Lack of access to affordable credit has been the greatest hindrance to SME’s and individuals from their full growth potential. Although statistics indicate that the country has made strides towards financial inclusion, high cost of credit is gnawing at these gains.
Alex Magu, director of Credit Sawa and a former banker who has been in the industry for over15 years identified this as the Achilles heel towards the country’s economic growth because it is a limiting factor to the participation of key stakeholders in the economy.
Of employed individuals, 90% earn their livelihood, whether directly or indirectly, from the SME sector hence it is a mega industry in itself that deserves due attention
“Credit Sawa is a credit market that assists borrowers who meet specific criteria of lenders in exchange for competitive pricing due to multiple bids by lenders,” says Alex Magu.
A potential borrower, he says, subscribes to the platform and have his credit worthiness evaluated then if authorized they have the privilege of gaining access to multiple lenders also on the platform which means the borrower has an opportunity to negotiate a customized and most favorable credit plan with the successful lender.
It is a platform that seeks to develop a symbiotic relationship between the borrower and the lender where the borrower to benefits more. It saves time and provides an array of options in terms of lenders for the borrower to choose from. Credit consumers using their credit score can access multiple lenders without increased costs in searching for information. Ultimately lenders offering competitive bids against those credit scores translate into lower lending cost to borrowers.
Credit Sawa also enables peer to peer lending as the lender on the platform is anyone with the credit appraisal skills and appetite for risk,” he says.
Kenya has made unprecedented and significant strides in the financial space if the discussion entails innovation and regulation but that is brought to an abrupt halt when the conversation borders on access to finance for entrepreneurs or generally, the borrower.
These figures show that in the context of the general growth of the financial sector, SME financing is growing at a relatively fast rate, and is thereby representing a growing share of the commercial banks’ portfolios. A report dubbed Bank Financing for SMEs 2014 by the Central Bank showed that total SME lending portfolio in December 2013 was estimated at be Sh332 billion, representing 23.4% of the banks’ total loan portfolio.
The small business portfolio grew fast in absolute values but also as a percentage of total lending. In the years preceding that (2009 and 2011) the total SME portfolio was estimated at Sh133 and Sh225 billion representing 19.5% and 20.9% respectively, of total lending. These figures show that in the context of the general growth of the financial sector, SME financing is growing at a relatively fast rate, and is thereby representing a growing share of the commercial banks’ portfolios.
Alex Magu attributes part of his motivation for starting Credit Sawa to the fact that despite there being plenty of financial institutions in the country and having one of the most advanced financial economies in Africa a major challenge of credit access persists.
“There are so many banks in Kenya and there seems to be a lot of activity within the industry, which abruptly slows when it comes to credit advancing,” he says.
The situation with high interest rates has become an unending conversation with plenty of pull and push involved. The regulator on the other hand seems to have their hands tied.
The Central Bank of Kenya, authorized lending institutions to frequently publish their interest rates in a move that was hoped would inspire competition amongst the banks and consequently have the rates lowered; efforts proved futile and Alex says despite the move the borrower would still struggle to accommodate the lowest bank rates in the market. Currently the rates have escalated to inconceivable heights, some as high as 25%.
Earlier in the year law makers sought to push for a Bill in Parliament that places a cap on interest rates that will be set following advice from the Central Bank. This definitely is a ‘when push comes to shove’ outcome that doesn’t presage well for liberated market.
“There is an ever whetting appetite for credit and sufficient number of banks ready to offer but there seems to be a stalemate. Enough supply, enough demand no transaction is where we find ourselves,” he adds.
How it works
The lenders once subscribed to the platform pay a success fee on loans disbursed which varies from lender to lender then the loans are prefunded in a trust account for revenue assurance. Borrowers pay a nominal fee of Sh100 per annum as individuals and Sh1000 per loan request for the companies and groups. The platform is also used by lenders who need a loan management system and mobile lending capability.
“For borrowers our target clients are in 3 categories: Individuals, SMEs and Groups/Chamas, whereby they subscribe to the service and obtain the documentation to place a loan request while for lenders our target clients are Formal; Prudential regulated lenders, Non Prudential regulated lenders and Registered lenders and Informal; unregulated lenders. We sign off an agency agreement with each lender at which point they become eligible to make offers to borrowers. The lender assigns us an account manager who will receive alerts from the portal and will resolve borrower issues that come to us,” explains Mr. Magu.
The benefits
- An incentive for good credit behavior.
- Standardization of commoditized loans.
- Consumer empowerment on appropriate credit.
- Enabling interventionist lending reach the target groups without significant cost to program supporters/donors through peer to peer lending.
- An incentive to compliance with law especially taxes.
- Financial inclusion, as those that previously accessed credit exorbitantly are enabled to have choice while those previously excluded through voluntary provision of information can be reached by lenders.
Despite challenges that mainly linger around acceptability which is common with new innovation, Magu is relentless. He has big dreams for his initiative. He plans to capitalize on the difficulty of credit access by acquiring a share of all new loans in the market and in the long term aims to have sufficient customer data to influence product development and public policy..
Credit Sawa adds to concerted efforts of financial inclusion in a special way. The platform enables lenders to readily obtain data not readily available hence enabling the lending to previously excluded groups for lack of information.
“Ultimately I am enabling the enrichment of credit scoring to a point where the score will be the largest determinant of lending decisions,” he says.
