Banks and other financial institutions are aggressively customising their services to improve the appetite for credit among micro, small, and medium enterprises (MSMEs) that comprise the country's majority of businesses.
Customised business loans, crowdfunding, and green financing are among the innovations the banking sector is documented to have invested in last year to lure more small businesses.
Additionally, banks are availing expert relationship managers to guide MSMEs in their financial decisions. This is as the institutions also document increased investment in education for owners of these enterprises.
The Central Bank of Kenya (CBK), the industry regulator, also documents in the report how banks are softening their stance on the need for collateral to offer credit.
This is being done through non-traditional collateral loans that some banks are issuing.
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While some products are meant to allow more MSMEs to access financing, others are targeted towards helping these businesses manage their finances.
For example, integrated payment solutions, a category of products introduced by banks in 2023, are meant to help these businesses manage how payments are made.
They combine payment processing, invoicing, and accounting services.
“These solutions help MSMEs manage their cash flow better and streamline their financial operations. Examples include point of sale (POS) systems, mobile wallets, and online payment gateways,” says CBK in its latest Bank Supervision Annual Report covering 2023.
The report notes that banks are partnering with or creating their crowdfunding and peer-to-peer lending platforms to offer MSMEs alternative funding sources.
“These platforms connect small businesses with individual investors looking to support entrepreneurial ventures,” reads the report.
While crowdfunding is the most common way small businesses raise money using friends, colleagues or strangers; having a bank come in as a middle-man does mainstream this informal method of investing.
However, of the innovations listed, non-traditional collateral loans stand out considering lack of it has been documented to be a major reason why MSMEs cannot access funds.
The report says some banks are accepting collaterals such as inventory and future receivables to secure loans for MSMEs.
“This approach helps businesses that may not have significant fixed assets to obtain necessary financing,” the report says.
Customised loans are also being offered to cater to the specific needs of MSMEs. The report says these loans are tailored in terms of repayment schedules, interest rates, and loan amounts. This provides the necessary flexibility for small businesses to manage their finances.
This flexibility is also witnessed in the provision of green loans which CBK says also offers these businesses more time to repay.
These green loans are designed for MSMEs involved in sustainable and environmentally friendly projects.
“These products often come with preferential interest rates and longer repayment terms to encourage investment in green technologies and practices. The product has been instrumental in managing climate-related risks,” the report says.
According to the report, 2023 saw an increase in innovative products among commercial banks tailored specifically for MSMEs.
“These innovations aim to address the unique challenges MSMEs face, such as limited access to credit, complex regulatory environments, and the need for efficient financial management tools,” the report says.
It adds that the said products have assisted MSMEs in managing business volatility as well as providing funds for working capital, business expansion, business protection, and yield enhancement.
The CBK report says banks have invested considerably in financial literacy programmes to empower MSMEs. This has been done through the provision of accessible and knowledgeable relationship managers
"Banks have invested considerably in financial literacy programmes to empower MSMEs to run their businesses optimally. This is through the provision of accessible and knowledgeable relationship managers to deliver expert advice on financial management, insurance, investments, and other financial solutions to MSMEs,” reads the report.
These institutions are also running capacity-building programs done through face-to-face training which the report says are carefully designed to de-risk MSMEs to enhance their ability to access bank financing.
“With this drive towards financial inclusion, MSMEs, a majority of which operate informally, can continue to play a key role in poverty reduction and shared prosperity. Additionally, the advent of technological advancement has given MSME consumers the power to choose fit-for-purpose financial products,” the report says.
Kenya National Bureau of Statistics (KNBS) documents 7.4 million MSMEs according to an elaborate survey published in 2016. The number is however presumed to be higher as many of such businesses are not formal which also means they are unable to access credit from mainstream financial institutions.
The 2022 CBK FinAccess Survey done in partnership with Financial Sector Deepening (FSD) Kenya, reports that MSME lending generated Sh105.1 billion for banks. Collateral is still a major consideration for banks to lend to MSMEs.
FSD Kenya confirms this noting that in its 2021 FinAccess Survey, only two per cent of business owners were registered in the 2021 survey down from nine per cent in 2018.
It adds that banks are serving a small segment of the MSME market, the majority of whom invest in and cultivate.
“Collateral requirements, therefore, continue to be a major barrier for MSMEs in accessing formal credit. Ongoing reforms such as the strengthening of the moveable assets registry and appropriate security enforcement mechanisms would therefore go a long way in enhancing the bankability of MSMEs among lenders and easing their access to credit,” notes the FSD Kenya-CBK 2022 FinAccess report.