Nearly all loans issued by banks to small companies are short term or overdrafts which means the businesses cannot get sufficient long term funding for growth.
The Central bank of Kenya said its survey on small businesses showed there was a relatively narrow range of credit facilities utilized by MSMEs, centering largely on short-term loans and overdrafts.
Within commercial banks, the term loans and bank overdrafts accounted for over 90 percent of the MSME loan portfolio.
Alternative financing instruments for MSMEs such as contract financing, performance bonds, invoice discounting, bank guarantees, letters of credit and warehouse receipts only accounted for 10 percent.
“Owing to the high cost of these facilities, they are not appropriate for long-term business developmental needs and do not support growth,” CBK warned.
Small businesses hold 1.18 active loan accounts in Kenya owing banks Kes783.3 billion as of December last year.
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CBK SME survey showed Banks were more willing to extend credit to MSMEs approving 83 percent or Kes829 billion of the Kes1 trillion loan applications
This was an increase of 35.8 percent from the 2020 survey, where they received loan applications from MSMEs worth approximately Kes740 billion, of which Kes546 billion (74 percent) was approved.
Banks are turning to small business on loan guarantees from government and development partners to increase their small business exposures even as private sector credit looks more attractive on increasing loan rates.
Banks are charging small businesses up to 15.5 percent for loans while micro lenders are pushing it up to 27 percent on average.
The highest reported rate charged on small enterprises was by micro finance banks which priced at the most expensive loan at 32 percent and the lowest at 10 percent.
In the micro enterprise category, the trade, transport and communication, finance services sectors received the most credit from commercial banks while the hospitality, energy and water, mining and quarrying sectors received the least.
In the small enterprise category, the trade, real estate and transport sectors were the largest beneficiaries while the hospitality, energy and water, mining and quarrying sectors received the lowest proportion of credit.
In the medium enterprise category, trade, real estate, and manufacturing sectors received the highest amount of credit from commercial banks while the hospitality, agriculture and mining sectors had the lowest approvals.