-business (B2B) transactions, bypassing the conventional intermediaries. They have replaced many conventional financial services offered by the banking and financial sectors.

Their digital lending has allowed youth- and woman-led MSMEs to grow and compete even in the most turbulent environment—as during the current depression and Covid-19 pandemic. They have played a big role in the human capital growth by making the labour force more productive.

The World Bank says financial inclusion is one of critical drivers of poverty reduction and economic growth in emerging markets and developing economies as identified by the G20. Studies show lack of adequate government support hinders MSME sector growth. The state should create an enabling business environment, like playing an active role in the development of a vibrant MSME loan market.

Mr Panya is a supply chain management lecturer and consultant at Jomo Kenyatta University of Agriculture and Technology (JKUAT). [email protected]