Powering SMEs In Kenya Through Intermediated Lending

A good number of SMEs in Africa owe their ease in accessing capital to the strong partnership between the European Investment Bank (EIB) and local banks across the continent. The EIB has disbursed millions of Euros through local banks in various African countries to support the long-term growth and sustainability of SMEs and MSMEs.

With the current macroeconomic uncertainty facing many African economies, many have not been able to access funds from international markets.   Governments have turned to borrowing in local markets, which has crowded out the private sector since banks prefer to lend to governments that they deem safer, as opposed to businesses that are seen as risky. This places entrepreneurs and MSMEs at a disadvantage in credit markets.

Many SMEs across the continent have been locked out of mainstream credit as they are thought to be high-risk borrowers with a high potential of defaulting compared to larger enterprises or corporates.

The story is not different in Kenya. Many SMEs, over the years, have struggled to remain afloat with one of the biggest challenges being the inability to access credit from mainstream banks.

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SMEs are the bedrock of most economies contributing to GDP and creating numerous job opportunities. To help SMEs in Kenya, the European Investment Bank (EIB) has taken a significant step to bolster the country’s economic landscape by partnering with local banks through an intermediated lending framework, hence, giving millions of SMEs within the country a financial lifeline. With intermediated lending, a larger bank like the EIB lends to local financial institutions such as Equity Bank and Co-operative Bank in Kenya. The EIB credit comes with favourable terms like longer tenures which makes it easier to repay. The local banks are then expected to lend that money to SMEs in their local area and pass along the favorable terms.

For example, at the height of the COVID pandemic, the EIB ran an initiative dubbed ‘Kenya COVID-19 Access to Finance’. This aimed at keeping SMEs afloat at a time when the economic conditions were depressed and many risked closing down. The EIB’s collaboration with established local banks like Co-operative Bank and Equity Bank to execute this initiative was a strategic move that leveraged the local banks’ deep-rooted relationships with their SME clientele.

Their long-standing presence and intimate knowledge of local markets positioned them uniquely to understand the specific needs and challenges faced by SMEs during the pandemic. This profound understanding enabled them to allocate loans judiciously and foster investments that yield tangible, sustainable growth.

“Access to finance is crucial for MSMEs in Kenya and beyond to support their growth and in difficult times, even to sustain their businesses,” said Edward Claessen, Head of the EIB Regional Hub for Eastern Africa. “The loans that are provided have enabled local banks to pass on favorable terms including longer tenures and affordable interest rates to the MSMEs here.”

The intermediated lending framework allows these banks to act as conduits for EIB’s financial resources, ensuring that funds are channeled efficiently to where they are most needed. These banks act by tapping into their extensive networks and leveraging their expertise, and, in the process, identify viable SMEs that have the potential to drive economic progress but may lack the necessary financial backing.

This partnership is more than a financial arrangement; it’s a catalyst for economic empowerment. SMEs in Kenya often struggle to secure financing due to stringent lending criteria and limited collateral. However, with the backing of the EIB and the facilitation by local banks, these enterprises now have a lifeline. Access to affordable credit will enable them to expand operations, innovate, and create jobs, ultimately contributing to the nation’s economic resilience.

Moreover, the collaboration underscores the importance of local knowledge in international finance. The EIB’s decision to work through Kenyan banks reflects a recognition that local institutions are best positioned to manage and disburse funds effectively. This approach not only enhances the impact of the investment but also builds the capacity of local financial institutions, fostering a more robust banking sector.

“Some of the obstacles that we have been encountering in our line of business is access to capital. Equity Bank has been able to educate us on different options that are there for financing our business. When the opportunity to benefit from the European Investment Bank facility came, it came in handy. So, we have been able to expand to every estate in Eastlands,” said Dr. Anthony Kinyanjui, the Medical Officer in charge of Equity Afia, Donholm, and one of the entrepreneurs who benefited from affordable capital injection from the European Investment Bank through its partnership with Equity Bank.

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There is no doubt that the European Investment Bank (EIB) has played a pivotal role in supporting the growth and sustainability of SMEs across Africa, particularly in Kenya. The EIB’s strategic collaboration not only facilitates financial empowerment but also strengthens the local banking sector, ensuring that investments are channeled efficiently and effectively. As a result, SMEs can continue to drive economic progress, innovate, and create jobs, contributing significantly to the nation’s economic landscape.