Majority of small businesses in Kenya consider commercial banks as inappropriate sources of finance, choosing instead to use family resources as start-up or growth capital, a newly released report says.
The Kenya National Bureau of Statistics (KNBS) says in a newly-released report that 80.6 per cent of establishments use family or own funds as the main source of start-up capital while another 4.2 per cent of business owners get loans from family or friends to start their businesses.
The survey, which polled 50,000 Micro, Small and Medium Enterprises (MSMEs), found that banks finance only 5.6 per cent of MSMEs, while investment groups or chamas account for 1.4 per cent of the small business financing.
Co-operative societies, which offer lower interest rates than banks, were found to account for an even smaller portion of the start-up financing at 0.4 per cent while government funding accounts for a paltry 0.1 per cent.
The report, which KNBS has described as the most comprehensive on the MSMEs sector in 17 years, makes nonsense of the role that the various government-backed kitties such as women and youth funds are making in the area of enterprise development.
The findings also debunk the notion that Kenyan banks have recently expanded their engagement with small businesses.
“The report shows there is very little financial access for the MSMEs,” said Micro and Small Enterprises Authority (MSEA) chief executive officer Patrick Mwangi during the report’s launch.
“Government funds, including Uwezo and Youth Fund, have negligible impact at one per cent as a source of funding to MSMEs. The financing schemes are not working or having the desired impact and should therefore be restructured,” said Ndiritu Muriithi, chief economist at Metropol Corporation.
Most entrepreneurs said accessing loans from commercial banks remains much more difficult, forcing them to deal with micro-finance institutions.
High interest rates and lack of collateral topped the list of reasons most small businesses avoid bank loans, the study found, confirming the recent outrage that saw Parliament enact a law to tame the cost of loans.
Other business people said they deliberately avoided indebtedness while others thought loans are too much trouble not worth going through.
The report amplifies calls for a rethinking of strategies that the government is using in an attempt to spur entrepreneurship and urges banks to re-engineer their products to tap into the growing small businesses market.
“In Kenya, the common approach of extending credit to MSMEs is based on collateral. This approach has its limitations and is not feasible for most of the MSMEs as some start with no tangible assets,” the report says.
It adds that collateral oriented lending should be de-emphasized and new creative and innovative strategies adopted.
Credit: Business Daily