Experts urge State to look for more business funding options

Tuesday, February 18th, 2020 07:56 |
Money. Photo/File

The government has been asked to explore alternative financing strategies to boost the development of micro, small and medium enterprises (MSEs) instead of relying on banks.

Experts said tackling funding problems bedevilling the small businesses is not an easy task, particularly if commercial banks were the only source of credit financing.

“Credit solutions to MSMEs require a different approach compared to what exists in other countries where the enterprises have wide funding options,” they said during a three-day symposium in Nairobi.

Anzetse Were, an economist with Financial Service Deepening (FSD), said funding solutions through banks cannot adequately address the credit needs of MSMEs unless other options are made available.

The solution to the inadequate funding problem of MSMEs in the country, according to Were lies in the adoption of other choices such as grants, venture capital, partnerships, crowdfunding – an innovative way of financing a project by raising funds from a very large number of people –and fundraising.

Credit solutions

“Until we appreciate the reality that commercial banks cannot and will not solve the funding requirements of the MSMEs sector in Kenya, an ideal credit solutions to the sector cannot be prescribed,” said Were during the forum organised by the Institute of Certified Public Accountants of Kenya (ICPAK). She added  that it was high time the country started looking for other funding options for the MSMEs sector, which are neither rigid in outlook and scope nor exploitative in nature as is the case with banks. 

She, however, acknowledged that banks were in the business of making profits and therefore may not be the ideal option to fund the MSMEs sector, which is viewed as risky borrowers.

She said capital markets could also be used by companies, especially the MSMEs, to raise cheap funds that they require for their business growth instead of relying on high-interest rate charges from banks.

In 2018, Central Bank of Kenya (CBK) together with five commercial banks launched a mobile-based credit scheme whose objectives are to improve access to credit for small-to-midsize enterprises, which have been locked out of the formal credit market because of the informal nature of their records and lack of collateral for secured loans.

The loan product, marketed under the name Stawi was to be initially managed by five banks – Commercial Bank of Africa Ltd (CBA), the Co-operative Bank of Kenya Ltd, Diamond Trust Bank Kenya Ltd (DTB), KCB Bank (Kenya) Ltd, and NIC Group Plc. Customers will access the loan through a mobile phone application. 

The money will then be credited to the customer wallet.

Stawi offers unsecured loan products ranging from Sh30,000 up to Sh250,000 with repayment profiles of between one and 12 months, at an interest of 9 per cent per annum. Customers are to be scored and advised of their credit limit. Additionally, they are eligible for a top-up functionality once 80 per cent of the loan borrowed has been repaid or track record of three months’ repayment.

Were said interest rate cap law enacted in 2016 restrained the MSMEs from accessing credit thereby reducing the overall growth of the economy by 0.4 per cent, inhibiting growth in the private sector by 4.5 per cent.   

George Mokua, ICPAK vice-chairman, told of how he lost all his retrenchment investments mainly due to the high-interest rate charges by commercial banks – which auctioned his property due to his failure to pay money which he had borrowed to grow his business.

He said a study by the umbrella body for the accountancy profession, revealed that apart from the unfriendly environment such as high cost of doing business, high-interest rate charges by banks contribute to the closure of many enterprises.

Closing shop

Commercial banks, Mokua added, have taken the advantage of the disunity of consumers to overcharge MSMEs, wondering why only players in the sector were the ones receiving a return on investment of 24 per cent where other companies were closing shop.

He said ICPAK was watching keenly every step the banking sector players were taking in the post-interest rate cap era and urged the government to unveil other  facilities so that MSMEs can have options when it comes to funding. 

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