Why SMEs are now the darling of banks

Banks and other financial institutions seem to have one thing in common at the moment: SMEs are the way to go.

For a while now the banks have been jostling to catch the eye of small and medium enterprises. Before its temporary closure in April this year, Chase Bank appeared to be ahead of the pack in attracting this segment. However, when trouble hit the lender, others banks saw an opportunity to go for the kill, having fought without much success for the better part of 2015 to solidify the grip on the sector.

Banks have been driven to pay special attention to this sector mainly to capitalise on the appetite by international lenders to offer low-cost, long-term loans to be advanced to SMEs.

The International Finance Corporation (IFC), the World Bank’s private sector lending arm, estimates that SMEs in Kenya have an annual credit gap of over $6 billion (Sh630 billion), which affects their ability to compete with bigger businesses.

In December 2015, Family Bank secured Sh3.33 billion from the European Investment Bank to lend to small and medium enterprises in form of cheap, long-term loans. This came two weeks after it inked another deal with Dutch financier, Oiko Credit International’s East African subsidiary, to advance Sh1 billion in loans to the SMEs. Family Bank had also received Sh2 billion three years ago from the European lender.

Last November, Chase Bank signed a Sh1.12 billion deal with French development agency, Agence Française de Dévelopment (AFD), to strengthen its lending towards companies investing in clean energy projects.

In 2015 alone, the African Development Bank gave Sh15 billion ($148 million) to Equity Bank and Sh5 billion ($50 million) loan to Chase Bank to boost their SMEs lending capacity.

Non-traditional forms of financing

AFD had also committed to offer an additional Sh2.2 billion (20 million euros) under the 12-year loan deal with Chase Bank.

“With banks turning their attention towards SMEs in the country, more creative and non-traditional forms of financing are needed in order to have SMEs access credit and scale up their business,” Equity Bank boss James Mwangi said recently.

Chase Bank launched African Trade Insurance Agency (ATI) last year to cover for the lender’s SME customers who have a shortfall in collateral for trade finance. It sought to lend up to $6 million (Sh630 million) per transaction under the partnership with ATI. The bank had declared that it would lend up to Sh60 billion to SMEs.

Trouble hit Chase Bank just days after K-Rep was bought up and rebranded to Sidian Bank by investment firm Centum, which was keen on turning it into an SME-focused arm.

It was reported that Centum was keen on merging Chase Bank operations with Sidian Bank although the management later denied there were such plans.

While self-styled SME banks have mostly gone to great lengths to target the market, the big old school banks have revolutionised their corporate social responsibility to tap into this market.

Barclays Bank announced plans to reach out to more than 10,000 SMEs by offering secured business loans at a subsidised rate of 17.5 per cent with same day approval, across 11 major towns in Kenya under the ‘Wezesha Biashara na Barclays’.  

The bank has set aside Sh30 billion for the initiative. In 2015, the bank introduced a single point of contact for SMEs in a plan it said would enable the lender “to better understand and resolve the challenges facing their businesses in a more nimble manner”.

To make it easier for SMEs, those seeking up to Sh15 million loan no longer need to provide audited financial statements and they would get feedback on credit applications in 48 hours. 

Kenya Commercial Bank has not been left behind. In March, the lender launched a programme for young entrepreneurs. The project dubbed Tujiajiri estimated to cost Sh50 billion seeks to create 2.5 million jobs over the next five years by supporting young entrepreneurs to ease the country’s unemployment challenges.

It has not been lost on telcos that mobile lending is fast gaining currency for SMEs, with nearly a dozen major players in the market including commercial banks’ platforms such as M-Shwari, M-Co-op Cash, KCB M-Pesa, and Equitel. Mobile lending platforms are giving banks a run for their money with no brick and mortar costs, effective use of technology and small loans of up to Sh50,000.

SMEs are gaining big from mobile lenders such as Tala, Branch, Saida and Mombo Mobile, which issue short-term loans. Branch is said to command 27 per cent market share in Kenya’s app-based lending market followed by Tala (24 per cent) while Saida controls 7.1 per cent, according to a study by Djuaji Research published early this year.

Lenders have also turned to offering SME specific products like invoice financing for businesses with payment cycles that require liquidity. SME financier, Umati Capital offers daily payments to dairy farmers on behalf of the processor without collateral, while the processor gets an extended period of up to 60 days to repay the money advanced to farmers.

Ranis Capital through its website, www.raniscapital.com gives entrepreneurs cash against invoices in 48 hours, instead of waiting for 30 to 180 days. The platform also has a peer-to-peer financing model, where an investor can sign up to offer capital to SMEs and earn interest.

Some SMEs who require huge capital investments to put up plant and equipment or buy motor vehicles are increasingly getting options. Equity Group and German based Bosch Group also recently inked an equipment microfinance deal to have small scale (jua kali) artisans access Bosch power tools through financing offered by the bank.