For cash-strapped Kenyan small retail firms, loans are hard to come by

By Steve UMIDHA

Credit demand appears to be drying up among Kenya’s smallest retail firms, as commercial banks tighten lending standards across board, shrinking the availability of loanable funds.

Nearly all commercial banks and several financial institutions have adjusted their loan interest rates since the start of the year 2023 to reflect the Central Bank of Kenya (CBK) base lending rate.

The Monetary Policy Committee (MPC) met this year for the first time in January, retaining its base lending at 8.75 percent to hedge the economy’s exposure to rising inflation and global risks.

CBK increased the benchmark lending rates thrice last year to 8.75 percent on November 23, being the highest since September 2019 when the rate was at nine percent.

And while local banks are justifying the move by raising their own borrowing terms, arguing it is to guard against the uncertainty and unfavorable economic outlook as well as a reduced tolerance for risk, small retailers are hurting. It has effectively seen prices of loans and mortgages rise exponentially.

Squeezed cash supply in the banking system has now seen small and medium enterprises (SMEs) turn to other forms of ‘goodwill’ borrowing to remain buoyant.

According to a market research by GeoPoll, the Africa MSME Pulse Survey Report, suggests that struggling businesses will rely on friends and family for informal loans.

“Access to formal credit for small businesses remains a challenge, with only Kenya having a sizeable number of businesses that have accessed bank loans and organized savings co-operations – SACCOs.

For the most part, businesses rely on friends and family for informal loans. Twenty-three percent overall say they have been denied a loan in the past,” reads the report, which found that only 26 percent of small traders had access to bank loans.

Similarly, the report found that government funds such as the consolidated fund, the Equalization Fund and the Contingencies fund managed by the national treasury, are also drying up, with just 7 percent of the 110 businesses who took part in the poll benefitting from such provisions.

Independent investors like the Non-governmental organizations (NGOs) have also limited their loan giving.

The impact, according to the survey, has left several businesses – majority of which are stressed from other challenges like high taxation, in the hands of expensive mobile lenders and loan sharks with the latter offering loans at extremely high interest rates, and has strict terms of collection upon failure, and generally operate outside the law.

Digital lending, for instance is projected to emerge stronger in the post pandemic era, according to industry trends by the Digital Lenders Association of Kenya (DLAK) which is attributing the likely surge in the usage of digital credit to the growing number of Kenyans choosing to use such platforms for their daily transactions.

“The supply of loanable funds is based on savings. The demand for loanable funds is based on borrowing. The interaction between the supply of savings and the demand for loans determines the real interest rate and how much is loaned out,” offers economist Kamau Macharia, who says challenges like high unemployment rate could also be a factor.

Kenya’s unemployment rate is expected to grow by 7.5 percent by the end of March 2023, according to forecast by the Trading Economics.