I recently listened to a conversation between a bank’s loan officer and a potential client that touched on issues ranging from the double digit interest rates, the mean lending nature to the Small and Medium Enterprises (SMEs). Having decided to go solo on his business after being in the field for five years, there was no better time for the client, who works in the hospitality industry, to run to his banker. The banker had earlier tried to woo him to two new products they had introduced. To the bank, the product came in handy, and it didn’t matter to them. After all, he was on pay slip.
It seems, unfortunately, that everything changes the minute you stop working for a reputable organization and start building a reputation for your small organization. All that the client wanted was US$8,000.00 start up. He already had US$9,000 which he had saved for over a year in a forex account.
“Listen gentleman,” the credit officer at the bank explained, “we only fund existing businesses. Yours is just a start up and we are not certain it will work.”
“I have the cash flow projections,” the client interjected.
That still being considered, it would only work better if the client, now business man, was on a pay slip. Did that mean that the client had to strike out a deal allowing him to go back to formal employment? No.
The new mortgage facility by a certain international bank seems to echo the same sentiments. You can only borrow 100 percent mortgage facility only if you are able to pay back Ksh. 7 million or more in 20 years. That is not the domain of the middle class. A Kenyan in the middle class does not earn over Ksh. 200,000 which would be a sufficient amount to enable him strenuously repay for his dream home.
Most banks do not do a proper credit analysis of the borrowers. When they do, the majority of those who have not been successful, even with noble ideas, are never helped through the loan process. As a result, banks end up qualifying borrowers for the wrong reasons while the non qualifying fail for the wrong reasons altogether.
One would think that banks do not have proper systems that can easily identify underlying risks in a borrower or just how much he qualifies to borrow. Many will use the conventional cash flow projections, strength of the balance sheet and other aspects of historical performance like the client base, years in operation, statements from the previous banker and lease agreement among others. That would perhaps explain the large size of the NPL book and a big population still yearning for a breakthrough in business start up.
Early this year, the Central Bank of Kenya (CBK) issued a press statement declaring all money gathering schemes such as pyramids illegal. To their reaction, the public went on rampage, demanding all their money back from the settings. Shockingly, the Central Bank has a research department, whose staff is supposed to work tirelessly to ensure that the public is not cheated into such schemes. The investors in the schemes did not hide this from the public thus wooing a great majority into it.
This led to banks coming up with more advertising campaigns that still haven’t impressed the public.
Is a country’s economic growth determined by how much money is in circulation? If yes, how much role does a Central Bank have in monetary regulation? Should we expect intervention into how banks determine who qualifies for a loan and who doesn’t? What lending rate is justifiable? Should it be pegged on the government securities rate since the two are inseparable?
The Microfinance institutions were meant to offer a solution to the borrowing crunch as most banks went corporate and high net-worth routes. Unfortunately, banks seem to have stretched wide, making the microfinance banks stretch in fear of competition. The result seems to be a dying SME class and a huge disorganized banking system.
The industry perhaps needs a venture capital firm that is specifically geared towards nurturing ideas besides funding the idea and getting a board position.
As long as the banks still fail in improving the lending process and decide not to ease up the ‘greedy’ rates, the public will always run to the unregulated schemes. As the Central Bank remains weak in its regulation procedures, the informal sector shall forever thrive.
By Michael Musau
CEO Emerging Africa Capital
Licensed by The Capital Markets Authority as Investment Advisers
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