Banks should design loans with more favourable terms for businesses

KCB CEO Joshua Oigara during an interview at his office. [Maxwell Agwanda, Standard]

The Covid-19 pandemic has largely been framed as a public health crisis. However, its economic impact has been severe and widespread. The effects have been felt across the economy, significantly afflicting all sectors and households.

In all this, irrespective of industries, the Micro, Small and Medium-sized Enterprises (MSMEs), have been particularly hard hit by reduced customer footfall and disruptions in supply chains, among other biting effects of the pandemic.

The widespread job losses and income cuts have also meant depressed demand for MSMEs’ goods and services, due to reduced purchasing power.

This has left MSMEs struggling. A survey by the Kenya Private Sector Alliance (Kepsa) in October 2020 indicated that about 64 per cent of the MSMEs surveyed had experienced a high or very high negative impact on their businesses from Covid-19.

These included loss of customers, liquidity challenges, high cost of operations, inability to pay salaries, and reduced labour productivity.

The MSMEs’ typically limited liquidity, financial flows and reserves, has left them more vulnerable, compared to the larger corporates. Thus, the pandemic, like any other shock, is guaranteed to throw them off balance in a very short time, effectively putting their survival in jeopardy.

Of all the kinds of support that businesses require to cushion themselves during such rough patches, the financial kind ranks top. This effectively puts the financial services sector, particularly, in the driver’s seat, to protect these businesses from the harsh effects of the pandemic.

However, there is need for banks and other players in the sector to go the extra mile in protecting MSMEs. The recently launched credit guarantee scheme by the National Treasury and seven local banks is an innovative approach towards unlocking credit for MSMEs.

Basically, the participating commercial banks will independently review the ability of the businesses to repay the loan and determine applicable interest rate based on risk of default.

The Treasury will guarantee 25 per cent of the loan in case of defaults while the bank will take up the balance under third-party credit risk mitigation scheme.

This initiative is a sure game changer for the MSMEs as they seek to stay afloat in the wake of the economic crisis. This will contribute significantly towards driving sustainable and inclusive growth that leaves no one behind.

The challenge for the banking industry now is to design concessional loans for businesses, with much more favourable terms. Though in dire need of working capital to stay afloat, the normal terms may not be suitable for businesses.

Adequate financing is critical to not only help them weather these tough times, but also put them in good stead to recover and build back better. This is the inspiration behind KCB Bank’s new, discounted MSME loan that comes with the options of being either secured or unsecured.

Alongside such innovative financing, businesses also need training and advisory support to weather effects of the pandemic. In the unfamiliar territory that businesses are increasingly finding themselves in, opportunities for continuous upskilling, puts them in good stead to effectively deal with the situation and thrive.

It is such out-of-the-box support that could be the difference between MSMEs staying in operation or struggling and eventually having to fold up, at a huge cost to the economy.

These may just be the straws that businesses clutch on to weather the pandemic. The pandemic has been a wake-up call for banks to rethink their business models and sharpen their priorities to create opportunities for MSMEs to navigate the crisis.