By Antony Mutunga
T
wo decades ago, most Kenyans were locked out of the credit market. As service providers, primarily digital lenders, entered the unexploited space, a high appetite for credit followed as financial inclusion grew.
It resulted in high-interest rates and low access to credit, thereby attracting the attention of investors and stakeholders, with the Kenyan parliament passing a bill that imposed a cap on interest rates in September 2016. True, but the cap did not last, as authorities came to terms with the fact that it reduced the chances of private sector players accessing credit, leading to an economic slowdown. It was repealed by the parliament in 2019.
Since then, the Central Bank rate (CBR) has faced the pandemic, geopolitical tensions, and rising inflation, which has seen it keep steady at 7% for most of the period before recently rising to 10.5% as of August 2023.
Financial institutions also increased their rates when the Central Bank of Kenya (CBK), through the monetary policy committee, raised the CBR for the first time in May 2022 due to growing inflationary pressures and rising commodity prices. From then on, the rates would increase every time the CBK increased CBR, negatively affecting individuals and businesses.
As the government focused on controlling inflation with high interest rates, small-scale businesses, which rely heavily on credit, were heavily affected. With access to credit drying up, these businesses find it difficult to operate normally and experience growth. Furthermore, this has seen commercial banks deem small-scale businesses risky to default; thus, most are unwilling to lend to this bracket.
The increase has also led to higher borrowing costs, with businesses having to part with more as interest. This has affected growth and expansion plans as businesses have been forced to cut their expenses or lay off employees. Also, this has affected the employees’ morale, reducing productivity as it affects one’s job security. These impacts have a ripple effect on the economy, slowing down growth.
Right step
According to James Mwangi, a research analyst, the government’s move to increase rates is the right step in reducing demand and reducing the increasing inflation. “However, the effect it has on the private sector is clear as businesses see the cost of borrowing increase, affecting their daily operations,” he said.
Businesses are not the only ones to be affected, as individuals also feel the effects of the increased interest rates. With the CBR at 10.5%, commercial banks have increased their interest rates to about 20%. For instance, in July, Equity Group lifted its base lending rate from 12.5% to 14.69%, with interest rates levied on customers going as high as 20.19% based on its risk-based pricing model.
On the other hand, Stanbic Bank lifted its base lending rate to 13.15% from 12.58% last month.
“Borrowers have been handed the burden of the increase as their monthly loan payments have risen with the benchmark lending rate,” said Mr Mwangi.
This is already eating into the disposable income of many households facing increased commodity prices. Additionally, this affects consumer spending as many households reduce spending, affecting many businesses reliant on the customer and the economy as well as the whole.
The move has played a role in the current state of the economy as businesses experience losses; even in the worst cases, they are forced to close down, leading to a rising unemployment rate and fewer opportunities. The number of individuals and businesses that have seen a rise in loan repayment is relatively high. As financial institutions continue to enjoy the profit they acquire from the increase, many remain in the dark about avoiding parting with more of their money.
Forced to adapt
To survive this predicament, businesses and individuals have been forced to adapt. For instance, for those with outstanding loans, loan restructuring is available to reduce the impact of increasing rates.
It refers to negotiations between the lender and the borrower to modify the loan terms. To avoid defaulting, one can enter negotiations with the lender to get back on track in servicing their loan. Loan restructuring is possible in a number of ways, depending on the agreement with the lender. For instance, the lender can agree to extend the loan term. This will allow the borrower more time to repay their loan and reduce the amount they have to pay monthly.
Also, through loan restructuring, it is possible to negotiate for converting variable interest rates to fixed rates so that in such a scenario where the interest rates are increased, one’s monthly repayment does not increase. Loan restructuring, in any way possible, reduces the chances of the borrower from defaulting.
When the price of commodities, such as fuel and food, is at an all-time high, many end up using up their monthly earnings without saving. Increased interest rates, reduced access to credit, and a rising cost of living will see many struggles, further slowing down economic growth.
Those in need of access to credit may be forced to look for alternative sources of finance. For instance, entrepreneurs may rely on crowdfunding to raise capital. Businesses can offer a share of the business in exchange for capital through equity crowdfunding or give incentives for financial support through rewards-based crowdfunding. For example, platforms such as M-Changa offer a place for entrepreneurs to connect with potential investors looking to fund businesses.
With banks considering small-scale businesses and many Kenyans as risky, crowdfunding on a peer-to-peer basis makes funding more accessible. It has the additional advantage of offering underfunded access to a global market.
According to Shakila Kerre, program manager of the innovation division at Financial Sector Deepening Africa (FSD Africa), crowdfunding remains attractive to investors, including commercial banks.
“Crowdfunding platforms are attractive to investors, including banks, because they de-risk the credit risk of a market segment previously perceived as thin or no file (i.e., minimal conventional data was available on these businesses and individuals). They cease being thin or no file by digitizing their economic activities and collecting data from these businesses,” she said.
Donation-based crowdfunding is also an option whereby donors typically receive nothing in return.
The government’s move to increase interest rates as a remedy to inflation and weakening shilling has reduced demand for goods and services. However, the government has failed to implement measures to protect businesses from high interest rates, as before the interest cap rate in 2016.
The government can provide incentives and support programs to assist small-scale businesses, or many will have no choice but to close down and increase the unemployed. Individuals are also locked out of access to credit; if the situation continues, Kenya’s economy will continue trending downward.