As Long As the Kenyan Government Competes With SMEs For Credit, They Will Always Lose

Kenya’s economic structure is broken at its core, and nowhere is this more evident than in the local credit market. The government, with its insatiable appetite for borrowing, has positioned itself as the primary competitor against small and medium enterprises (SMEs), the very businesses that should be the backbone of economic growth. The result? A system where SMEs stand no chance, locked out of affordable credit, suffocating under the weight of financial exclusion, and dying at an alarming rate.

For commercial banks, lending to the government is an easy choice. Treasury bills and bonds offer a virtually risk-free investment with guaranteed returns. Why should a bank take on the headache of assessing the risk of a small business when it can simply lend to the government and enjoy safe, predictable profits? This risk-free lending distorts the credit market, crowding out private enterprises that lack the same guarantee of repayment. In essence, banks have abandoned their traditional role of financing businesses, choosing instead to act as conduits of state borrowing.

The consequences are dire. SMEs account for over 80% of Kenya’s employment and nearly 40% of GDP, yet they receive less than 10% of formal credit. The numbers paint a grim picture. Data from the Kenya Bankers Association shows that SME loan approvals have plummeted by over 50% in the last five years, while government borrowing has surged, consuming nearly 70% of all new credit issued by commercial banks. With no viable access to credit, SMEs are collapsing, leading to job losses, reduced consumer spending, and an overall contraction of the economy.

This situation has also stifled financial innovation. In countries with thriving SME sectors, banks have developed sophisticated credit risk models that evaluate a business’s potential beyond just collateral. Machine learning, behavioral analytics, and alternative credit scoring methods have made it possible for SMEs with no traditional banking history to access credit. Yet in Kenya, the banking sector remains stuck in outdated models, where lending decisions are largely based on fixed assets as collateral rather than a business’s actual cash flow or growth potential.

The direct impact of this rigidity is the rise of an aggressive, unregulated black market for credit. With banks refusing to lend, desperate entrepreneurs turn to loan sharks, digital lenders with predatory interest rates, and shylocks who demand exorbitant collateral for loans. This parallel credit market is growing at an alarming rate, with interest rates as high as 30% per month—compared to the 12-15% annual rates from formal lenders. The result is a vicious cycle where businesses take on unsustainable debt, fall into financial ruin, and are ultimately auctioned off.

Read Also: The Silent Killer: How Delayed Payments Cripple SMEs While Big Brands And Governments Thrive On Their Pain

Auctioneer notices have surged by over 1000% in just two years, signaling an economy in deep distress. Businesses that once thrived are now being liquidated overnight. Family homes are being repossessed. Vehicles, machinery, and stockpiles of inventory are being seized and sold for a fraction of their value. The human cost is catastrophic—behind every auction notice is a family losing their livelihood, employees being sent home, and dreams being crushed.

Despite these warning signs, neither the government nor the private sector has developed any meaningful stimulus package or intervention to resuscitate the SME sector. The Kenya Association of Manufacturers recently reported that over 400,000 small businesses shut down in 2023 alone due to financial distress. This represents more than just numbers; it is a systematic breakdown of the economy, a signal that we are heading towards an economic implosion.

Countries that have successfully supported their SME sectors do so through deliberate policies that ensure easy and affordable credit access. South Korea, for instance, has government-backed SME lending programs that guarantee loans for small businesses, reducing risk for banks and encouraging lending. Singapore, a country Kenya often compares itself to, has leveraged technology to develop real-time credit scoring, allowing businesses to access funding within hours based on real-time transaction data.

In contrast, Kenya’s policies have been actively hostile to SMEs. The introduction of the minimum tax in 2021 (later declared unconstitutional) was an example of how government policy prioritizes revenue collection over enterprise growth. The recent Finance Act 2024 has only compounded the problem, introducing new taxes that increase the cost of doing business while offering no relief in terms of credit access.

The banking sector cannot escape blame. While it is understandable that banks prioritize low-risk lending, the refusal to innovate and adapt to a changing economic landscape is inexcusable. Kenya’s banking sector is among the most profitable in the region, yet it remains one of the least accessible for SMEs. Interest rate spreads—the difference between what banks charge borrowers and what they pay depositors—remain some of the highest in Africa, indicating a financial system designed for maximum profit rather than broad economic participation.

The emergence of digital lenders initially offered hope, but without proper regulation, these platforms have turned into predatory lenders. The Central Bank of Kenya (CBK) has attempted to introduce oversight, but the damage has already been done. Reports indicate that digital loans now account for a significant portion of personal and SME debt, yet many of these loans are unsustainable due to high default rates and opaque lending terms.

This is where policy intervention is critical. First, the government must stop being the primary borrower in the local credit market. A policy shift is needed to encourage commercial banks to lend more to SMEs by introducing guarantees and risk-sharing mechanisms similar to those seen in developed economies. The National Treasury must work with the CBK to restructure Kenya’s debt strategy to reduce reliance on domestic borrowing and instead pursue long-term concessional financing options.

Secondly, a radical transformation of the banking sector’s credit assessment mechanisms is needed. Alternative credit scoring using mobile money transactions, utility bill payments, and supply chain data must be integrated to provide a more accurate assessment of an SME’s creditworthiness. Banks must also develop sector-specific lending models that recognize the unique needs of different industries rather than applying a blanket risk assessment model that disadvantages small businesses.

Third, regulation of the informal credit market is long overdue. The CBK must step in to cap interest rates for unregulated lenders, introduce clear disclosure requirements, and ensure fair debt collection practices. This will protect SMEs from predatory lending and offer them more sustainable options for credit access.

Lastly, a comprehensive SME stimulus package must be introduced. This should include tax incentives for financial institutions that prioritize SME lending, direct government-backed funding pools for small businesses, and policies that encourage financial inclusion. If Kenya is serious about economic growth, it cannot afford to ignore the SME sector any longer.

The warning signs are clear. An economy where businesses cannot access credit is an economy on the brink of collapse. We are already seeing the impact—rising unemployment, declining manufacturing output, and an increasing cost of living. If no urgent action is taken, Kenya will find itself in a full-blown recession, with little hope of recovery.

Both the government and private sector must wake up to this reality. The time for talk is over—real policy shifts are needed to break this cycle of financial exclusion, predatory lending, and economic decline. The solution exists, but it requires the courage to challenge the status quo and prioritize long-term economic stability over short-term profits. The future of Kenya’s economy depends on it.

Read Also: More Than Half Of Kenyan SMEs Do Not Have An Insurance Cover