Micro and Small Enterprises (MSEs) in Kenya experienced a myriad of challenges, pushing up the default loan rate from 42.8% to 60.7% in June 2023, a Survey conducted by the Central Bank of Kenya (CBK) has revealed.
This MSE Tracker Survey, undertaken in collaboration with the Kenya National Bureau of Statistics (KNBS) and Financial Sector Deepening Trust (FSD) Kenya, blames the woes of these micro businesses on tough business conditions, rising interest rates, and inflation.
According to this Survey findings, most MSEs experienced inconsistent cash flows arising from the high cost of doing business negatively impacting their profitability and market linkages, which in turn limited their ability to grow.
While most cash-strapped micro enterprises took up loans to remain afloat, the persistent harsh economic conditions resulted in many of them defaulting on their loan repayment obligations by either paying late, missing a payment, or paying a lesser amount than was expected.
Timely loan repayment plays a critical role in maintaining a good credit score and enhancing the borrowing credibility of a borrower.
The CBK Survey findings reveal that the proportion of micro enterprises that used savings to repay their loans decreased from 64.3% in October 2022 to 52.9% in June 2023.
The proportion of micro enterprises that reduced expenditures on household items to repay loans and those that took other loans to repay existing loans declined from 59.8% and 53.6% in October 2022 to 34.7% and 30.5% in June 2023, respectively.
Among the micro enterprises that borrowed from digital credit providers, overall only 9.3 percent defaulted on their loan obligation either in missing payment, paid late, or paid less than the required amount.
In terms of sex, male-owned businesses reported a higher default proportion at 11.6% compared with female-owned businesses.
The proportion of urban-based MSEs reported high default levels at 10.4% compared to rural-based MSEs at 8.3%.
Among the different age groups, the 26-35 years age group reported the highest default rate at 13%.
The Survey established that at least 48.8% of the Hustler Fund borrowers either paid late, missed a payment, or paid less amount in the last three months. Upon being asked whether they are aware of the consequences of failed or delayed payment, only 54.9 percent of the respondents said yes.
The Survey recommends the need to educate the public to differentiate the Hustler fund from political handouts.
The three main challenges cited in the use of digital loans were high interest rates; short repayment periods and harassment by some of the digital credit providers.
The MSEs Tracker Surveys are undertaken after completion of Financial Access (FinAccess) Surveys, conducted every 2 to 3 years since 2006.
The MSEs Tracker Surveys use a sample from the FinAccess Surveys with target households being those who derive income from small businesses. Data is collected on their business profile, access to finance, technology and innovation, business environment, and the nexus between business performance and household welfare.
The Tracker surveys provide data used to assess the resilience of MSEs and identify challenges and opportunities faced by the enterprises.