SMEs feel bite of interest rate caps in 2017

July 5, 2018
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The Central Bank had warned that the rate capping would squeeze credit to the private sector /FILE

NAIROBI, Kenya, Jul 5 – The interest rate caps that were introduced in 2016 limiting borrowing rates to 4 percentage above the Central Bank Rate was supposed to inject a new wave of capital through affordable loans.

But a new report shows that access to finance was the biggest obstacle to SMEs in 2017.

The report by Wyled International states that about 68 per cent of SMEs in Kenya did not have access to Finance due to the interest rates capping.

Director of Research and Innovation Victor Otieno says only 32 per cent of SMEs in 2017 accessed finance from third-party financial institutions such as SACCOs

Interest Rates capping was the second biggest problem SMEs faced in 2017 after a long electioneering period that saw about 55 percent of SMEs reduce their earnings.

Only 14 percent of SMEs increased revenue above 25 percent.

Meanwhile, Kenyan banks have turned to external funding as they seek to address the asset-liability mismatch.

The banks received about Sh36 billion in April from international institutions due to the time horizon mismatch between issued loans that tend to be relatively long-term and deposits that tend to be relatively short term.

KCB received Sh10.1 billion credit from the Africa Development Bank expected to be used to facilitate onward lending to Micro, Small and Medium Enterprises (MSMEs) as well as issuing finance to deserving corporate entities across the agriculture value chain.

Stanbic Bank Kenya has also raised a Sh10 billion dual-tranche syndicated loan that was coordinated by UAE-based bank Mashreq bank.

The loan will have a two and three-year maturity for the two tranches. The proceeds of the loan will be devoted towards new lending and general corporate purposes.

Victoria Commercial Bank (VCB) also received Sh500 million of subordinated tier II compliant loan from SwedFund, a Swedish development finance institution.

The loan is expected to shore up the bank’s capital position and thereby improve the company’s lending capacity to Small and Medium Enterprises (SMEs).

Co-operative Bank of Kenya also received Sh15.2 billion from the International Finance Corporation (IFC).

“Issues such as that of the International Finance Corporation to Co-operative Bank were priced at the London Inter-Bank Offered Rate (LIBOR), plus an unspecified premium. The current 12-month LIBOR rate is at 2.8 percent,” the report indicates.

Latest data from the Kenya National Bureau of Statistics indicate that average deposit rates increased to 8.2 percent in December 2017 from 7.3 percent in December 2016, while commercial bank average lending rates remained unchanged at 13.6 percent in December 2017.

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