Credit gap among Kenyan SMEs widens

By Remie Otieno

A growing number of smal businesses in Kenya continue to hurt from debt capital financing challenges despite the high number of existing financial institutions in the country.

A new report by Yunus Social Business (YSB) found that 72 percent of social businesses in Kenya today face a challenge in raising debt capital, with collateral requirements, high funding costs and limited access to networks also cited as the key barriers to obtaining debt capital for SMEs.

Dubbed, Enterprise Support Landscape study, the report done in partnership with IKEA Foundation further identified lack of direct exposure to international investors, high due diligence cost and low valuation as the greatest challenge to accessing equity funding.

A staggering 61 percent of social entrepreneurs who took part in the poll agree.

Debt capital refers to borrowed funds that must be repaid at a later date. The amount can be in any form of growth capital a company raises by taking out loans – which may be long-term or short-term such as overdraft protection.

As a result, the report noted that businesses are finding it increasingly difficult to sustain their operations, and have little choice but to pass on the high operations costs to their customers.

“Our study shows most of these businesses continue to struggle because traditional sources of financing do not fit their growth pattern.

However, funding alone is insufficient and needs to be coupled with accessible and tailored capacity building support to social businesses,” said Susan Ngalawa, an Investment Director, Yunus Social Business, Kenya.

About half of those surveyed indicated that they were more likely to reach out to Board Members or other entrepreneurs for non-financial support with commercial banks reluctant to lend owing to lack of the aforementioned factors.

Small and micro enterprises (SMEs) play an important role in the Kenyan Economy constitute 98 percent of all business in Kenya, create 30 percent of the jobs annually as well as contribute 3 percent of the GDP, according to the National Economic Survey estimates by the Central Bank of Kenya (CBK).

But most local banks have been hesitant in lending to the small business due to lack of collateral, credit history, financial statement and banking history, ultimately denying the country’s largest sector employer which also contends with multiple city council duties and poor access to justice among others.

When asked about the main thing that keeps them up at night, over 50 percent of SMEs in the polled countries of Kenya, Colombia, Brazil and India mentioned lack of credit access as the challenge to maintaining and growing their businesses.

“The biggest segment of social businesses that experienced a decrease in revenue are in Education & Training and Agriculture & Food Security. In Healthcare, a proportionally higher number of social businesses saw an increase in revenue than a decrease,” reads the report in part.

The report comes on the back of a looming weak labor market which also coincides with the upcoming general elections.

Projections by the Parliamentary Service Commission (PSC) on medium term alternatives for steady economic growth during the transition period for 2022/2023, show that employers in key industries such as manufacturing, will halt hiring as investors adopt ‘a wait and see’ attitude pending polls outcome.

PSC, while relying on figures from the Kenya National Bureau of Statistics (KNBS), believes that growth in the private sector will remain muted as a result, even though Government consumption will increase significantly in 2022 on election related spending and drought mitigation measures.

“Growth in private investment is likely to remain muted as investors adopt a wait and see attitude pending the outcome of the general elections. A tension filled election marred with pockets of violence could lead to investor flight,” reads the PSC report which covered the months between January and October 2022.