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Access, not cost is the driver of credit uptake to informal sector

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Mobile lenders have been urged to increase credit access to informal sector with experts now saying such a move by existing providers would go a long way in supporting underserved livelihoods like the Juakali sector.

“A look at the statistics reveal that the informal sector is still underserved by the banks. Yet, there is need for financial inclusion to activate the informal sector and support livelihoods of millions of Kenya,” says George Abwajo, an economist and Chief executive of GulfHub, a Trade and Financial Data company, who believes that such individuals even though considered high risk and low profit demographic, have a crucial role to play in the country’s economy.

Most Jua Kali individuals and small traders are not formalized and therefor lack collateral to take to financial institutions, and as a result often locked out on credit access by institutions like banks.

The enhanced access to credit comes on the backdrop of a series of initiatives by the government, the private sector and foreign companies to support individuals and SMEs in the formal and informal sectors.

The initiatives include the Youth Enterprise Fund, UWEZO Fund, and Women Enterprise Fund. Other efforts include M-Benki, an initiative rolled out targeting the smallest unit of investors to put in a minimum of Kshs.3000 to buy government treasury bills and bonds.

Duncun Motanya, the chief executive of Zenka, a Kenyan-based mobile money lender, says that mobile loans continue to make a difference to the underserved and believes that there still exists untapped opportunities in the informal sector.

“These lending institutions have helped in bridging the gap in offering much needed credit to small business people who could not access credit because they lacked the credit score or banking history,” says Motanya, adding that mobile lending apps will continue to provide a respite to majority of small traders.

Also expected to trigger that growth is the push by Digital Lenders Association of Kenya (DLAK) expected to bring sanity in the mobile lending industry.

In 2014, domestic credit to the private sector as a percentage of GDP was 35 per cent, this dipped to 27 per cent in 2018. This shows that there was a slowdown of disbursement to this sector and digital lenders helped bridge that gap.

One such beneficiary is Lucy Wanjiru, a merchant in wedding gowns merchandize for instance, operates her business using up to three mobile loans for credit access for urgent orders to her clients. She imports her products from China.

“For me it’s mostly for urgent orders that I am very certain are deliver and receive payment,” adding that, “I borrow between Sh 30,000-50,000, depending on the orders,” cautioning she only takes the loans for quick orders, but not for the stock, unless “the supplier is running those quick sales and I have to order in a hurry.”

Digital financial inclusion will enhance country’s economic growth – which is predicted to grow by 6 per cent this year according to the latest African Development Bank (AfDB) figures. Kenya ranks favorably in the continent as a pioneer leader in financial inclusion.

Economists and industry observers believe that small and medium enterprises (SMEs) who are the key beneficiaries of mobile loans will continue to play a fundamental role in the growth of the East Africa’s biggest economy which has grown by an average of more than 5 per cent in the last five years.

According to the 2019 FinAccess Household Survey, put together in collaboration with the Central Bank of Kenya, Kenyan National Bureau of Statistics and FSD Kenya, 82.9 per cent of the adult population has access to at least one financial product.

Digital lending will be a big changer this year for small traders owing to positive regulatory environment and progressive Government initiatives as well as tough conditions set by commercial banks which has seen small businesses turn to informal credit channels.

Over the last few years, the advent of Kenyan fintech with regards to digital lending, has been a game changer for the MSMEs in the last few years. However, Mr. Macharia says a huge chunk of the market with opportunity for digital lending is still left untapped and could attract more players with both local and foreign presence.

According to a study on SMEs Competitiveness Report 2019 by the International Trade Centre, Ministry of Trade and Kenya National Chamber of Commerce and Industry (KNCCI) released in September last year shows that 33 per cent small traders avoid commercial bank loans despite their need for credit.


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