Kenyan Banks Must Review Lending Terms to SMES to Spur Needed Growth
Banking has been in the news for the past couple of months for all the wrong reasons. This article has been in the pot for the past six months because I believe my sentiments will resonate with majority of us. I believe it’s time we took an honest look at the growth and development of banking services and products from pre-1963 to date and why the SME funding aspect has so far been nothing more than a fallacy that bankers have used to collect deposits to enrich themselves.
The early European trade in the Indian Ocean at the coast of East Africa, chiefly in Zanzibar, courtesy of the Imperial British East African Company (IBEAC) in partnership with the National Bank of India (NBI) formed a partnership courtesy of the British merchants and NBI in 1897 to form the first bank in Kenya’s history. IBEAC was disbanded in 1896 to form the EA protectorate and with that, the National Bank of India was tasked with the funding of the railway line to Kisumu.
The National Bank of India funded the railways for EA Protectorate and business was good. In 1901, the railway line arrived in Kisumu. In 1904, the National Bank of India opened its first branch in Nairobi, away from Mombasa. The first banking ordinance was set up in 1910 to coordinate the terms and conditions of engagement, deposits and loans.
Read: The History of the Banking Sector in Kenya: An Evolution in History
This particular period has my interest. What informed the developers of the ordinance to come up with it. What terms did they refer in it? What made one qualify for a loan and what was the collateral. Despite the two World Wars, banking in Kenya kept growing and from the NBI partnership with the British colonial master, one can infer that the essence of collateral in terms of real assets that were tangible was established.
Why I say today’s banks and other financial institutions are fallacious when it comes to lending to the SME sector is because of how lending structures are set up and going back in history might help us understand this better.
The NBI funded the railway and land was the collateral among other assets and agreements on the management of the railway line. This gave rise to real estate in key areas around the line and they offered more collateral for banks that kept coming up as business picked up. Manufacturing grew. This was another hot area to fund, given the tangible assets in the sector.
Feeding people was key, as the hinterland was opened up to trade, financing agriculture was key. In 1911 Standard Bank of South Africa was set up with two branches; one in Mombasa and the other in Nairobi. Business was doing well. The British colony was growing. Key areas that these banks up to independence focused on were logistics i.e. the railway line, agriculture, manufacturing, trade (in terms of retail) and security. These sectors formed the foundation on how banks would lend. Any SME that was in this category got the support of either the bank or the government of the day. Other sectors were ignored and never given enough support to grow, if any.
Service sector is an economic piece whose success is dependent on other aspects of the economy like manufacturing and agriculture. It was ignored. It never had the requisite assets for funding. Growth was limited to the availability of assets to acquire a loan or funding.
Read: Securing the Future of Industry in the SME sector
Fast forward to today, there are many sectors of the economy. Technology has changed how Kenyans and the world in general do business, how we communicate, how we seek funding, how we seek loans and especially how we pay them back. Interesting thing is, despite the technological advancements in the banking sector, the terms and conditions for accessing financing, especially for SMES in sectors other than manufacturing, agriculture and real estate, are still archaic and more or less similar to how they were in the late 19th Century.
Banks are spending billions to tell us how they love SMEs and how 80% of the jobs created in Kenya are by virtue of them hence why they need to fund them. The banks end up getting funding from bodies like the IFC, ADB and the World Bank to finance SMEs in various sectors but what actually ends up happening is that the list of funded SMEs usually lies in the manufacturing, real estate and agricultural sectors. The rest of the SMEs in other sectors are left to fend for themselves.