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Posted on December 13, 2019

Reflections on FSD Kenya’s 2019 Annual Lecture

On November 19, FSD held its annual lecture where David Ferrand shared his insights in a lecture titled ‘Financing Kenya: 2020 hindsight for Vision 2030’. After David’s lecture, I had the pleasure of moderating a panel consisting of Phyllis Wakiaga, CEO of the Kenya Association of Manufacturers (KAM); Sitoyo Lopokoiyit, Chief Financial Services Officer of Safaricom; Nuru Mugambi, Director of Communications and Public Affairs for the Kenya Banker’s Association (KBA); Neha Shah, Managing Director of Maitri Capital, and David.

The panel discussion provided interesting food for thought and I would like to share some key insights that emerged.

I asked Neha of Maitri Capital, for her thoughts on how to provide more and better quality capital to small and medium-sized enterprises (SMEs) in the country.  She pointed out that technology is actually opening up financing options for SMEs from different types of investors and capital from around the world. However, the reality is that local investors tend not to view SMEs as a viable investment class, preferring to invest in real estate, bonds or equity for example. As a result, domestic supply of investment to SMEs limits the local options SMEs have around the variety of financing options available to them. She also highlighted that even when Kenyan investors do invest in SMEs, they don’t usually let the public know the extent to which they do this and their successes specific to the sector. As a result, there are no well-known cases of local investors backing local companies and both benefitting from the collaboration. She also underlined the reality that access to finance alone is not enough, and SMEs often need an ecosystem of technical support such as legal services, financial advisors and sales strategists to effectively leverage financing.

To Phyllis from KAM, I asked about the manufacturing sector and the type of financing manufacturers typically get versus what the sector needs. She stated that the sector typically gets limited, short-term capital whereas the capital-intensive nature of the sector means players need large amounts of long-term financing to set-up or scale business activity. Further, financing given typically has no grace period, which is a constraint given the complexity of value and supply chains, and the time lag between the setting up of manufacturing activity, to production and eventual sales. In addition, financial products that speak to the needs of manufacturers do not exist, and these should not be a ‘one size fits all’ product as financing needs are informed by the value chains in which the manufacturers function. SME manufacturers are particularly affected by the limited financing options.

My question to Nuru from KBA centred on the implications of the repeal of the interest rate cap and what that would mean regarding the cost of loans. She pointed out that some of the aggressive risk pricing and aversion to lend is informed by the fact that most businesses in Kenya do not make it past their fourth birthday, and of those, 60% fail within two years. As a result, the banking sector has concerns as to the viability of lending in an environment where this is the reality of the longevity of businesses in Kenya. Further, businesses can have a gap in their technical capacity and depth to run a business in the long term. The concerns around capacity are particularly acute when lending to the youth, resulting in low lending rates to young Kenyans. These factors heighten the perception of the riskiness of lending to business, and when combined with the real risk of doing business in Kenya, these factors translate to a tendency toward risk aversion and higher risk pricing. However, she highlighted the growing importance of women in seeding stability in the banking sector given that female clients have much lower non-performing loan (NPL) rates than males. And while women are more reluctant to borrow, when they do borrow, they are more purposeful in their borrowing and do not divert loans to other activities, resulting in better performance.

On asking Sitoyo about Safaricom’s motivation to launch Fuliza he pointed to the fact that it was preceded by M-Shwari, which was launched as a platform to encourage saving, and to this day, remains predominantly a savings platforming. Fuliza was designed as a ‘top up’ service because 11 million M-Pesa transactions were failing per month due to insufficient funds; FulIiza has brought that figure down to two million and has an NPL rate of 0.6%. Lessons learnt from the popularity of Fuliza has highlighted the reliability of women as consistent performers in credit repayment within Fuliza, as well the role data generated by the M-Pesa platform can play in increasing access to credit by SMEs. He suggested that Kenya ought to have a deeper appreciation for the innovation coming out of the domestic fintech community and how it has created a dynamic where products considered innovations elsewhere, are considered normal and routine in Kenya. Yet domestic fintech innovators continue to struggle to secure financing, which is a shame.

David Ferrand, who gave the headline lecture added to the panel discussion by pointing out the importance of looking at the role of the financial system as a whole, not just the financial sector and private sector within that. He pointed to the need of government to make better long-term resource allocations to sectors that may not be the most commercially viable at present, but are important in increasing economic capability, driving economic development and sophisticating the Kenyan economy. A key financial role of state is to bear uncertainties that cannot be borne by private sector, while managing the risks of past state failures in that role. The state ought to be able to look at the different elements of the economy, the different types of capital and actors in the financial sector and meld these different elements effectively, using their own resource allocation strategy as a tool within this context.

On the key themes to look out for in 2020, panellists highlighted the strengthening of the role of technology, be it automation in manufacturing, or furthering digitisation in banking and SME financing. Another theme was climate change and the need for innovation in the financial sector to increase household, business and national resilience to climate change. Finally, the need to better serve women was highlighted across sectors given the underrepresentation of women in sectors such as manufacturing, and the fact that women arguably have a stabilising effect on the financial sector due to their lower default rates.

As Economist for FSD, I was struck by a point in David’s lecture on the four elements of the financial system consisting of the financial sector, informal finance, state finance and embedded finance, and these four elements are constituted in different proportions in different countries around the world. This synergises with my view that not only are there many ways in which a financial system can function, but there are numerous pathways Kenya can take towards creating a financial system that drives inclusive economic growth; one should treat overly-prescriptive, pre-set formulae for economic and financial system development with caution. The panellists highlighted not only the diversity of financial needs in Kenya, but sadly the continued ways in which these continue to be inadequately met despite an immense amount of innovation in the sector in Kenya. It underpinned my view that fiscal policy can be more effectively leveraged, and the task is often to find the pockets where public finance by national and county government can be more effectively directed towards improving the quality of lives of Kenyans.

Watch the 2019 FSD Annual lecture and panel discussion

Anzetse Were is Economist at FSD Kenya.

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