How COVID-19 is affecting SME funding in Kenya

This year was expected to mark significant progress in access to finance for Small and Medium Enterprises (SMEs) in Kenya. Initiatives such as the repeal of the interest rate cap, financing opportunities through the African Development Bank, and the establishment of a credit guarantee scheme were underway. However, the global COVID-19 pandemic has caused a shift in priorities and budgets, leaving vulnerable Kenyan SMEs facing uncertainty and financial challenges. In a recent interview with SME Consultant Victor Otieno on CNBC Africa, several key points emerged regarding the current landscape of SME funding in Kenya. Victor Otieno highlighted four key areas of concern. First, traditional banks have historically been the primary source of SME funding, but their position is gradually diminishing due to the rise of mobile wallets and chama groups, which offer uncollateralized loans and additional support services such as access to information and advocacy. Second, over the past four years, SMEs have predominantly relied on self-financing, contributions from family and friends, and chamas. While this approach has its advantages, it often limits SMEs in investing in critical areas such as innovation and research, which are essential for long-term growth. As a result, SMEs may continue to face challenges even after the COVID-19 crisis. Third, SMEs have identified three critical areas requiring expenditure during the pandemic: marketing, business remodeling, and new product development. Lastly, SMEs appreciate the government's efforts to support them amid the crisis but emphasize the need for alternative SME investors such as venture capitalists, private equity firms, and angel investors. They urge the government to incentivize these investors to inject funds into the SME sector. Reflecting on past government initiatives to enhance SME financing, Victor Otieno highlighted key efforts undertaken last year. These included the repeal of the interest rate cap, the introduction of mobile lending mechanisms like STAWI by five banks, commitment to settle pending bills, plans to establish a credit guarantee scheme, and the creation of an SME fund by the Capital Markets Authority and other government bodies. While these initiatives were promising, the COVID-19 pandemic has posed new challenges. However, Otieno remains optimistic that the government's response to COVID-19, such as reducing the cash reserve ratio for banks, settling pending bills, and revising tax-related statutes, will help provide additional support to SMEs. Despite the ongoing uncertainties, Otieno believes that the private sector, especially SMEs, must prepare for the worst while striving to navigate through the crisis. He also emphasized the importance of addressing the frustration among SMEs regarding the collateral-based lending practices of financial institutions and the need for greater diversification in SME financing options, including venture capital and angel investments, to drive growth and innovation in the Kenyan SME ecosystem.