The cost of credit for SMEs remains high due to a number of factors, including the limited use and sharing of positive information about borrowers, inefficiencies in the collateral registration process, the cost of the judicial process, and high overhead costs.
This is according to a research by FinAccess. The project undertaken in collaboration with FSD-Kenya, the World Bank, and the Central Bank of Kenya (CBK) was meant to seek knowledge and ways to improve understanding of the SME market on both the supply and demand sides
The move towards positive information sharing by banks should go some way towards addressing these problems, but positive information sharing from all credit providers including payment service providers and utilities companies among others, would add great value to the information already present in the credit bureaus and should be prioritized going forward, provided that data quality can be ensured, recommends the study.
The collateral registry could be made more efficient in terms of the speed and the range of items accepted as collateral, reads the report in the recommendations.
It further advises that
Resolving the legal and regulatory challenges, especially regarding the contractual environment, will require significant reforms over a period of several years.
For instance, it advances that supporting the alternative dispute resolution system established by the Kenya Bankers Association (KBA) and the Association of Kenya Credit Providers (AKCP) would be a promising approach. Such a system would ensure that the majority of disputes are mediated and resolved prior to entering the judicial system, therefore avoiding lengthy judicial procedures.
While the Government sees its role in supporting SMEs primarily as market enabling and has largely avoided direct interventions in the SME finance space, several donors are active in supporting banks through credit lines or partial credit guarantees, often coupled with technical assistance.
Given that the market for SME finance is relatively vibrant, the question is what gap donors are filling,
a potent concern the report raises.
Inevitably there is bound to be overlap in the donors’ involvement.
Closer donor coordination could therefore be quite important in ensuring that resources are allocated effectively and are market enabling, and that they do not create an uneven playing field for market players.
The challenge is also on government which could play a stronger role in keeping track of the various donor initiatives to encourage transparency and a sharing of best practices across initiatives.