Lack of access to credit stunts growth of SMEs

A study carried out by the Financial Sector Deepening (FSD) Kenya, shows that SMEs face numerous hurdles in accessing credit, denying them an important growth line at best or accessing it at a very high cost.

The Small and Medium Enterprises’ (SMEs) access to credit is being constrained by exacting legal requirements, lack of a standardised and shared information registry and expensive and time consuming enforcement mechanisms.

“There are more than 20 legal requirements and lack of standardised shared information registry which makes the whole process of accessing credit cumbersome, expensive and complex,” says the study which will be released on Wednesday.

In addition, the lack of standardised and shared information registry lengthens the process of accessing credit as borrowers have to provide collateral which financial institutions need to counter-check their authenticity.

According to the Central Bank of Kenya governor, Njuguna Ndung’u, the whole process of fulfilling the basic requirements of a financial institution such as valuation and registration of collateral raises the cost of accessing credit facilities.

“Borrowers are required to seek property valuation, legal registration before accessing credit and even then it’s not guaranteed hence incurring upfront cost defeating the whole purpose of seeking funds”, said Prof Njuguna.

Before they can access a credit facility, borrowers are required to provide financial institutions with security to be charged against the loan.

The process entails transferring the security to the lender, which then has to be registered with the government to lock out any potential plan to transfer it through sale.

This process is said to be costly accounting for between two to six per cent of the loan value.

For instance if one plans to borrow Sh1 million, the cost of registering the security will amount to Sh60, 000 which has to be paid by the business before the whole process starts.

However, it’s the cumbersome recovery process that discourages financial institutions from dealing with SMEs.

The FSD study shows that it costs over Sh500,000 and it can take up to 10 years, as a result of prolonged legal battles, to dispose of security to recover advanced funds.

This discourages financial institutions from lending to the risky SMEs sector.

This also explains why financial institutions prefer to lend to big corporates which hold huge chunks of land which can be disposed of to recover loans.

For a majority of SMEs, demand for cash to keep the business running means that they have little or no cash to invest in the acquisition collaterals such as land to buffer their asset base.

Besides, limited access to credit is seen as a major stumbling block to the growth of the SMEs which are credited with lowering poverty and enhancing a country’s national output in the shortest time possible.

According to the World Bank, easy access credit can add up to two per cent of a country’s Gross Domestic Product (GDP).

To mitigate the challenges of collateral requirements, a number of financial development institutions such as the International Finance Corporation (IFC) and Proparco are offering credit guarantee schemes to allow SMEs to access credit without having to provide collaterals.

“Our guarantee scheme allows SMEs to access credit facilities from commercial banks by lowering the risk of default”, said Luc Ghislain de Valon the regional representative of Proparco a long term development financial institution.

The FSD Kenya study calls for a reorientation of access to credit to ensure increase uptake and stimulate the growth of the SME sector.

“Banks need to accept a wide variety of assets as collateral and not be fixated on real estate along, promote the use of alternative credit facilities such as trade finance, asset leasing and cash flow performance”.