SMEs dilemma in Kenya

BY ANTONY MUTUNGA

The beginning of 2020 was to mark the end of the continuous challenges that a majority of small and medium enterprises (SMEs) in Kenya have been facing. Limited access to credit (top of the list), limited market access, poor infrastructure, rapid changes in technology, and lack of adequate skills and training are but a few. 

With President Kenyatta recently repealing the interest rate cap, SMEs were foreseeing a change in terms of finance, which in turn, would help deal with the rest of the challenges.  

In the last half of 2019, the private sector, which had been falling further down, had started on recovery in which SMEs played a big part. 2020 was to be the year of growth for the sector. But ever since the Covid-9 pandemic started its spread, financial institutions in Kenya have gone back to limiting access to credit. 

The lack of security to be given credit has been a common reason as to why many financial institutions have turned them away. Signing into law of the interest rate cap in 2016 was to bring about a change. On the contrary, it brought about a period where several SMEs experienced continuous losses while others shut down. As a result, the credit growth of the private sector slowed down. According to data from the Central Bank (CBK), it decelerated to 4% at the beginning of 2017 as compared to 5.4%, August 2016. 

SMEs were among the most affected as data from the CBK shows that the share of loans to corporates increased relative to small enterprises and personal loans. Circumstances seem to have repeated themselves once more, as with COVID-19, SMEs are once again considered risky.

Limited access to credit means no cash flow, leading to piling expenses and delayed salaries. Apart from this, the pandemic has caused the number of customers for most businesses to dwindle. SMEs in Nairobi and Mombasa, the most affected, have recorded fewer sales as people have chosen to stay at home, not to mention the dwindled purchasing power. 

Several small businesses lacking the capital to stay afloat during this period have shut down their operations to avoid rising expenses. The ones that import are the most affected. As several SMEs not only source their raw materials from overseas, most even import finished goods to resell. Henceforth, with most flights and ships down due to the pandemic, imports have reduced. The result has been the closure of more businesses and job layoffs. 

To survive and avoid being ravaged by the pandemic, SMEs will need financial assistance. There is a need to improve access to credit to these enterprises as they are a significant contributor to the country’s gross domestic product (GDP). The time for SMEs to change the way they operate is now. Those that had put a delay on integrating technology need to invest now. The ones who did are in the lead as they still connect with their customers through their online platforms and continue to make sales. In investing in the same, businesses can maintain cash flow and reduce their reliance on credit in the long run.

Additionally, in a move to help the sector, the CBK came up with measures to cushion SMEs from the pandemic. For starters, the bank reduced the cash reserve ratio (CRR), the specified minimum deposits, which commercial banks have to hold as reserves with the central bank, to 4.25%. The Government also came up with the National Covid-19 Emergency Response Fund to assist SMEs with funding in the period as well as temporarily suspended the listing of SMEs in the credit reference bureaus (CRBs).

SMEs are crucial for the Kenyan economy as is technology in this era. Enterprises, however small, need to integrate technology to survive and shift to the next stage. They need to evolve.  

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