Last month, the world celebrated the 5th anniversary of Micro, Small and Medium-sized Enterprises Day – MSME Day – with a focus on the need to raise awareness of the tremendous contributions of micro, small, and medium-sized enterprises to the achievement of the Sustainable Development Goals (SDGs).
This is particularly significant in light of global tectonic shifts such as the COVID-19 pandemic, the climate crisis, and the Ukraine-Russia conflict, all of which pose serious threats to SMEs.
MSMEs are the backbone of our economies, accounting for one-fifth of global banking revenue. According to a McKinsey study, micro and small businesses account for more than 70% of all businesses and more than 50% of all jobs globally. MSMEs contribute more than half of global GDP in high-income countries, while they create the most formal opportunities in emerging markets, accounting for roughly seven out of every ten jobs.
However, the last two years have been difficult for MSMEs. The COVID-19 pandemic, for example, has revealed significant vulnerabilities within the sector. According to the UN, MSMEs, particularly those led by women, youth, ethnic minorities, and migrants, have suffered the most. According to an International Trade Centre (ITC) study on the impact of COVID-19 on businesses in 136 countries, nearly 62% of women-led small businesses have been severely impacted by the crisis, and women-owned businesses were 27% more likely to close as a result of the pandemic.
Closer home, emerging issues such as the Ukraine-Russia crisis have sparked inflation, and the effects of climate change and upcoming elections have shrunk Kenya’s GDP forecast to 5.2 percent growth in 2022, down from 7% in 2021, according to a recent Focus Economics report.
To stay afloat, MSMEs are increasingly turning to banks for additional credit and business advice in order to navigate the complex and volatile environment. Banks have made strategic decisions such as collaborating with global agencies to increase capacity and reduce risk when lending to SMEs. Absa, for example, recently signed a KES 1.25 billion loan portfolio guarantee facility with the African Guarantee Fund (AGF), which allows access to up to KES 100 million in a single borrower limit.
Bank restructured loans have also provided a lifeline to MSMEs. According to the Central Bank of Kenya’s 2021 report, banks restructured loans worth KES. 234.7 billion in 2020 as part of several other measures aimed at mitigating the blow suffered by businesses that struggled to repay debts. Other important decisions have included increasing credit limit capacity, long to short-term lending such as loan top-ups, trade financing, and digital lending.
All of these have been instrumental in aiding SME business growth and improving their operational performance.
Banks are responding to the needs of the MSMEs market with innovative business products. Some of them include personalized accounts for women entrepreneurs – who traditionally face unique challenges compared to their male counterparts – insurance products for SMEs to protect them from disruptions and provide business continuity, asset financing for purchasing trucks and vehicles for logistics and operations or climate financing for environmentally friendly businesses.
Loan defaults by SMEs during difficult economic times have been major pain points for banks in their debt recovery efforts. Banks, on the other hand, are mitigating risks and closing the gap by carefully assessing businesses’ debt worthiness and providing business development advice before extending credit.
There is no one-size-fits-all solution, but banks that rethink their SME lending businesses on a regular basis can increase their market share and promote profitable growth.
In terms of financial inclusion, financial institutions must do more to close the gender gap. This is critical because, according to the CBK, women own slightly more than a third of all SMEs in Kenya (33 percent).
Second, by leveraging advanced analytics, processes, and infrastructure, banks can make risk-adjusted lending decisions, reducing risk and uncertainty previously encountered.
Finally, combining financial assistance with advisory services can be one of the most effective ways of assisting the MSME ecosystem. Banks should endeavor to support MSMEs in thriving by providing market guidance, guiding transformation efforts, and providing networking and information exchange opportunities.