Ease funding red tape to grow local enterprises

One bold entrepreneur who shifted from Karen to Ol Joro Orok hinted to me how difficult it is to get funding.

Yet every entrepreneur dreams of expanding their business and possibly owning a global empire, like the transnational firms we admire and study as case studies in our MBA classes. Why is funding such a big issue when banks make huge profits lending to individuals, businesses, and the government?  

The 2025 State of Banking in Kenya Report by the Kenya Bankers Association indicates that in 2024, banks’ operating profit came from two main sources: loans at 51.4 per cent and government securities at 24.9 per cent. Large banks are noted to be more profitable than small ones.  

Why then should lending to entrepreneurs be an issue? It’s about risk profile. We know so little about startups and Small and Medium Enterprises (SMEs), the backbone of our economy.

If you are not listed, it’s hard to get your risk profile despite Credit Reference Bureaus (CRBs). This raises the interest rate and discourages firms from borrowing. While they can provide their financial statements, a lot of “ifs” remain. Remember the uproar over the Kenya Revenue Authority’s (KRA) eTimS?  

The risk profiles of listed firms are well known; they even get lower interest rates on loans. Do you recall the oversubscribed Safaricom and Kenya Breweries Ltd (KBL) bonds?  It’s harder for startups. They have no track record. And their entrepreneurial ideas may seem too outlandish to be funded. Think of someone seeking funding for an M-Pesa project or opening an email for the first time!  

While we could have technical experts in the banks, the idea could be perceived as too risky despite its potential. Noted how investors, including foreigners, love injecting money when the business is up and running? Risk appetite explains why a quarter of Kenya’s banking income comes from government securities such as treasury bills and bonds.

Add reduced operational costs. Think of lending Sh100 million to the government and the operational cost of lending the same to 1,000 entrepreneurs. 

The risk profiling used for our lenders is often borrowed from the West, rarely from the East, where contexts are very different. Think of the trust deficit.

Why do you demand letterheads and stamps?  The trust deficit leads to high risk perception.  Banks that understand our contexts and behaviour are likely to do well. Ever wondered why local banks do so well compared to their international counterparts?  

Why are entrepreneurs unhappy? One is the high interest rates charged; many feel it’s not commensurate with the risks.

Who understands the risk better: the entrepreneur or the funder? Remember tacit knowledge? In addition, the process of getting a loan can be long and tiring, with additional requirements when you are just about to get the money.  

The Sh627 billion in non-performing loans in our banks by 2024, mostly from real estate, manufacturing, trade and personal/household loans, could be another reason banks want to take no chances.  Used to government paper, and with only a few banks dominating the market, it seems banks are not best suited to fund startups and SMEs.

The 10 top banks in the country give 81.5 per cent of total loans. The risk appetite for big banks and entrepreneurs is different. Like human beings, as we grow older, big, mature banks can afford to be cautious and choosy.  

Was that the idea behind microfinance banks? Do they understand their clients better? Are they equivalent to the American community banks? 

Could the emerging finance Saccos be better placed to fund our entrepreneurs? Do these entities’ risk appetite closely match that of entrepreneurs? 

Remember, our venture capital market, bootstrapping, crowdsourcing, and angel investment are still small.  

How about the government? How many firms get government guarantees, leading to reduced rates? 

This is where we have lost; we leave our infant industries and entrepreneurs to the market. How did China get its state-owned enterprises (SOEs) into the global market? What of Korea’s chaebols? How is the Kenya Development Corporation faring?  

One contentious issue is when local institutions get foreign funding for onward lending to local firms.

Ostensibly, they have better knowledge of the local markets. Do they act as honest brokers? Do they allow vested interests to cloud their judgments? 

Global car brand

Do local entrepreneurs get incentives like tax holidays? What of the government purchasing their product or service as the anchor buyer? Think of how India’s Mahindra became a global car brand.

Support does not need to be financial. Does our investment in public goods like roads, power and education focus on sectors and regions likely to give us the highest entrepreneurial returns (leave session no. 10 of 1965 for now)?

I noted the road to Eldoville (remember the bold entrepreneur from Karen to Ol Joro Orok?) and Primarosa greenhouses are not tarmacked. 

We are silent on another reason our entrepreneurs lack support: jealousy. We don’t always celebrate success.

Jealousy becomes more potent when cross-pollinated with politics, tribalism, and pettiness. How often do we look down upon local products and services? Think of local names and food picked from the shamba – potatoes and chips.

Kenyans abroad can attest that our organically grown food, including meat, is second to none.  

Entrepreneurs, even when funded, face rejection in our market. Think of our love for imports. Funding is not enough; market sentiments matter.

Charity begins at home. Is 80 per cent of our economy not informal? “Coolness” should not override supporting our entrepreneurs and the jobs they create.