Customising financial solutions can help more MSMEs take up credit

The need for customised financial solutions for micro, small, and medium enterprises (MSMEs) has been emphasised as key to increasing the credit flow to businesses and firms.

This is according to a new study that found businesses with low or considerably high turnovers may not be benefiting from such intermediation programmes.

The study, titled Access to Bank Finance by MSMEs: Size and Turnover Effects, presented at this year's Kenya Bankers Association (KBA) annual meeting, shows that while such programmes have had positive impacts on businesses that take them up, only mid-sized enterprises are the likely beneficiaries.

These are enterprises with turnovers of between Sh100,000 and Sh250,000.

As such, the study discourages a one-size-fits-all kind of approach when it comes to financial intermediation among MSMEs.

These findings are based on the analysis of the Inuka Enterprise Programme, an initiative of KBA that is aimed at increasing lending to MSMEs.

he programme prides itself in training over 70,000 MSMEs across 47 counties and facilitating more than Sh3.2 billion in loans. The study used the 2024 Inuka Impact Survey data by KBA to examine the impact of the banking sector's intervention programme on MSME's ability to access credit.

"The results show that while the programme has had a positive effect on MSMEs' ability to access bank credit, there are heterogeneous effects across the enterprises' size and their average annual turnover levels," the study reads in part.

"Moreover, among the control variables, the age of the entrepreneur, and the sector of the enterprise operation played a role in determining whether an MSME would access bank credit."

Part of the analysis of the data in the study found a significant positive impact of the program on MSMEs with turnovers between Sh100,000 and Sh250,000. "This suggests that MSMEs in this turnover range are better positioned to leverage the Inuka program for improved credit access," the study says.

"In contrast, MSMEs with turnovers below Sh100,000 and above Sh1 million experience negative and insignificant effects, indicating a complex relationship between turnover and the programme's efficacy." The study authored by Dr Samuel Tiriongo, Roselyne Njino, and Hillary Mulindi compared these findings with other studies and found consistency. They cite Beck et al (2005) who found that financial development significantly increases credit availability for small enterprises, particularly those with moderate revenues, by facilitating better risk assessments and reducing transaction costs.

"The positive effect for the mid-tier turnover MSMEs may also reflect better information availability, as suggested by Love and Mylenko (2003) and Galindo and Micco (2007), who show that credit information systems enhance lending by reducing information asymmetry and adverse selection risks," the study reads.

Financing gap

The study acknowledges the challenges MSMEs face while recognising their significant contribution to the country's gross domestic product (GDP) at 30 per cent.

"However, despite their significant contribution to the economy, these enterprises face considerable challenges in accessing formal finance. The limited access to bank credit hampers their growth, sustainability, and overall contribution to the national economy. This financing gap is especially pronounced for micro-enterprises, which often struggle to obtain formal credit due to their small size, lack of collateral, and limited credit history," the study says.

The study adds that in Kenya, about 70 per cent of MSMEs report difficulties in accessing credit from formal financial institutions, on account of multi-faceted reasons. These reasons range from their informal operations which cover about 80 per cent of such businesses.

"This informality restricts their access to crucial financial services, including bank loans, and hinders their growth potential. Typically, informal enterprises lack the necessary documentation, financial records, and collateral that banks require, making it difficult for them to meet the strict lending criteria imposed by most financial institutions," the study says. The Inuka MSME Programme has facilitated Sh3.2 billion credit to small businesses.