Five ways flexible credit options can boost MSMEs

Micro, Small and Medium sized Enterprises (MSMEs) in Kenya constitute over 90 per cent of all businesses and employ close to 14.9 million people, accounting for 78 per cent of the total labor force.

Data from the Kenya National Bureau of Statistics (KNBS) further estimates that the sector contributes about 33 per cent to Kenya’s Gross Domestic Product (GDP).

Evidence from various sources suggests that the loan products offered by traditional lenders do not suit the needs of micro-entrepreneurs.

For instance, most loans offered to Kenya’s small businesses follow strict repayment schedules, which are not flexible and conducive to long term viability and growth of these businesses.

Moreover, current global financial unpredictability makes planning around repayment deadlines difficult for MSMEs.

According to the Central Bank of Kenya FinAccess survey 2021, loans obtained by small and medium enterprises had a repayment period ranging from 30 to 41 months. The seasonal and unpredictable nature of MSMEs, require cost friendly, flexible credit options in order for them to get adequate financing for investments and operational expenses.

Here are a few benefits of flexible repayment options for MSMEs to consider
 
1. Helps MSMEs remain resilient against economic uncertainties

Without the pressure of strict credit repayment timelines, small business owners will be able to focus on keeping their businesses afloat during an economic fallout until a time when the economy has recovered or when their profit margins are restored, after which they can resume their payments.

According to their financial schedules, some may choose to make payments every two weeks based on the business income cycles.

2. Encourages long-term investments

The KNBS 2016 comprehensive MSME survey found that close to half a million MSME’s shut down annually mainly due to increased costs of operation and declining business revenue.

Five years later these challenges remain true, but they can be resolved if the credit system encourages long-term investments. These will help to keep the businesses afloat when the main source of income is disrupted.

3. Supply chains continue operating in the face of current economic challenges

The Covid-19 pandemic has had an impact on the Kenyan economy in addition to social and economic uncertainties. This combination of external shocks further threatens the already vulnerable supply chains, which directly impacts the success of MSMEs. Flexible credit repayment options to manufacturing sector businesses will help keep production lines running and increase their resilience during this period.

4. Improved working capital liquidity

With Fintech’s such as Tala moving to create credit products that allow small business owners to choose their loan repayment dates according to their income cycles, MSMEs can now customize their credit lines accordingly and serve their customers needs more efficiently.

5. Enable MSME owners to diversify their portfolios

No entrepreneur starts his or her business with a plan to fail. While others count on luck for their success, the truth is that futuristic planning caters for preservation of a business through time.  Allowing entrepreneurs room to breath away from loan repayment pressures, empowers them to seek other opportunities to grow their business sustainably.

Micro, Small and Medium-sized Enterprises play a significant economic role in creating employment and driving economic growth. This calls for concerted efforts towards the identification, deployment and maintenance of flexible credit repayment options amongst financial market players. These options will ultimately promote robust and more sustainable success of MSMEs operating in Kenya and the African region.
 
The writer is the General Manager, Tala East Africa