Some commercial banks in Kenya have gone into a lending sabbatical, opting for less risky ventures. Government securities is one of those lucrative instruments that have become a safe haven for these banks.

The Central Bank of Kenya said recently that there was a slowdown in credit growth, especially in trade, manufacturing and real estate, and private households — which account for 60 per cent of total credit to the private sector. CBK said that the contribution of these sectors to credit growth dropped from 13.6 per cent in July 2015 to 4.6 per cent in February 2017.

The regulator attributed the drop to depressed exports from the manufacturing sector; delays in the perfection of loan securities due to delays in registration of titles; slow building approvals; and lack of alternative financing for key projects. The recent interest capping laws have made banks look at different ways to raise revenue as opposed to lending to the private sector.

Commercial banks hold customer deposits as transitory funds and they owe a fiduciary duty to depositors. Depositors must be convinced that once they need their cash, they can access it. The banks must therefore ensure that they invest the funds in safe instruments.

That partly explains why banks opt for low return but less risky instruments like Treasury bills as opposed to lending to high-risk borrowers.

This is a controversial topic and many financial experts have poked holes in the models and rationale that banks use to calculate the risk margin. Experts argue that some of the models end up overcharging and punishing good borrowers, who are generally a low risk.

Most borrowers are obsessed with the traditional lending options. So, can potential investors or businesses obtain financing apart from the traditional bank loans? Can a business be only funded through debt finance?

Alternative financing options exist and many offer better, more flexible terms and conditions for entrepreneurs than the traditional funding instruments.

Necessity is the mother of invention. The challenges in raising capital for businesses have given rise to innovative alternative financing solutions.

The 2008/2009 global financial crisis immensely contributed to the development of alternative financing. Many commercial banks were affected by the crisis and the natural reaction was to cut lending.

A study carried out by the University of Cambridge and EY after the financial crisis indicated that in Europe, transaction volumes through alternative finance solutions grew six times in three years and were expected to be in excess of €7 billion ($7.8 billion) by 2015.

Exponential growth

In Africa, the growth has been exponential.

There is no definite list of the alternative financing solutions, but the most common are angel investors, peer-to-peer consumer lenders, crowdfunding, invoice trading and venture capital.

Angel investors are wealthy investors who invest in start-ups or promising business ventures that lenders are reluctant to finance. In the US, angel investors must meet the Securities Exchange Commission’s standards for accredited investors.

To become an angel investor, one must have a certain minimum networth and annual income. A perfect example is Google, which employs more than 20,000 people worldwide and believed to control about 60 per cent of the world daily searches.

It is said that the unsung heroes of this success story are Andy Bechtolsheim, known as the “Golden Boy of Google,” and Ram Shriram, who helped with the technical knowledge at the inception stages.

Peer-to-peer consumer lending is debt-based transactions between individuals or businesses through online services that match up lenders with borrowers. The online lending companies operate with lower overheads than conventional banks, and therefore have better terms for their lending.

Crowdfunding involves investment of small amounts in return for a non-financial reward. Crowdfunding can either be reward-based or equity based.

Invoice trading allows businesses, especially small and medium enterprises, to sell their invoices or receivables to individual or institutional investors at a discount in return for cash for business.

Venture capital is cash given to assist start-ups that are considered high-growth but high-risk. Investors expect to earn a return by sharing in the risky venture.

The challenges in accessing lending must rouse businesses to start looking for alternative financing solutions. But these solutions must be tailor-made to match a business’s capital and cash flow needs. Solid financial relationships and networks are also useful to assist in securing financing quickly and at good terms.

Macharia Kihuro is a financial risk manager based in Nairobi; [email protected]