Micro, Small and Medium Enterprises (MSMEs) play an important role in the Kenyan economy. It is estimated that there are over 7.4 million MSMEs in Kenya and they employ more than 15 million people. In Africa, MSMEs are the driving force behind economic development accounting for 90 percent of all businesses.
MSMEs also serve as a conduit for new ideas and innovations to penetrate the market, thus contributing to economic diversity and productivity.
The government’s bottom-up economic transformation agenda positions MSMEs as one of the key elements in economic revitalization and inclusive growth objectives. Sustainable Development Goal 8 recognizes the contribution of MSMEs to ending poverty, hunger and creating decent work. Despite this, MSMEs continue to face several challenges; key among them is limited access to finance.
The problem is compounded by the high interest rates prevailing in the Kenyan market and government borrowing in domestic markets. When the government borrows extensively, it usually competes with private borrowers (including MSMEs) for funds.
This competition tends to increase interest rates in the market. MSMEs, which often have a higher perceived risk compared to government debt, may find borrowing more expensive. These decisions could lead to unintended consequences, especially considering the ongoing challenges posed by Gen Z protests in the country.
The Credit Guarantee Scheme created by the government to encourage banks to lend more to MSMEs did not address the challenges of affordable, flexible and accessible credit for MSMEs. Many banks preferred to allocate their resources to large enterprises rather than small businesses.
The MSME Loan Guarantee Scheme Annual Performance Report (2022) showed that by June 2022, only 2,490 MSMEs had benefited from the scheme. The Government may consider expanding the scheme to effectively mitigate risks for a wider range of small businesses.
The expansion of credit guarantee schemes where the government guarantees lenders (banks or financial institutions) against losses on loans to MSMEs will significantly help to devalue MSMEs. This reduces the perceived risk for lenders and encourages them to lend to smaller businesses.
The government may also consider subsidizing loans for MSMEs, making borrowing more affordable and less risky for these businesses.
Moreover, MSMEs remained a significant contributor to banking sector financing, representing 14.9 percent of total customer deposits in commercial banks and 59.5 percent in microfinance banks (MFBs) according to the CBK’s 2022 Access Survey Report of MSMEs in bank credit.
Consequently, players in the banking sector need to develop specialized loan products specifically designed to meet the needs of MSMEs with flexible repayment terms, lower collateral requirements and interest rates that reflect the risk profile of small businesses.
This extends to the implementation of robust credit rating models and risk assessment frameworks that take into account the unique characteristics and challenges faced by MSMEs, enabling a more accurate creditworthiness assessment and pricing strategy. risk that can accelerate access to credit by MSMEs.
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