Inside Politics

Small enterprises’ appetite for personal loans puzzles banks

Friday, September 24th, 2021 00:00 |
Loan. Photo/Courtesy

Small and Medium Enterprises (SMEs) with turnovers of above Sh500,000 prefer personal borrowing over business loans, a new study by the Kenyan Bankers Association (KBA) reveals. 

The survey, done between May 7 and 21, 2021 from a random sample of 279 enterprises chosen from KBAs Ibuka programme indicated that 41.67pc preferred business loans while 44.44 per cent went for personal loans.

“It is still a puzzle why SMEs with turnovers over Sh500,000 lean more towards use of personal loans over business accounts,” said Samuel Tiriongo, KBA director of research and policy.

But the Kenya Private Sector Alliance (Kepsa) head of projects Harrison Ngatia argues that most of the businesses are informal and without registration.

Consequently, Ngatia said it was easier for them to borrow as individuals than a business through traditional borrowing and digital lending.

“There are so many Kenyans who are employed but run businesses on the side, which makes it easier for them to borrow through their employment account as it’s easier to access funding for a salaried person,” said Ngatia.

Through the different businesses, Ngatia said, proceeds are channeled through personal accounts which they then use to borrow.

He said digital lending provides a platform through which lenders can align the features and requirements of personal and business loans through artificial intelligence (AI).

“Deepening digital lending for businesses is possible where digital platforms are embedded with Artificial Intelligence (AI) capabilities to enable profiling of business behaviour which makes it possible to customise funding based on individual business needs instead of issuing generalised funding products as is the case with traditional lending,” he said.

Kenya National Bureau of Statistics  data indicates that micro, small and medium enterprises (MSMEs) employ over 15 million people and contribute 30 per cent of the national value-added.

However, they still face difficulties accessing finances from banks, instead preferring savings, credit co-operative organisations (Sacco’s), a problem that has been attributed to difficult collateral requirements.

Sectoral reach

In addition, the MSMEs preference for Saccos is also because of their diversity and penetration across the country in terms of geographic and sectoral reach which makes it easier for businesses to access most of their financial services including funding. 

“With the often promoted savings aspect of Saccos, businesses utilise this opportunity to support the owner as he saves and leverages the same savings for accessing funding,” said Ngatia.

According to Central Bank of Kenya (CBK), only SMEs within the trade (52.1 per cent) and transport and communication sectors (8.5 per cent) attracted increased bank credit last year from a 2019 percentage of 41.8 per cent and 10 per cent respectively.

Tiriongo was presenting a paper on what drives MSMEs choices at the opening of a three-day KBA 10th Annual Banking Research Conference in Nairobi. Sheila M’mbijjiwe, CBK deputy governor was the chief guest at the conference whose theme was “Banking Beyond Covid-19”. 

M’mbijjiwe said the pandemic had amplified opportunities and risks, and that resilience would be important in navigating through the health crisis.

On his part, KBA Governing Council chair John Gachora said the pandemic had extensively depressed the economy, noting that facilitating an understanding of the financial environment through research has become a necessity considering the dynamics of the Kenyan market and global disruptions caused by the pandemic. 

Habil Olaka, KBA chief executive expressed optimism that the Kenyan banking industry’s resilience will play a critical role in supporting a strong and sustainable economic recovery this year.

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