Kenya’s startups feel the heat as credit dries up

Originally heralded as a panacea for local entrepreneurs, Kenya’s interest rate caps are now throwing small businesses off balance.


In Nairobi, home to all things innovation and micro, the small and medium-sized enterprise (SME) ecosystem seems to have evolved over time to incorporate easy access to credit.

The many innovation hubs dotting the city paint a picture of a vibrant startup ecosystem where innovators, investors and venture capital funds coexist blissfully. But away from these hubs, the reality is that most of the country’s startups are struggling, with little to no access to capital.

To the uninitiated, starting and running a small business in Kenya seems like an easy task, until the need for more funds presents itself. Indeed, many entrepreneurs with brilliant ideas churn out new startups every month, but an acute lack of funding for early stage businesses means that few succeed past the first two years.

Others stagnate at the startup stage for years as they lack funds to scale, ultimately throwing in the towel when the going gets tough. When these enterprises take a hit, the economy suffers. Yet lack of funds to sustain and grow a business continues to affect thousands of micro and small enterprises in Kenya. 

Land of entrepreneurship

“Kenya is an important place for entrepreneurship,” says Vineet Rai, the founder of Aavishkaar and Intellecap, two Indian companies that focus on helping to build and scale profitable enterprises. His two outfits saw a gap in early stage startup funding in Africa and sought to fill it by venturing into the continent in 2012. Rai explains that the problem is not lack of venture capitalists because there are a significant amount of funds flowing to slightly larger enterprises. “Small enterprises find it difficult to get capital,” he says.

Intellecap and Aavishkaar have essentially been crowdsourcing entrepreneurs to show them off to investors. “Our goal is to search, sift, support and skill entrepreneurs,” says Nisha Dutt, CEO of Intellecap. “We work extensively with entrepreneurs to help them succeed and also make an impact.” Intellecap’s effort is just one among many initiatives by different stakeholders in a bid to support small businesses. The Kenyan government runs a procurement policy that requires 30% of all government tenders to be given to special groups, including women, youth and people with disabilities.

This affirmative measure has brought in some results, though analysts feel that small entrepreneurs are losing out to rich individuals and larger corporates as they lack enough capital to execute the tenders. The existence of such a problem is backed up by data from the Public Procurement Regulatory Authority’s latest report, which shows that the special groups handled 18.17% of the half-year procurement budget of KSh208.3bn ($2bn). Though laudable, this falls short of the 30% target.

Interest rate cap backfires

Last year, the capping of interest rates presented an excellent opportunity for local SMEs to access affordable credit from banks. This came into effect after the signing of a bill limiting the rate of interest that any bank can charge on loans.

The move was seen as a solution to the spiralling problem of high interest rates that was locking the majority of Kenyans out of affordable credit. However, the initiative has yielded negative results as entrepreneurs are still finding it hard to access loans from banks.

“Interest rate caps have lead to a shortage of funds just as price caps lead to shortage of sugar and other essential commodities,” says XN Iraki, an economics lecturer at the University of Nairobi. A new study conducted by Strathmore University and Invest in Africa shows that the rate caps have led to a cash crunch for SMEs. One such enterprise is Agri Mech Africa, a startup that is setting up mechanisation hubs across the country.

Kenya has over time faced problems attaining food security, and Agri Mech Africa provides a solution in the form of two-wheeled tractors to help farmers in far-flung rural areas access affordable farming equipment.

But while Agri Mech Africa has the capacity to turn the tide for millions of smallholders in Africa, obtaining the KSh50m needed to scale up the business is a daunting task for Pascal Kaumbutho, the founder. “It is now harder to get credit from banks than it was a year ago,” says Kaumbutho. His story echoes the frustrations of many other entrepreneurs across the country.

Bridging the gap

To bail out small entrepreneurs, something needs to be done to bridge the gap between them and credit. This explains why firms like Aavishkaar and Intellecap are trying new kinds of initiative in emerging technologies, entrepreneurship skills and success to create a real impact on the ground.

“There is a very steep investment needed to see early stage startups grow,” Rai observes. His firms have over 16 years of experience investing in early stage startups. The venture capitalist is building an entrepreneurship ecosystem in East Africa with an aim of accelerating the growth of startups. But before such an ecosystem starts to yield any results, local startups have to contend with the bad news; access to affordable credit is only a dream.

Amoxers Wachira         

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