Why SME funding will be the economic rebound acid test
KCB Group has just received Sh16.3 billion ($150 million) funding from the International Finance Corporation (IFC) to grow loans to micro, small and medium enterprises (MSMEs) and fund climate change-related projects.
The development reflects part of a growing consensus that banks and other financial institutions have an obligation to fund SMEs to increase their resilience and boost their survival chances in light of the COVID-19 related shocks.
- Kenyan companies used the pandemic to reorganize payroll
- Turning on credit taps for small businesses after COVID-19
Over the first-half of the year, lenders have made it a tactical strategy to pack money in safe assets like government securities as they avoid riskier classes such as SMEs, who have taken a hit from the pandemic.
This has seen loans to customers grow at a slower rate. Nevertheless, the top nine lenders in the country including KCB, ABSA, Stanbic, Co-operative, Diamond Trust Bank, Equity, I&M, NCBA and Standard Chartered have seen loans to customers’ jump by17.2 per cent from Sh1.9 trillion to Sh2.3 trillion.
As the economy reopens and expectations of a V-shaped recovery take shape, banks are willing to start lending to SMEs.
Loan defaults are however at record highs in spite of restructured loans having crossed the Sh1 trillion. As such, banks are under great dilemma to risk more or play it safe, and sit on crucial funds to aid in recovery.
According to the Central Bank of Kenya (CBK) Monetary Policy Committee (MPC), the ratio of gross non-performing loans (NPLs) stood at 13.6 per cent in August, compared to a lesser 13.1 per cent in June.
CBK said loans amounting to Sh1.12 trillion had been restructured as of the end of August, representing 38 per cent of the total banking sector loan book of Sh2.9 trillion.
One of the options to push out more funding to SMEs has been the setting up of the SME credit guarantee scheme, as proposed by the government. Treasury has revealed would set aside Sh10 billion across the next two financial years while the European Union (EU) has allocated Sh11.7 billion (100 million euros) to cover the risk faced by banks in extending loans to SMEs.
The alternative is presented in partnerships between banks and development finance institutions which can offer low interest and long term monies for onward lending just like the IFC loan to KCB.
Better yet, the IFC will offer training in the areas of green finance which will help the small enterprises utilize the money productively with expert advice to reduce rate of failure and ultimately squeeze out loan defaults by SMEs .
However, the biggest challenge to financing SMEs is whether the process will also motivate the demand side.
Generally, Kenyans who have lost jobs or handed pay cuts have used up savings or postponed investment decisions, thereby reducing aggregate demand.
While there are efforts like Kazi Mtaani where the National Treasury has injected Sh10 billion directly into the pockets of young Kenyans, the anticipated multiplier effect on the consumption side will only come into being if firms resume hiring.
This will entail a feedback loop where banks lend to SMEs and the small businesses hire more people who can then purchase their products ensuring the profitability of entities and dilute loan defaults