Self-employment can be a rewarding path to economic independence, particularly for the young, unemployed population, despite the inherent challenges. According to a 2019 survey by Statista, a global data and business intelligence platform based in Germany, Kenya accounted for slightly more than 49 per cent of the total self-employed individuals in Africa. Neighbouring countries like Uganda and Tanzania boasted even higher percentages, with 77 and 83 per cent, respectively.
While these statistics may have shifted during significant global events like COVID-19, one constant challenge remains: maintaining newly established small businesses due to poor financial skills. This situation is exacerbated by difficulties faced while trying to access credit, especially through traditional banking channels.
In response to this predicament, new business models have emerged, offering microfinancing at flexible repayment on daily, weekly and monthly terms. Some models even enable entrepreneurs to obtain financing for assets, like motorcycles, which then serve as collateral for the loan.
This new credit system has given rise to relatively new business models, such as lease-to-own and pay-as-you-go, gaining popularity among young entrepreneurs with limited capital to start their businesses.
Drawing from my experience at the helm of one of Africa’s largest asset financing companies over the past eight years, I have learnt lessons about responsible borrowing that I wish more entrepreneurs would know. This is especially important when these businesses borrow money to start or sustain their ventures while supporting their families and servicing their debt.
Those traditionally underserved by the formal banking system have found an avenue to financing through microfinanciers, asset financing companies and fintech institutions that provide small loans with greater flexibility, helping small businesses thrive during uncertain times.
According to the World Bank, this approach enhances financial inclusion for millions of individuals and small businesses with limited offers of financial assets, products and services. It not only gives them a viable source of livelihood through credit, savings and insurance services but ensures they are delivered sustainably.
In Kenya, commendable progress in financial inclusion rates, as demonstrated by the 2021 FinAccess Household Survey commissioned by the Central Bank of Kenya and the Kenya National Bureau of Statistics, continues to be achieved due to these new financing models. The survey indicates that formal financial inclusion expanded to 83.7 per cent in 2021 from 82.9 percent in 2019, compared to 26.7 per cent in the baseline survey conducted in 2006.
As we continue to register this positive growth, it is crucial to prioritise responsible borrowing. The government and the private sector must take up this challenge, ensuring individuals make well-informed financial decisions and comprehend factors like interest rates, risk management, and regulatory considerations before committing to loans.
For example, before a customer signs up for a boda boda, tuktuk, or phone loan with Watu Credit (Watu), customers receive comprehensive guidance on available repayment options, the impact of repayment periods on the total loan amount, and the importance of managing their income efficiently. This proactive approach helps borrowers steer clear of loan defaults.
In the private sector, financial service providers must play their part by ensuring customers grasp these principles guided by regulations set by the government.
Firstly, customers need to be empowered to understand the impact of borrowing and the complete loan journey, from initiation to final repayment.
Borrowers and customers should be educated about the importance of financial discipline, ensuring loan instalments are paid on time and setting aside funds for ‘rainy days’.This not only prevents defaults but also cultivates a savings culture as a way of life.
Financial literacy for small businesses provides the right knowledge to make informed decisions about savings and insurance coverage, thus protecting their livelihoods and ensuring financial stability for their families, even during difficult times.
Secondly, for there to be a sustainable impact, the sector must partner with the government to promote financial inclusion and literacy through policy and regulatory frameworks. In addition to consumer protection measures, policymakers should facilitate education and confidence-building initiatives for those currently excluded, coordinating, establishing standards and curricula, and possibly co-funding private sector efforts.
Lastly, holistic financial inclusion isn’t solely about opening bank accounts for everyone; it is about ensuring all individuals and businesses, regardless of size or formality, have access to affordable and appropriate financial services. This empowers them to manage their finances wisely, invest in their futures, and weather economic storms. In this regard, financial literacy plays a pivotal role.