High interest rates hold back SME growth

High cost of credit in Kenya has stifled growth of the small and medium enterprises, a World Bank report says, crippling an industry that is central to the country’s economy.

In its latest update on Kenya’s economy: Re-invigorating growth with a dynamic financial sector, the World Bank blames the high interest rates charged by local banks for cash-flow challenges gripping small entrepreneurs.

“High rates leave them with little recourse but to dig deeper into their personal savings or turn to family and friends to raise funds for day-to-day operations.

Given the seminal role SMEs play in growth and job creation, channelling credit to this sector is a critical function of banks,” the report reads in part.

SMEs KEY DRIVERS OF ECONOMIC GROWTH

The micro, small and medium enterprises segment is a key driver of Kenya’s economic growth and has been identified as pivotal in realising the national blueprint, Vision 2030.  

But according to fresh findings, prevailing high interest rates charged by lenders in Kenya could derail growth of the industry.

“The difference between the average rate of interest charged by banks on loans to customers and the average rate of interest banks pay on savings/deposits remains persistently high.

At the same time, banking sector profitability has grown,” reads the report.

The Bretton Woods institution now wants a study commissioned to establish the factors that influence the way in which banks price loans in order to develop a comprehensive policy for lowering the cost of credit.

“High lending rates can be traced to a range of factors, including the macroeconomic environment, high bank overheads and profits, information gaps, structure of the banking sector, and the volatility of the risk-free return.

A multi-pronged approach is needed to increase bank lending to this critical sector if growth and job creation are to take-off,” the bank’s country director, Diarietou Gaye, said in her presentation.

BRINGING DOWN INTEREST?

The call comes barely a week after Deputy President William Ruto ordered the Central Bank of Kenya to hold consultations with the Kenya Bankers Association to come up with an agreeable method to bring down interest rates to a level that is affordable to most Kenyans.

“There is a question I have always asked the chairman (Kenya Bankers Association) and Professor (CBK governor Njuguna) Ndung’u, and I have not been provided with a clear answer, which is on the reason for the high interest rates in the country,” Mr Ruto said last week.

National Treasury cabinet secretary Henry Rotich said the government was working on a new regulation that will give CBK power to demand more information disclosures on how banks set their base lending rate.

The law is expected to be in place early 2014.

“The law will promote transparency and accountability in the Central Bank.

It will also give the Central Bank more power to oversee consumer protection issues such as truth in lending and transparency in the calculation of interest rates,” said Mr Rotich.

Speaking at the just-concluded Jua Kali/Nguvu Kazi exhibition in Nairobi, micro and small enterprises authority acting chief executive Patrick Mwangi said the business suffers from poor access to credit, uses inappropriate technology and lacks markets as well as key business information.

“We would want to have policy interventions that would see the bank interest rates come down to a level that entrepreneurs in the informal sector can easily access affordable credit,” Mr Mwangi said.

MILLIONS EMPLOYED

Last year, according to the Economic Survey 2013, the micro, small and medium enterprises employed about 10.5 million people, accounting for 82.5 per cent of the total workforce in Kenya. 

The World Bank wants the government to develop effective collateral registries, credit information systems and creditor rights framework strengthened.

“The high levels of informality within the sector and inadequate systems of collateral verification hinder lending.

Banks, savings and credit cooperatives (SACCOs), payment service providers, and utility companies should be encouraged to share positive information about consumers,” says the report.

Efforts should be made to enable some SMEs to tap equity funding, either through private funds or through the Growth Enterprise Market Segment of the Nairobi Stock Exchange, said World Bank.