Study: Mobile loans grow as source of funding for Kenya’s SMEs

Types of financing trends

NAIROBI, KENYA: The appetite for bank loans among Small and Medium Enterprises (SMEs) is on a downward trend, a new survey reveals.

Compared to last year, the uptake of bank loans among SMEs declined by 29 per cent in 2020 compared to over 80 per cent witnessed last year.

“Although banks have retained top spot as the preferred location for business-related funds there has been a significant 29 per cent point drop between 2019-2020 possibly due to increased uptake of mobile money as well as continued emergence of Chama saving groups whose value proposition include uncollateralised loans, social protection on issues related to death and business interruptions, advocacy, information, and mentorship among others,” notes the Viffa SME access to Finance 2020.

According to the survey, there is an increase in the uptake of credit from mobile money lenders in 2020 compared to the previous year. Sacco and Chama groups are also emerging eating into commercial banks' territory.

SMEs competitiveness survey by the International Trade Centre, Ministry of Trade, and Kenya National Chamber of Commerce and Industry released in September last year shows that 33 per cent small traders avoid commercial bank loans despite their need for credit.

SMEs represented the high growth in employment creation, having scooped 83.6 per cent of the 846,000 jobs created across 2018 as per provisional data from the Kenya National Bureau of Statistics.

Year after year, mobile money deployment has grown faster than any other channel to mirror the increased role of the digitisation of financial services.

Digital lenders have bridged a gap in offering much-needed credit to small business owners who could not access credit because they lacked a credit score or banking history.

Experts attributes the uptake to a Credit Information Sharing System (CIS) as one of the cornerstones of financial inclusion in Kenya and has made it easier for borrowers to access additional growth credit.

“Improved credit rating supported by the CIS system has over the last couple of years allowed digital lenders like M-Shwari, Tala or Zenka to provide the necessary funding to small businesses requiring quick short-term loans to thrive,” says Duncan Motanya, the CEO, Zenka Finance.

“It is now taking Kenyans a few minutes to access credit at their comfort; many people no longer need to travel or physically present paperwork. With just a tap on your smartphone, you can key in crucial data points that allow lenders to rate your creditworthiness.”

Business financing most helpful during COVID-19 period to date

The Viffa SME access to Finance 2020 study points out that financing from family and friends, owner funds also remain the main source of capital for SMEs.

Kenya SMEs continue to struggle with accessing business finance. In the last four years, this was more pronounced due to external factors such as heavy domestic government borrowing, delayed payment by county and national governments, and interest rate cap among others.

The year 2020 was projected to be turnkey on the back of several initiatives that were espoused to change the SME access to finance tide including; repeal of the interest rate cap, establishment of a credit guarantee scheme, payment of pending bills owed to SMEs, set up of SME fund together with supporting policy and Biashara centers, SME loaning through STAWI, financing opportunities through African Development Bank among others.

Unfortunately, the COVID 19 pandemic has caused unprecedented havoc to the Kenyan economy with SME bearing the full brunt.
The government has put in measures to backstop SMEs by providing liquidity relief through various tax and non-tax interventions such as the reduced turnover tax from three to one per cent, reduced corporate tax from 30-25 per cent, reduced VAT from 16-14 per cent among others.

“Marketing remains top priority as a measure to recover from COVID 19 with SMEs projecting to adapt to a new normal driven by changing consumer trends hence the emerging need to invest in; changing business model, capacity building of employees and modern equipment."