For a long time banks have been reluctant to lend SMEs loans as they generally view it as risky venture. They all have a unified perception that SMEs are more likely going to default a loan.
Although most banks are still uneasy to commit their money to SMEs, some progress is being made more so in Kenya . According to the World Bank, Kenya is leading on the Continent in regards to bank lending that is directed to Micro, Small and Medium Enterprises (MSMEs).
Kenyan banks have made commendable strides towards supporting SMEs. A report by Kenya Banker’s Association analyzed the role Kenyan banks have played in supporting SMEs. The report showed that there was a 35 percent growth of bank lending to SMEs. 95 percent of banks at least have a product tailored for SMEs and that banks were able to provide lending to SMEs in different sectors of the economy despite the risks involved with some of the sectors.
In an attempt to encourage more lending to SMEs, African Guarantee Fund (AGF) has set aside USD 170 Mn to support Kenyan bank lending to SMEs.
The initiative will be implemented through a scheme that will insure the lenders against defaults.
“The current pipeline is USD 170 Mn for Kenya. This will enable the banks to on-lend at least USD 340 Mn to the country’s SMEs,” AGF told the Business Daily.
Through the scheme, AGF guarantees half of the value of a loan balance to a single SME borrower charges banks a fee of between 1.5 percent to three percent for the risk guarantee.
Local banks that have struck such deals with the institution include NIC Bank and Ecobank.
So far, AGF has far issued risk guarantees to Kenyan banks amounting to USD 51 Mn.
Jules Ngankam, AGF Deputy Chief Executive through Business Daily revealed that the institution had experienced a default rate of two percent on average for the SME loans it insures.
In a bid to open avenues for SME lending, the government through Treasury CS Henry Rotich recently re-proposed the repealing of section 33B, a part that deals with commercial lending rates.
Before the era of rate caps, banks found lending to SMEs worth the risk because they could charge them very high interest rates.
Numerous reports have addressed the importance of SMEs in a country’s economy. The general argument is that SMEs contribute immensely to a country’s GDP. When SMEs flourish, an economy benefits in many ways which is why it is crucial to give the much-needed support to ensure they grow and succeed.
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