How high interest rates impede credit access by small businesses

The report notes that before joining the programme, 63 per cent of enterprises did not have access to any credit from a financial institution. [iStockphoto]

High interest rates made micro, small and medium enterprises (MSMEs) avoid applying for loans. This is even as a report by the bankers’ association shows over Sh5.5 billion was disbursed to these businesses over the last five years.

The report, which documents the strides of the Inuka Enterprise Programme, an initiative of the Kenya Bankers Association (KBA) targeting small businesses, details how the programme has facilitated financial inclusion.

According to the Inuka Impact Evaluation Survey Report 2024, KBA notes that whereas access to credit remains a constraint among enterprises, the programme has changed this trajectory.

The report notes that before joining the programme, 63 per cent of enterprises did not have access to any credit from a financial institution.

However, after joining, 66 per cent of them applied for credit with 55 per cent having their applications approved in full. Some 16 per cent had their credit partially approved while 29 had theirs rejected.

“Further, the evidence shows that the enterprises are not applying for credit. The main reasons for not applying included complex loan applications (21 per cent), high-interest rates (28 per cent), lack of required documentation (21 per cent), no adequate or favourable financial product (s) available in terms of interest rate charged, and loan period (11 per cent), and no need to borrow (16 per cent),” the March 2024 report reads.

The type of credit facilitated courtesy of the programme includes overdrafts accessed by 25 per cent, short-term lending of less than one month (51 per cent), short-term lending of less than three months (63 per cent) and long-term lending of more than three months (34 per cent).

“In terms of volume of loans accessed by SMEs under the programme post-training, it is estimated that slightly over 7,000 SMEs have accessed loans amounting to approximately Sh5.84 billion over the last five years of the programme’s existence,” the report says.

Some 7,000 MSMEs accessed loans from commercial banks.

The challenge with access to credit also could be linked to the fact that most enterprises, while they have improved and started keeping records, are in physical form.

The report details that of the MSMEs surveyed, 92 per cent of those under the KBA initiative prepare and keep records compared to 88 per cent of enterprises which did not undergo the training.

“However, the records are predominantly in a physical form rather than in digital with 81 per cent of Inuka enterprises and non-Inuka enterprises at 70 per cent preparing and keeping records in physical form,” the report noted in part.

 Randomly selected

KBA states in the report that by the end of January 2024, more than 70, 000 MSMEs across the 47 counties had been reached by the programme.

The study targeted 1, 000 MSMEs across the 47 counties which were randomly selected. The survey took place in January this year

The Inuka Programme is premised on the fact that MSMEs, by 2015, accounted for about 34 per cent of the country’s Gross Domestic Product.

Data from Kenya National Bureau of Statistics, 2016, show there are about 7.4 million MSMEs and they employ more than 15 million people.

The Inuka program, launched by the banking industry in 2018, provides seven core modules of straining namely: business and strategic planning; entrepreneurship and company registration; financial management; human resource management; legal management, constitutional rights; marketing and business communication; and operations and value chain management.

The MSMEs targeted are split into three categories: micro-enterprise with an annual turnover of between Sh160,000 to Sh1 million with at least one full-time or permanent employee; small enterprise with an annual turnover of between Sh1 million and Sh50 million with a workforce of five to 30 employees and; medium enterprise with an annual turnover of Sh30 million to Sh250 million with a workforce of between 30 and 150.

KBA states that while the programme has met its high-level objective, several areas call for enhanced intervention.

Digital lenders

For example, Inuka is bank-focused while the MSMEs' avenues for funding are wider, including microfinance institutions, Savings and Credit Cooperatives (Saccos) as well as unregulated digital lenders.

“The possibility of overlaps in the source of finding, that extends beyond financial markets’ players to include supplier’s credit is an aspect whose understanding will inform the constraints to MSMEs beyond training,” the report reads.

The report also emphasises on the training aspect as an enabler of access to finance.

“It is, however, not sufficient unless mapped with other constraints that are exogenous to the enterprises such as market access issues and firms’ competitiveness,” KBA says.

“Without these additional dimensions, the program’s promotion of access will not optimally translate to enhanced usage of financial services.”

KBA recommends handholding intervention which it describes as specialised with the cognisance of the unique and dynamic challenges MSMEs go through. “Such interventions as advisory services to support hand holding of SME would be instrumental,” it says.