By MICHAEL MUSAU

There was a time in the 1990s when unemployment was the major problem facing Kenya, East Africa?s biggest economy. With confidence in the new government after the December 2002 elections, investor confidence rose with the regulation of interest rates. Small and medium investors had a field day, but the excitement didn?t last.

Among the major problems faced by business starters in Africa is limited access or complete inaccessibility to credit.  Like most developing countries, the credit market in Kenya is characterized by both formal and informal components. The formal market comprises of the commercial banks that were, until recently, a preserve for the rich.

With the increase in competition, some commercial banks are now venturing into the informal market, which consists of the so-called gray economy. Its credit worthiness is highly limited and other than the amount of collateral, it is based on many other factors including kinship, neighborhoods, profession and other mechanisms that encourage interaction.

Most informal borrowers are so scared at the mention of a loan that convincing them that based on the time value of money it would benefit them is almost impossible. Most of them would prefer to make use of surrogates like the merry-go-round.

This has led to the double-service delivery whereby other than offering credit, follow-up services are also available.  Take the case of K-Rep Bank, a micro-finance institution (MFI) operating in Kenya. K-Rep bank?s credit services are complemented by its advisory services for consultancy and K-REP Development Agency offering related services.

Motherland Micro-Finance is another good example where car loans come with car sales. Where a group is concerned, the amount that can be borrowed is again determined by the wealth of individual members.

 K-REP Bank, Faulu Kenya and Pride of Uganda ,where group lending is core, are characterized by different loan classifications.  K-REP, for example, has Kati Kati loans for people in the higher income bracket with the majority of group borrowers falling under Juhudi loans. The only limiting factor with such borrowing is the fact that credit values are based on the collective wealth of the participating members. This follows that the lower the wealth the smaller the loan.

The market tapped by the micro-finance institutions, or MFIs, is too large and other players, especially commercial banks, have started tapping into it. The National Industrial Credit Bank (NIC) is a good example.  Other banks have followed suit, with multinationals giving loans as low as Kshs50,000 ($667).

Borrowing for most individuals is not an overnight decision. The Institute of Policy Analysis and Research, or IPAR, says that for most people, the credit- seeking decision is a result of three stages. There is always the decision made over whether to or not to borrow.  The credit source follows the credit perceptions of the borrower and the attendant costs.

When Kenya?s Transport Ministry moved to streamline the public transport industry, many Kenyans got a lot of drive to venture into the business of ferrying commuters and other travelers.  However, raising money was an uphill task and many eyed the banks.  It was possible but not as easy as many thought.  Most banks asked for cash collateral of at least Kshs300,000. ($4,000). This  condition locked out many borrowers. 

Studies have revealed that more men are likely to borrow than women. It is highly likely for women to borrow from MFIs and NGOs while men go to commercial banks.

Among the key determinants for small business borrowing is age, where mature borrowers are able to borrow more due to experience, while younger ones borrow less. The level of education also determines how much a borrower can get due to the possibility of adopting a contemporary management style, which is unlikely to fail. The age of an enterprise is also important as older enterprises get more consideration for credit qualification than young ones. 

As financing sources keep pace with evolving information technology (IT) and economic trends, there is need for financial institutions, both formal and informal, to widen up their doors.

Most rural people have no access to banks because of poor infrastructure in such areas. Rural businesses also face low incomes due to lesser concentration of people and fewer economic activities. It is thus clear that the government?s role in infrastructure development would play an important role in improving credit worthiness or access to it.

People involved in small-scale lending should employ the concept of the triangle of outreach, financial sustainability and impact, as they choose their target clients. The more innovative and locally adapted the project design, the better the prospects.

Michael Musau is a contributing writer for the African Executive magazine.