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By Steve UMIDHA
As the Kenyan economy enters the next credit cycle from the proposed tax changes under the Finance Bill 2024, financiers are fast finding both opportunities and challenges in the market for lending to small and medium-size enterprises (SMEs).
As a result, commercial banks and other financial institutions are now doing more to close the financing gap, adopting customer-centric approaches and prioritizing flexibility as well as reimagining lending for modern businesses and their needs.
“We have to think on our feet and act accordingly to meet the changing demands of borrowers who are looking for tailored financing options,” offers Mr. Peter Macharia – the CEO of Jijenge Credit ltd.
Adding that, “Kenyan microentrepreneurs and individual borrowers are citing a lack of access to working capital as a barrier to maintaining or restarting operations owing to dire economic situation in the country. Fortunately, micro lenders like ourselves offer a viable solution to these emerging financial needs.”
He was speaking during an update on the firm’s recently launched motor repair loan.
“We now give loans to motorists to cover their repairs. This enables customers to quickly do repairs on their cars and continue using their cars as they pay for the loan,” says Macharia, who says the move was motivated by the ongoing flooding issue brought by heavy rains across the country which has wreaked havoc on properties, homes and vehicles.
Although volumes are growing slowly, Macharia says most financial institutions are not reaching their full potential. Many – especially banks still use old business models, rely on legacy processes, and even view SMEs as corporate entities. By failing to meet the needs of these businesses, Macharia – a banker himself, says banks are leaving opportunities on the table.
“This has seen us lower our interest rates so that we retain and attract customers,” he says.
He further notes that, it is essential to acknowledge the potential risks and drawbacks associated with these alternative avenues. Costs may be higher compared to traditional bank loans. Nd while, alternative finance providers may offer faster approval processes and more lenient eligibility criteria, they often do so at the expense of higher interest rates, fees or revenue-sharing arrangements.
“It’s important for businesses to carefully assess the total cost of borrowing to ensure it remains manageable and sustainable for their operations,” he advises.
Further, Macharia says that a growing number of Kenyans are borrowing to repay their debts pointing to the extent hard economic times has pushed many to the wall – a situation that has been made worse by late reopening of schools, pointing to an upsurge in school fees loans among parents.
The rate at which consumers apply for loans to pay school fees has been higher in the last few weeks according to him, with an many borrowers taking a facility to offset school fees arrears in comparison to last year or a year earlier.
Rising cost of borrowing
In February this year for instance, the Central Bank of Kenya (CBK) raised borrowing costs to highs last seen nearly more than 10 years ago, as it moved to contain stubborn inflation and pull a handbrake on the free fall of the Kenya shilling.
The banking sector regulator pushed upwards its base lending rate by 50 basis points from 12.5 percent to 13 percent, a level last witnessed in the sunset years of President Mwai Kibaki’s administration.
The decision has effectively given commercial banks the signal to increase their lending rates, setting up borrowers for a new era of expensive loans.
Government’s plea
This comes amidst the ongoing debate on the Finance Bill, with the government now promising to scale down its borrowing rate for the financial year 2024/2025.
Speaking at the National Assembly on Wednesday, May 29, Kiharu MP Ndindi Nyoro, the Budget and Appropriation Committee chairman said that the government is working towards cutting the debt deficit.
“We want to rationalise the amount of money we want to borrow. At the budget policy statement level, the country was looking forward to borrowing around Sh 700 billion. In this estimate we have brought down that estimate to Sh 514 billion,” said Nyoro.
Nyoro said interest rates for loans taken will be clustered under the Consolidated Fund Services (CFS) which account for the payment of interest rates and pensions totaling Sh 1.3 trillion.
He further mentioned that changes were already made in the division of revenue bill.