This archive report was first published on 7 December 2019.
As banks shun credit issuance to small and medium enterprises (SMEs), mobile loans have become a lifeline for these businesses, with many turning to the service for funding.
According to the 2019 Kenya SME Performance Index by Viffa Consult, mobile money is the second primary source of business financing for SMEs, accounting for 22% of funding, behind only retained earnings.
Moreover, mobile money is the top principal financial partner for SMEs, contributing 33% to their financial needs, surpassing the combined contribution of banks, chamas, and family and friends.
Mobile money deployment has grown faster than any other channel, mirroring the increased role of digitization in financial services.
The index attributes the increased reliance on business loans to the long freeze of private sector credit, which was caused by the stay of the interest capping law. This led to banks de-risking out of the sector to mitigate perceived higher risks.
“The interest rate cap has been the game changer, having resulted in the denial of bank loans to SMEs. The financing of business from retained earnings was not just enough under the current operating environment,” noted Viffa Consult Managing Director Victor Agolla.
Mobile money is expected to grow in prominence, eclipsing earned profits, despite the lifting of interest rate caps, which are expected to free up credit flow to the sector.
However, while mobile loans have attracted higher annualized interest charges, Mr. Agolla appraises the source of funding for its ease of access compared to banking sector loans.
“Interest rates charged on mobile loans are definitely higher, but what is the other option to expanding your business?” he posed.
SMEs have been a significant source of employment creation, accounting for 83.6% of the 846,000 jobs created in 2018, according to provisional data from the Kenya National Bureau of Statistics (KEBS).
However, the business has taken a slump due to the continued stay of a depressive operating environment, which has seen hundreds of workers laid off from firms under bearish market conditions.
The slump is mirrored in the index’s tracking of the enterprises’ declining turnovers over the review period.
Annual turnovers of between Ksh.500,000 and Ksh.1,000,000 and those from Ksh.1,000,001 to Ksh.5 million declined by a respective four percent, while the return of amounts less than Ksh.500,000 increased by 18 percent in the period.
Further, the return of medium enterprises, represented by the guidance of between Ksh.5,000,001 and Ksh.10,000,000, was up by three percent, but only after a 30 percent dip in returns ranging between Ksh.10,000,001 and Ksh.30 million by larger enterprises.
Local SMEs expect a better run in the New Year, buoyed in large part by new reforms, including the recent lift on lending by commercial banks and the development of innovative financing products.
Among the top aspirations by the enterprises in 2020 include the access of new markets and expansion.
However, the index expresses caution in the ongoing fiscal consolidation efforts by government, which glooms government spending in the economy.
“This is easier said than done due to underlying risks such as expenditure rationalization without affecting productivity of critical services including non-payments to SMEs’,” notes the index in part.
