SME Trade Finance: Review of facilities available in - FSD Kenya

12 • SME TRADE FINANCE – REVIEW OF FACILITIES AVAILABLE IN KENYA
in after-tax profit in 2007. Non-performing loans decreased, on average, from
more than 20% at the end of 2006 to about 10% at the end of 2007.
The financial authorities are supporting the consolidation of the sector through
increased equity requirements for banks. They have raised the minimum level
of core capital from the current KSH 250 million to KSH 1 billion in 2010.
The financial system is not diversified, lacking various specialised institutions,
such as leasing companies, factoring and forfeiting institutions. However, a
few capital investment funds though have been emerging recently to promote
longer term financing for SMEs including quasi-equity.
The financial sector is fairly liquid at the moment. This is shown by the
Nairobi Stock Market’s positive performance over the last couple of years.
This is due to the reduction of Government finance requirements, which have
forced the banks to look more aggressively at private business for profit and
development.
The banks’ strategy towards the SME sector
All banks visited during the field phase expressed a strong commitment to
servicing the SME sector. Most of the banks have SME departments with a
more or less common understanding of what constitutes an SME. In general,
the banks consider a business to be an SME if:
1. the yearly turnover ranges between KSH 5-20 and 100-150;
2. the maximum number of employees is 100-150; and
3. the financing needs do not exceed KSH 50 million.
As part of their branching out activities in the main cities, the banks hope to
attract more SME business. A number of banks are also trying to formalise
their relationships with SMEs.
This follows the example of Barclays Kenya in promoting ‘Business clubs’ for
SME managers. Some of the other banks are courting the trading SMEs by
organising overseas trips to facilitate international trade for their clients, Asia
being one of the most sought after destinations.
Box 3: Favourable access to finance 14
On the average, there is a favourable lending regime for Kenyan firms. A high proportion of SMEs have access to bank debt, and only about one-third of firms
report access to finance as an impediment to operation and growth. The favourable financing regime is characterised by low reported real costs of debt, a moderate
duration of loans, and a high proportion of firms with good quality information. Relative to a number of richer or more dynamic economies, medium and large
firms in Kenya use external financing as intensively as firms in India and South Africa.
14 The World Bank, Regional Programme for Enterprise Development (RPED) and Africa Finance and Private Sector (AFTFP). (June 2008). Kenya Investment Climate Assessment.
15 For more information on the Safaricom M-PESA money transfer by mobile phone see the Safaricom web site: http://www.safaricom.co.ke/index.php?id=228
Box 4: Saving on intermediaries
During one of the trips to Asia organised by a major bank in Kenya,
an SME participant checked the prices of a number of goods that his
company was purchasing through a local trader. The Kenyan company
was able to save up to 40% on the price of the imported components for
its operation. This depended on the support of the bank, which agreed
to open an LC directly in favour of the Asian supplier.
The banks recognised the importance of developing regional trade, and are
engaged in expanding their regional network considerably. Branches are being
opened in Uganda, Tanzania, Rwanda and even Burundi and Southern Sudan.
Most banks advertise their regional presence as a strong marketing argument
to dynamic SME managers and regional traders. This shows their strong
interest in trade finance services in an area where cash and cross-border trade
is still predominant.
Recent developments could create new competitionor synergies for banks.
One such example is the new M-PESA service offered by Safaricom in Kenya,
which allows money to be transferred anywhere at any time via the mobile
telephone. It is likely that such a simple service might suit the cross-border
traders when the mobile phone payment system is widespread throughout
the region. 15
Generally, the banks have in the last few years recognised SME trade finance
requirements as a clear growth area. It is clear however that a large number of
them are not yet prepared to devote the necessary time, energy and manpower
to assist SMEs structure their operations.
Eventually, the banks will be forced by competition to move away from
collateral financing. By and large banks have to provide the required attention
to the SMEs’ financial requirements.