Challenges Facing SMEs In Accessing Credit

SMEs have long been recognized as one of the cornerstones of a country’s development. SMEs account for about 90 percent of businesses and more than 50 percent of employment worldwide.

Access to finance is a key constraint to SME growth, it is the second most cited obstacle facing SMEs to grow their businesses in emerging markets and developing countries such as Kenya.

The International Finance Corporation (IFC) estimates that 65 million firms, or 40 percent of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending.

In attempting to gain access to financial services SMEs continue to face constraints caused by many factors including:

Information Asymmetry

Information asymmetry between entrepreneurs and bankers is one of the factors that SMEs face while attempting to raise finance from banks. Most SMEs evolve in the informal sector and are therefore not in a position to give banks the minimum information they generally require.

Formal financial institutions demand details such as contacts, financial statements legal documentation such as licenses. New or recent start-up businesses may be unable to provide evidence of a good financial performance track record which banks rely on as an indicator for the future profitability of projects.

Bank Requisition for Collateral

Most SMEs in Kenya lack fixed assets that they can pledge as security for loan applications in banks. The banks’ insistence on immovable assets as collateral locks out more SMEs who have movable properties that they could pledge as security. Lenders have not been innovative in considering other forms of collateral

Stringent Documentation and High-Interest Rates

Financing the SMEs in Kenya is considered risky and as a result, they are charged highly on loans. An average of 1.97 percent of the value of the loan for small firms and 1.79 percent for medium-sized firms are generally almost twice as high as in other countries in terms of fees payment,

Moreover, the loan processing in many financial institutions may be quite complicated onerous, and lengthy, especially for borrowers requiring a small number of loans.

Inability to prepare required Business Plan

It is difficult for most SMEs to employ specialized persons in the field such as financial planning, business planning, preparation, and interpretation of financial statements. To this, they might have good plans but lack the implementation strategy.

Likewise, most financial statements are prepared by accountants to secure a loan without giving due regard to the business performance in all aspects. Thus, a lack of manpower in specific fields hinders their ability to make a correct decisions about their business performance and demands at various stages.

Small Cashflows

Small firms generally have smaller financial reserves to draw on in times of crisis and are also relatively highly geared compared to larger firms due to the difficulty and expense of attracting new equity finance.

Thus, such firms are characterized not only by higher business risk but also by higher financial distress risk.

In addition to the above-mentioned constraints of lack of access to finance for SMEs, SMEs are more disadvantaged in obtaining external finance.

Developing countries like Kenya have economic imbalances that lead to excess demand for available domestic savings as well as institutional weakness that encourage a large number of individuals to engage in low productivity informal activity.

Therefore, government action is necessary to correct market failures, and also assist potential start-ups and disadvantaged groups in society.

How is Asante Financial Services Group helping SMEs?

Asante Financial Services Group has products such as Bloom Loan that is offered to Safaricom’s Lipa Na M-Pesa Buy Goods Merchants. The loan can be accessed via a USSD Code *310#.

They also have the Jenga Stock product that provides working capital to bars, restaurants, and liquor owners under the key EABL distributors known as Hugeshare and Obradelys.

Related Content: How Asante Financial Services Group Is Enabling Financial Inclusion and Boosting SMEs