Miriam Njeri Kariuki,

Miriam Njeri Kariuki, 24, outside her Karis Daughter Shop in Ole Kasasi.

| Millicent Mwololo | Nation Media Group

Where are the takers of SME loans?

For close to two years, coinciding with the Covid-19 pandemic, micro, small and medium-sized enterprises (SMEs) became a “pariahs”, shunned by risk-averse lenders unwilling to extend a helping hand amid economic uncertainty.

So grave was the situation that a quarter of small businesses in Kenya seeking loans were turned away by lenders last year fearing defaults.

A Central Bank of Kenya study (CBK) showed that banks turned away 28 per cent of small businesses while microfinanciers declined 96 per cent of the loan applications made to them.

“Within 2019 and 2020, commercial and microfinance banks received loan applications from MSMEs worth approximately Sh740 billion of, which Sh546 billion (74 per cent) was approved,” CBK said in the report published recently.

But with economic shocks and uncertainty about the pandemic gradually wearing off, many anticipated an overall improvement in SME loan transactions as more banks dropped their extreme cautious stance on lower risks.

A review of the MSME lending market, however, shows lacklustre response by small businesses amid minimal shifts in the size of loan books of key lenders.

For instance, Equity Bank’s loans to small businesses stood at Sh283 billion as of September 2021, up from Sh269 billion in a similar period last year— representing a marginal 5.2 per cent rise.

Co-operative Bank’s MSME loan book also grew slightly to Sh48.8 billion this year, from Sh45.6 billion in 2020 while KCB lending to small businesses rose by about 40 per cent to Sh45 billion this year compared to the previous period.

SME lending

While these shifts may raise some hope on improved SME lending, analysts said the marginal growth in overall disbursements pointed to a dilemma for banks that had hoped to drive business with small traders.

“There is a demand-side issue that needs to be reviewed. The growth in the SME loan books is quite low, which may mean there are no takers of facilities” said Mr George Bodo, a banking analyst.

A survey report released by the CBK on Thursday last week showed all may not be rosy in the SME world—a factor that may be impacting lenders targeting the small business segment.

The study revealed that over a third of small businesses in Kenya shut down due to the economic fallout of the Covid-19 pandemic.

At least 35 per cent of firms that were active in February 2020, just before the first case of Covid-19 was reported in Kenya, had been shut by July this year, a joint study by the CBK, the Kenya National Bureau of Statistics (KNBS) and the Financial Sector Deepening Trust (FSD Kenya) revealed.

“There has been a rise in business closures between March 2020 and July 2021,” the trio said in a report released last week.

The survey said banks accounted for 14 per cent of loans held by MSMEs as of July 2021—dwarfed by other sources including mobile facilities such as M-Shwari (42 per cent) and Chamas (26 per cent). Saccos and social networks also put up a strong show in MSME lending, each with a 12 per cent share of the loans held by small businesses as of July.

Ironically, the banking industry in Kenya has registered a sharp rise in the number of initiatives aimed at boosting financing for MSMEs.

Apart from the loans by individual banks, the MSME sector has also witnessed increased on-ward lending deals—an arrangement whereby an organisation advances money that it has borrowed from another firm.

In the past few months, several top banks have signed deals with several development finance institutions to provide capital to fund the post-Covid-19 recovery for small businesses through favourable debt terms.

50 million euros

Less than two weeks ago, Co-operative Bank signed a 50 million euros (Sh6.3 billion) partnership with the European Investment Bank (EIB) to help small businesses fund the acquisition of tangible business assets, enhance their working capital and develop their distribution networks and improve innovation and business research. Firms with up to 250 workers are eligible for the Co-op Bank-EIB seven-year loan facility that is capped at Sh1.5 billion per customer.

“Co-operative Bank commitment to the SME sector in Kenya will ensure that this facility will be available immediately to fund acquisition of tangible business assets, working capital, development of distribution networks, innovation and business research among others, and contribute to the recovery of Kenya’s businesses following the covid-19 challenges,” Co-op Bank CEO Gideon Muriuki said when he signed the deal with EIB on November 25.

Equity Bank, on its part, has over the past 15 months signed facilities for onward lending worth more than Sh62 billion as it built up liquidity to expand lending to small businesses.

In September last year, the bank inked a $50 million (Sh6.4 billion) loan facility with the International Finance Corporation (IFC), a $100 million (Sh11.25 billion) with French financier Proparco in October, and a 125 million euros (Sh16.5 billion) loan facility with the European Investment Bank.

Other credit facilities that Equity has signed are; $100 million (Sh11.25 billion) from European development banks DEG, FMO, and CDC-UK, and $75 million (Sh8.44 billion) from the African Guaranty Fund to fortify credit flows and liquidity to SMEs.

The bank signed the sixth facility, a $100 million (Sh11.25 billion) loan deal with the Africa Development Bank (AfDB), the latest in a series of long-term credit to allow the lender to offer concessional medium-term loans to small and medium enterprises. KCB also last year received $150 million (Sh16.88 billion) from IFC for MSME lending at flexible terms.

Apart from the onward lending and individual loans by banks, the National Treasury also has a running MSME Credit Guarantee Scheme (CGS), which aims at promoting enterprise development through access to quality and affordable credit.

Fresh data by the National Treasury showed that the scheme had guaranteed 334 credit facilities amounting to Sh634.5 million as of June 30, 2021. The scheme has seven participating financial intermediaries (PFIs) who issued the credit facilities to enterprises in 36 different counties representing 77 per cent county coverage. The facilities were issued to enterprises dispersed over 11 different economic sectors.

“The number and value of credit facilities provided under the scheme indicates a positive trend and is expected to continue providing much-needed financial support for local enterprise development in the long-term,” Treasury Cabinet Secretary Ukur Yatani in his proposed Budgetary Policy Statement for the financial year 2022.

“Going forward, the government intends to adopt a sustainable model for the scheme, on-board additional PFIs, and grow the leverage ratio on the current Sh4 billion capital. In addition, the government will also engage development partners to increase the capital from the current Sh4 billion to Sh10 billion to enhance the coverage of the Scheme” he further said.