Debt pain for small businesses hurting the Kenyan economy

My father once told me that one cannot successfully acquire wealth without borrowing money. I was curious what he meant because I grew up debt-averse. I was afraid of debt, especially colossal amounts of money. It felt scary to constantly feel weighed down by the fact that I owe someone and, worse still, if I defaulted. I heard many stories about how loan recovery had left many families homeless and hopeless.

However, to illustrate why debt or loans are not such a bad idea after all, my father gave me an example. Say you want to buy an asset worth a million shillings and you have Sh100,000 cash at hand. Your options would be to either save one million shillings or borrow the balance and immediately acquire the asset, then pay the debt over time. This can be with or without interest, depending on the source of the money. However, few people, even family, will lend you money without interest.

On the other hand, assets appreciate in value. Therefore, if you waited for a year or so to acquire the asset, say land, at a later date, its cost would jump. So, either way, there is a price to pay. You can choose the interest on a loan or price increment as you save.

The reason we have so many lending institutions such as banks, MFIs, or saccos is because most people would rather borrow and meet their immediate need than wait. This is why many of us will seek loans. If you are in business, the need for money tends to be even higher, from working capital to asset financing. The tragedy is that interest rates are just too high in our market. Then there is the need to have collateral to secure the loan.

Expanding and growing your business requires financial resources. This means having the capacity to borrow and repay. The business community is highly demoralised by the high interest rates in Kenya and low interest paid on deposits.

Lending at 20 per cent while paying interest at two per cent is exploitative, regardless of how CBK and bankers want to explain this. The government and the Kenya Bankers Association need to intervene for SMEs. Corporates tend to have an opportunity to negotiate interest rates due to their size and the amounts they borrow. SMEs, on the other hand, hardly get their way on interest rates. SMEs are the only hope for expanding the economy as well as creating job opportunities.

It does not matter how many projects the government launches such as Lapsset, standard gauge railway, or laptops for Standard One pupils. Failing to address the needs of the SME sector will mean low use of the infrastructure. Unless the government is looking at a major takeover of the economy by a few local and international firms, there is an urgent need to solve SME financial woes, especially on interest rates.

SMEs are the backbone of Kenya’s economy. They are also the engine of the economies of the US, Canada, Australia, and other countries. Support and growth of SMEs is key to the attainment of double-digit growth, as envisaged in the Jubilee government’s manifesto.

Author is the CEO and founder, OPENWORLD LTD Email: [email protected]