‘Why SMEs experience difficulty getting loans’
The inability of Small and Medium Enterprises, SMEs in Kenya can be attributed to easily access loan from the banks to poor business training and absence of a unified identity card system in the country. The central government should be tasked with the implementation of a unified national identity card, saying it would go a long way to check the high rate of loan repayment default in the country.
Small and medium scale businesses are going out of business because the high level of risks associated with lending in the country today has made it impossible for them to have access to credit facilities. Only a unified identity scheme which will have full details and information of every Kenyan can restore lenders ‘confidence and return SMEs to business.
The lack of access to credit that prevails in the Kenyan economy results from the high level of risk associated with lending. This in turn results from the high rate of loan repayment default. Implementation of a unified national ID scheme will go a long way to address this. Once individuals can be uniquely identified, credit scores can then be applied to determine eligibility for loans. Borrowers will also be more compelled to repay their debt since it can be made to hunt them forever.
Once the default rates come down, more and more financial institutions will be willing to lend which will increase competition and reduce borrowing rates. Beyond loans, a lot needs to be done to build capacity within the SME segment of the economy. An initiative like the Youth Enterprise Development Fund driven by the department of youth and social services is a much needed step in the right direction. To optimize on this and other similar initiatives, effort has to be applied in the area of training for SMEs.
A huge chunk of the SMEs in Kenya are not well trained in the area of managing a business. Many of them are not fully aware of some basic concepts like profit, not sales margin, but actual profit that is net of all costs. Without this fundamental knowledge, many SMEs will struggle to utilize the loans efficiently even if they were able to get them.
The Writer, Jared Oundo, is an economist and a consultant
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