How lenders are milking small businesses dry

Small businesses are choking under huge debts as the tough business environment has resulted in non-performing loans over the past four years.

Lenders are now charging high interest rates to maximise profits, a strategy that has frustrated thousands of traders in the informal sector.

The latest data from the Central Bank of Kenya shows that about a quarter of micro, small and medium-sized enterprises (MSMEs) failed to honour loan obligations last year as lenders increased interest rates to a high of 33 per cent for the sector. 

Of the 915,115 MSMEs loan accounts in the banking industry as of December, 204,802 accounts valued at Sh98.7 billion were non-performing, CBK’s 2020 survey report on MSME access to bank credit shows.

“This amounted to 22.4 per cent of total MSME loan accounts and 15.5 per cent of the total value of outstanding MSME loans. Non-Performing Loans (NPLs) in MSMEs also made up 22.0 per cent of total banking industry NPLs as of December 2020, which stood at approximately Sh436 billion,” the regulator stated.

The new figures are an indication of movement to the wrong direction, compared to the rate of NPLs as of December 2017, which stood at Sh56.4 billion, or 13.6 per cent of the Sh413.9 billion MSME loan portfolio then.

The survey further reveals that, of the NPL accounts registered by December last year, businesses classified as micro – any business with an annual turnover not exceeding Sh500,000/employing 1-9 people and with total assets not exceeding Sh5 million in the service and farming sector – constituted 85.1 per cent. These are the smallest categorised businesses in the economy.

High interest rates

“Small enterprises accounted for 10.7 per cent of the total non-performing loan accounts and 24.1 per cent of the value of non-performing loans; while medium-sized enterprises accounted for 4.3 per cent of the non-performing loan accounts and 68.0 per cent of the value of non-performing loans for MSMEs,” CBK indicated.

A loan is classified as non-performing when the borrower fails to make payments at least 90 days after the stipulated time.

Lenders have been charging smallest businesses high interest rates as compared to big firms. This is besides the observation that micro enterprises take averagely shorter periods to repay loans compared to the small-and-medium-sized ones.

The average interest rate charged on micro enterprises last year was 16.6 per cent, small enterprises an average of 12.4 per cent and medium ones 12.3 per cent.

“Microfinance banks charged between 12.3 per cent and 22 per cent on average on MSME loans, compared to 2017 where it ranged from 19.0 per cent to 19.9 per cent. The highest reported rate was charged on micro enterprises at 33 percent and the lowest stood at 15 percent for medium sized enterprises,” the regulator stated.

CBK said commercial banks had also increased interest rates charged on MSME loans to between 11.2 and 12.3 per cent on average, compared to 2017 where it ranged from 10.0 percent to 12.1 per cent. 

It cited impacts of the Covid-19 pandemic on businesses as a cause for many enterprises failing to service their loans, reporting that in the 12 months to December 2020, a total of 6,253 MSME loans valued at Sh2.6 billion were written-off. 

MSME loan accounts

Commercial banks and microfinance institutions wrote off Sh2.3 billion and Sh0.29 billion respectively, equivalent to 0.6 per cent of total MSME loan accounts, or 0.4 per cent by value.

Banks have also reduced the amounts they lend to MSMEs to an average of Sh86,000, Sh2.9 million and Sh7.7 million for micro, small and medium enterprises respectively, from Sh498,651, Sh3.2 million and Sh14.4 million in 2017.

“The reduction in the average loan size is largely attributable to a differential increase in the value of the loan portfolio as compared to the number of loan accounts. A possible contributing factor is the growth in mobile-based and digital credit disbursement channels between 2017 and 2020,” CBK stated.

“These channels made it possible for institutions to extend low-value loans to a wider client base than was earlier the case with traditional service channels. As a result, the number of overall loan accounts rose at a higher rate than did the overall amounts borrowed, bringing down the average loan values across all MSME service categories.”

However, the number of active MSME loan accounts have surged by 42 per cent to 915,115 between 2017 and December 2020, holding a total of Sh638.3 billion by value. By December 2017, there were 646,018 active loan accounts, holding Sh413.9 billion. The MSME loan portfolio also grew by 54.2 per cent to Sh638.3 billion.

“Lending to MSMEs generated Sh70.8 billion for the banking industry, representing 12.2 per cent of the total income generated from lending by the banking industry. However, this was a proportionate drop from the Sh74.1 billion, or 15.2 per cent, recorded in 2017,” the regulator stated.

Lenders have also designed MSME-specific products, where more than 60 per cent of the commercial banks offer products targeting all the three categories of MSMEs. About 10 per cent design products for medium enterprises, while 8 per cent target the small-and-medium-sized group.    BY DAILY NATION