Anyone who cares about the economic progress of this country must acknowledge the critical role that small and medium enterprises (SMES) play. However, there remains a serious threat to economic progress camflougaed in the form of a new international accounting standard – IFRS 9.
There has been a lot of talk about how IFRS 9 shall affect banks but little has been said about how it will affect SMES. IFRS 9 will force banks to recognise bad debts assuming they are likely to occur as opposed to when they occur. This will make it more expensive for banks to lend to SMES. And constrict availability of credit even if the interest rate caps are lifted. In 2016 before the capping, Kenya National Bureau of Statistics (KNBS) reported that 52 per cent of credit applications made by SMES to banks were rejected. So what next for SMES?
A recent survey by the KNBS indicates that there are over 1.6 million licensed SMES formally employing over four million Kenyans. When including unlicensed SMES these numbers grow to 5.9 million and 14.9 million. These enterprises collectively account for over a third of Kenya’s GDP. There are many reputable non-bank, non-deposit taking lending companies that play a critical role in driving economic progress. Many of these companies operate professionally and above board and offer credit at relatively higher interest rates when compared to banks.
Their rates are justifiable given the level of risk they underwrite and their higher cost of funding. Some of these non-bank lenders have developed innovative financial solutions such as Invoice Factoring. This is a form of invoice discounting which enables SMES to access fast cash on the basis of pending invoices without requiring physical collateral. This product recorded annual sales of over $2.5 trillion globally – equivalent to over four per cent of global GDP, but very few banks in Kenya are willing to provide it. One of the leading causes of SMES closing shop is a lack of access to working capital. Let’s face it, access to relatively more expensive credit, is better than no access to credit at all. It is high time to acknowledge the legitimacy of the positive role played by this alternative non-bank lending industry.