75% of Kenyan SMEs stare at total collapse by end of June

Three quarters of all small and medium enterprises (SMEs) are staring at a total collapse by the end of June as cash-flows shrink.

Central Bank of Kenya (CBK) Governor Patrick Njoroge made the revelation Thursday while referencing an April survey by McKinsey and Company which paints the expected doom on the Kenyan economy by the end of June.

According to the survey conducted under its financial decision maker sentiment series, 52 percent of surveyed respondents are unsure of an economic recovery while 16 percent of the surveyed are pessimistic.

Moreover, 75 percent of respondents argue the economy will be in a much worse condition by the end of June with a mere two percent of individuals expecting financial conditions to improve.

The bulk of respondents expect the impact of the pandemic to last for up to two years. 80 percent of respondents report household incomes have fallen which the rate of spending and saving has declined for 47 and 90 percent of respondents.

78 percent of respondents are concerned of their job security while a majority 42 percent of respondents say present savings can only last two to four months.

According to the CBK Governor, government must with urgency rush to implement mitigation strategies including the establishment of the much awaited SME credit guarantee scheme to salvage the businesses.

“Three quarters of SMEs are on the ropes and would be gone as they do not have any cash to keep the lights on, pay for supplies and compensate workers. The urgency to SMEs is clear to us and we understand it as we have a pulse on that part of the economy,” he said.

“If we don’t have a scheme urgently, the matter will only get worse.”

However, Dr. Njoroge argues that saving SMEs is not limited to a mere credit extension to the businesses as the enterprises additionally face up to other risks.

“The issue is not about throwing money at SMEs. It is finance plus. This is an issue of providing solutions to their problems, there for instance exists a need to drive demand for their products,” he added.

The government has been plotting for a National Treasury credit guarantee scheme to cover SME risks and further credit expansion towards the sector.

Last week, the government dedicated Ksh.3 billion as seed capital for the scheme as part of the Covid-19 stimulus and now awaits further contributions ahead of launch.

“We expect banks and international partners to support the scheme and project contributions to be in excess of Ksh.20 billion,” Ukur Yatani told Radio Citizen’s Vincent Ateya in an interview Thursday.

The looming close of the majority of SMEs would cast Kenyans into the depths of an economic depression hell with the sector making for one third of of the country’s GDP.

Data from the 2020 Economic Survey shows a continued trend in fall of formal jobs with the informal sector now employing 83.4 percent of Kenya’s labour force or an equivalent 83.4 percent of jobs.

In spite of the looming doom, the CBK has retained its economic growth projection at 2.3 percent for 2020 arguing for the resilient of local industry.

“The target is not ambitious but rather our best estimate, taking into account all of the uncertainty. We are highly diversified in terms of our exports and destination markets unlike commodity reliant economies,” Dr. Njoroge said.

CBK’s recent policy measures continued to take effect in the economy as private sector credit in April rose to a record 9 percent from 8.6 percent in March.

On Wednesday, the CBK retained its benchmark rate at seven percent indicating continued policy translation.

However, banking sector asset quality has continued to deteriorate even as credit growth improves with industry gross non-performing loans rising to 13.1 percent in April from 12.5 percent in March.

The CBK has expressed calm in growing loan defaults even as commercial banks come under pressure from increased consumer risks.

“We have policies in place which if used correctly would arrest the evolution of NPLs. This are highly exceptional times and it’s not the individual borrower credit risk that has changed. Banks shouldn’t be penalizing themselves for the risk neither should they penalize borrowers,” Dr. Njoroge added.