SMEs in Africa take more loans as global peers wean off debt

Monday October 09 2023

People at one of the busy trading centres at Nakivubo in Kampala, Uganda. PHOTO | MORGAN MBABAZI | NMG


Loans to small and medium enterprises (SMEs) on the continent have increased over the past year, even as most similar businesses globally reduce borrowing following improvement of the economic from the slump of the pandemic and Ukraine crises.

Latest figures from the International Monetary Fund (IMF) show that while the amount of outstanding loans owed by SMEs in 2022 generally decreased in Europe, Middle East, Central Asia, and the Western countries, in Africa, they increased.

“After an initial surge at the onset of the Covid-19 pandemic, the outstanding amount of SME loans as a share of GDP has consistently declined throughout 2022 in several regions,” reads the IMF’s latest Financial Access Survey published this week.

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According to the research, the decline is partly due to the ending of support measures to businesses, such as debt guarantees, implemented at the peak of the pandemic to help keep them afloat as economies struggled.

Another possible driver of the decline in loans uptake is the tightening of financial conditions occasioned by the recent hikes in central bank rates across the globe, the survey says.


But in Africa, despite the unwinding of the support programmes and monetary tightening just like the rest of the globe, the amount of loans owed by businesses continued to rise in 2022, indicating that the economic conditions could be worsening for small enterprises on the continent.

High interest rates

In Kenya, for example, the number of small businesses with outstanding loans rose by 1.3 percent to 56.3 percent in June 2023, up from the 55 percent recorded in October last year, according to the Central Bank of Kenya’s latest Financial Access MSE Tracker Survey.

The survey shows that this year, businesses taking loans to purchase stock have increased to 59 percent from 51 percent in October last year, a pointer that they could be operating under difficult economic circumstances.

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Kenyan SMEs are also taking more loans this year to cover general household expenses, education, and expand their businesses, compared to last years.

Further breakdown reveals that at least 7.2 percent of owner-operated businesses that have outstanding loans use them to pay business rent in addition to the other expenses, and over 14 percent of those with one to nine employees take loans to pay salaries.

Jared Oundo, the national coordinator of the United SMEs Association of Kenya, avers that Kenyan small firms are taking up more loans because while the economic condition might have improved across the globe, Kenya’s economy has not caught up.

“Factors such as limited access to capital, high interest rates, and a challenging business environment could still be prevalent in Kenya, leading to an increased reliance on loans for SMEs,” Mr Oundo told The EastAfrican.

He argues that while more loans to SMEs could be a good sign that the small firms, which are Africa’s leading source of employment, have improved access to financing and can therefore seamlessly grow and expand, but there is a flip side to it as well.

Leading source

“On the other hand, if SMEs are struggling to meet their financial obligations and are taking on more loans to stay afloat, it could be a sign of financial distress and potential insolvency,” he said.

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Wambui Mbarire, chief executive officer of the Retail Traders Association of Kenya agrees that the main reason for the increased borrowing is the difficult economic situation in the country.

“Businesses are struggling to meet overhead costs because the devaluation of the shilling has made cost of living very high, so there’s less consumption and less sales,” Ms Mbarire said.

According to the CBK statistics, the recently established Financial Inclusion Fund, alias Hustler Fund, has become the leading source of loans for small businesses in the country, which could be an indication that many businesses might be taking loans due the easy availability.

Over 44 percent of businesses with outstanding loans took them from the Hustler Fund kitty, displacing mobile banking loan services which dropped from providing 57.2 percent of loans in October last year, to 28 percent in June.

Mr Oundo contends that “the presence of informal lending practices could also lead to the increased appetite for loans by SMEs in Kenya,” but the lack of alternative financing sources like angel or venture capital investment could also be playing a critical role.