High loan rates, taxation push small enterprises to the brink

Access to credit limitations and high taxation continue to hinder the growth of small-scale businesses in the country, even as global institutions like the International Monetary Fund (IMF) urge sub-Saharan African nations to create job opportunities.

These challenges have forced several companies to either scale down operations or completely exit the Kenyan market.

Richwill Gudu, founder of Oneness Products Solutions, a startup specialising in the production of gift bags, merchandise customisation, and design, highlighted the struggles faced by small businesses in accessing affordable loans due to high lending rates and irregularities associated with non-deposit-taking financial institutions.

“Personally, I’m not taking loans from banks because the interest rates are too high for me. My business is still in its infancy, having started just a year ago. These loans come with high interest rates and short repayment periods. If I do the math, it feels like working for the lenders instead of growing my business,” he said.

Gudu also noted challenges with non-deposit-taking financial institutions, stating, “They are a good source of funds, but their policies are unclear, and sometimes they breach user privacy.”

High lending rates

Commercial banks in Kenya have maintained relatively high lending rates throughout 2024, despite the Central Bank Rate (CBR) being revised downward to 11.25 percent by the Central Bank of Kenya (CBK).

This trend drew criticism from the National Assembly’s Finance and Planning Committee during the 2024 Business Amendment Bills public participation exercise at the Kenyatta International Convention Centre (KICC) in November.

Lawmakers faulted banks for failing to provide loans to small businesses, limiting their growth despite the sector’s critical role in providing employment opportunities for young and unemployed Kenyans.

In response, Kenya Bankers Association (KBA) issued a statement in December assuring Kenyans that interest rates on loans would progressively decrease following the downward revision of the CBR during the Monetary Policy Committee (MPC) meeting on December 5, 2024.

“Starting December 2024, banks will progressively reduce interest rates on loans and notify customers of the changes. The rate reductions will be guided by adjustments in monetary policy and evolving credit risk factors,” the KBA stated.

Interest rates on loans

Commercial banks have preferred to invest in government securities, citing high returns and guaranteed payments, as dealing with small and medium enterprises (SMEs) has become “risky” due to poor credit scores among some businesses. However, KBA chair and NCBA Group Managing Director John Gachora noted that the situation would improve with the application of a risk-based model in lending.

Gudu remains hopeful that easing loan rates further will help small businesses scale up. The entrepreneur shared his initial struggles, explaining how limited finances hindered operations and growth.

“When we started, we used paper waste as raw material, and we needed human capital to collect it from different sources. This was on a wage basis, and due to the size of the business, it was difficult to sustain the process. The biggest challenge was paying wages because our sales were not meeting production costs,” he explained.

He also highlighted difficulties in attracting partners who could provide financial backing without taking control of the business. “We’ve had partners who offered substantial amounts, but upon auditing the business, it became clear that they could indirectly buy the business from us. Majority shares mean operating under their terms, which is unsettling,” he said.

Despite these challenges, Gudu’s business has managed to partner with corporations and learning institutions as clients. The business has also been instrumental in equipping learners with branding and related skills, offering training sessions that provide youths with passive income while they continue their studies.

Enhance mutual growth

This initiative is timely as the country faces a high unemployment rate, currently at 4.8 per cent, according to the Kenya National Bureau of Statistics (KNBS).

Gudu emphasized the need for financial institutions to adopt customer-centric approaches to support business growth for the benefit of the economy.

“Banks need to understand that businesses are struggling. They should devise proper strategies to enhance mutual growth, with lower rates being one of them. If businesses can access loans at affordable rates and be categorised based on their capabilities, it will benefit everyone,” he said.