SMEs hit with up to 32% interest rates by Micro Financiers

The Central Bank of Kenya (CBK) has raised concerns about microfinance banks (MFBs) charging high interest rates, up to 32 percent, on loans to small and medium enterprises (SMEs). These high interest rates are despite the requirement for collateral and are seen as a potential hindrance to the growth of SMEs.

Here are the key points from the CBK survey report:

1. High Interest Rates: MFBs are charging SMEs interest rates as high as 32 percent on loans, with an average rate of 27 percent. This is significantly higher than the 15.5 percent interest charged by commercial banks.
2. Sector Distribution: Most of the SMEs accessing loans from MFBs are in sectors such as trade, real estate, transport, and communication.
3. Loan Types: The survey indicates that term loans and bank overdrafts make up more than 90 percent of the MSME loan portfolio. However, these types of loans are not suitable for long-term business development and growth due to their high cost.
4. Collateral Requirements: Despite the high interest rates, MFBs require SMEs to provide collateral that covers a significant portion of the loan value, ranging from 83.06 percent to 91.38 percent.
5. Repayment Duration: SMEs take an average of 27 months to repay loans as of December 2022, a slight decrease from 30 months in 2020.
6. Growth in Loan Accounts: The number of active MSME loan accounts in the banking industry increased from 915,115 accounts worth Sh638.3 billion in 2020 to 1.18 million accounts valued at Sh783.3 billion in December 2022.
7. Non-Performing Loans: The data shows an improvement in the non-performing loans (NPLs) rate, with 11.5 percent of outstanding MSME loans classified as NPLs in 2022, compared to 14.6 percent in 2020.
8. Loan Write-Offs: In 2022, a total of 18,105 MSME loans valued at Sh9.6 billion were written off, with commercial banks and MFBs writing off Sh9.1 billion and Sh510 million, respectively.
9. Loan Amounts: The average loan amounts from MFBs increased in 2022 compared to 2020 for micro-, small, and medium enterprises. Commercial banks also increased their lending amounts.

The high interest rates charged by microfinance banks on loans to SMEs, despite collateral requirements, are a cause for concern. These rates may hinder the growth of small businesses and limit their access to finance for long-term development needs. The survey highlights the need for a more affordable and sustainable lending environment for SMEs in Kenya.

The Central Bank of Kenya (CBK) is aware of the challenges faced by SMEs in accessing affordable credit, and it has voiced its concerns about the impact of high-interest rates on the growth of these businesses. The CBK recognizes that SMEs are a crucial driver of economic growth and employment in Kenya, and their access to affordable financing is essential for their success.

To address these challenges and promote a more favorable lending environment for SMEs, several measures can be considered:

1. Interest Rate Regulation: The government and regulatory authorities can consider implementing interest rate caps or guidelines to limit the maximum interest rates that MFBs can charge on loans to SMEs. This can help protect SMEs from usurious interest rates.
2. Promotion of Alternative Financing: Encouraging the development and adoption of alternative financing mechanisms, such as venture capital, angel investors, and peer-to-peer lending, can provide SMEs with additional funding options at more competitive rates.
3. Financial Education: Enhancing financial literacy among SME owners can empower them to make informed decisions about borrowing and managing their finances effectively. This can help SMEs negotiate better loan terms and understand the true cost of borrowing.
4. Credit Risk Assessment: Improved credit risk assessment mechanisms can enable MFBs to offer loans to SMEs at lower interest rates based on their creditworthiness and repayment capacity. This can reward financially responsible SMEs with more favorable lending terms.
5. Support for Start-Ups: Tailored financial products and support programs for start-up SMEs can help them access the capital they need to grow and establish themselves in the market.
6. Transparency and Competition: Promoting transparency in lending practices and encouraging healthy competition among financial institutions can lead to more competitive loan offers for SMEs.
7. Reduced Administrative Burden: Streamlining administrative processes and reducing the paperwork and time required for loan applications can make it easier for SMEs to access financing.
8. Government Initiatives: The government can introduce initiatives to support SMEs, such as loan guarantees or subsidies, to make loans more affordable.

In conclusion, addressing the issue of high-interest rates on loans to SMEs is crucial for fostering economic growth and supporting entrepreneurship in Kenya. By implementing a combination of regulatory measures, financial education, and support, the SMEs will be able to get reprieve on business financing.