Impact of high interest rates on Kenyan SMEs

Kenyan small and medium enterprises (SMEs) are facing a daunting challenge in navigating the high interest rates prevalent in the country. The average interest rates issued by commercial banks have been hovering around 15.88 percent, while microfinance institutions are averaging around 27 percent. In a recent interview with CNBC Africa, Victor Otieno, Managing Director at Viffa Consult, shed light on the impact of these high interest rates on SMEs. Otieno highlighted that a significant portion of SMEs in Kenya, around 75 percent, operate in the wholesale retail sector, with an average return on investment of about 10 percent. This poses a major hurdle for SMEs as the cost of finance at commercial banks and MFIs stands at 15 percent and 27 percent, respectively, making them uncompetitive and hindering their business operations. Beyond borrowing, high interest rates also contribute to the overall rise in the cost of doing business for SMEs in Kenya. Interest is a cost line item in the profit and loss statement of any business, and any increase in interest rates directly affects business profitability. In addition to interest rates, factors like high inflation, foreign exchange volatility, regulatory challenges, and tax environments further burden SMEs, making it harder for them to thrive in the market. Despite these challenges, there are some opportunities on the horizon for Kenyan SMEs. Otieno discussed green funding opportunities available for SMEs in Kenya. With the government and financial institutions introducing policies and guidelines to promote climate-friendly initiatives, SMEs can tap into sectors such as renewable energy, sustainable transport, and green building. By aligning their businesses with these environmentally sustainable practices, SMEs can not only contribute to a greener planet but also access funding and support to grow their ventures. Technology plays a crucial role in helping SMEs enhance their efficiency and competitiveness. Otieno emphasized the importance of digital tools such as social media platforms like Instagram, Facebook, and WhatsApp in helping SMEs market their products and reach customers effectively. While smaller businesses focus on market-driven tools to expand their reach and drive sales, medium to large enterprises are adopting more sophisticated technologies to boost productivity and operational efficiency. In the face of high interest rates, SMEs in Kenya are exploring alternative financial models and instruments to finance their growth. Traditionally, access to financial services for small businesses has been limited, with only 20% of the loan book of commercial banks going to SMEs. This scarcity of funding has led to the rise of fintech platforms, offering cash flow financing options to SMEs, especially those in wholesale retail. The challenge lies in diversifying the sectors that receive funding, with a need to encourage SMEs to venture into agriculture, manufacturing, and agro-processing to foster sustainable growth. The regulatory framework in Kenya plays a crucial role in shaping the business landscape for SMEs. Otieno highlighted the cost of doing business factors, such as the ease of setting up a business, taxation, and energy costs, that impact SME operations. While the government has made efforts to broaden the tax base, SMEs continue to face challenges in accessing markets and shifting from wholesale retail to other sectors. Looking ahead at the African Continental Free Trade Area (AfCFTA), Otieno discussed the opportunities and challenges facing Kenyan SMEs in accessing regional markets. Formalizing SMEs, sourcing markets, organizing SME cooperatives, providing capacity building, and facilitating access to finance are some of the strategies that can help SMEs benefit from AfCFTA. By focusing on value addition, product diversification, and market expansion, Kenyan SMEs can overcome duplication challenges and tap into new markets across the continent. The road ahead for Kenyan SMEs is paved with both obstacles and prospects, but with strategic planning, innovation, and support from stakeholders, SMEs can navigate the high interest rates and regulatory hurdles to achieve sustainable growth and success in the competitive business landscape.