SMEs face uphill task getting credit from banks

When the government announced a plan to phase out low-capacity public service vehicles in 2010, Teddy Wahome knew it was time to diversify his business beyond his four 14-seater matatus.

After considering a number of options, he decided to buy a high-capacity public service vehicle. He needed Sh2 million. Getting the necessary capital was an uphill task that took him more than a year.

“Meeting the conditions that the banks set was very difficult. They also charged a lot of money just to give you the loan,” he told Money.

A former driver, Mr Wahome had never banked his income formally, instead choosing to invest in a local savings and credit cooperative organisation (Sacco).

With an annual profit of less than Sh3 million, he came across as a high risk credit candidate for the banks. Further, most of the banks he approached demanded at least three years of financial statements and six months to build his credit history as a registered account holder.

Mr Wahome did not keep proper books of account to support his quest for a bank’s credit facility.

Over the past few years, Kenyan banks have developed credit products tailored for small companies. Despite this, such businesses still face many hurdles in their quest to get capital through formal banking channels.

“Small firms have erratic income and are, therefore, more risky. Banks will boggle them with many requirements and expensive interest rates to guard against the risk,” said a KPMG director, Mr John Kiruthu.

Business loans often require collateral in the form of land and other property. Valuing this collateral takes time and money.

At Cooperative Bank of Kenya for instance, the borrower may shoulder costs of up to Sh300,000 in legal fees and other charges when collateral like the borrower’s land gets valued and perfected — a process that ensures that the land is transferable to the bank and that the owner cannot sell it before the loan is paid.

According to Mr Anthony Githu of the SME Network, small enterprises often do not develop the record-keeping discipline that banks so stringently demand. The companies are also usually relatively new.

“Most SMEs are no older than five years. This systematic history that banks require locks them out of loans,” said Mr Githu.

The conditions Mr Wahome faced were not supportive of the urgent changes he needed to make in his business. He had planned to buy a 33-seater matatu before demand drove the vehicle prices sky-high.

As a consequence, by the time he managed to put together Sh2 million by combining a Sh300,000 Equity Bank loan and Sh1.7 million loan from his sacco, the matatu prices had risen well beyond his reach.

He had to find an alternative and he ended up settling for a lorry that now transports potatoes to Wakulima Market in Nairobi.

Mr Githu said it is more difficult for small companies to get money from the big lenders.

Given this flood of information, and in many cases lack of it, Money has profiled the personal and business loan requirements from five of Kenya’s biggest banks.

Cooperative bank of Kenya

Personal Loan

This is meant for salaried individuals who have operated an account with the bank for at least six months. One can get a minimum loan of Sh50,000 and a maximum of Sh2 million. Any amount in excess of this cap requires security.

The loan servicing period stretches up to 60 months — five years. For you to qualify, you need to provide your payslip and letter from your employer.

The bank charges 24 per cent interest rate for this product.

Business Loan — BizWise SME Loan.

For the small business considering taking a loan with Cooperative Bank, the minimum amount is Sh50,000 and the maximum Sh50 million.

One must shoulder an appraisal fee of 2.5 per cent of the amount borrowed. Further, there is an application fee that is calculated on amount borrowed and repayment term. There is also a standing offer fee of Sh250.

The bank’s interest is at a base rate of 24 per cent. However, if land is offered as security, the rate is 25.75 per cent, while motor vehicle security attracts about 28 per cent. If the loan is secured using cash, the rates can go as low as two percentage points below the base rate.

The period of repayment is up to 84 months. For eligibility, one should have a Coop Bank current account for at least six months — business account operating balance of Sh10,000.

The business must have been in operation for at least one year and one should produce the registration documents. In the case of land as security, one bears the perfection charges as well as the legal costs. This can amount to as much as Sh300,000.

Depending on land perfection processes, it can take up to six months before the loan is approved.

Kenya Commercial Bank

Personal Loan

As an individual, one can borrow up to a maximum of Sh4 million. According to the bank, the repayment period can be stretched up to five years.

One will be served with an interest rate of 24 per cent plus a margin of at least three percentage points calculated on risk.

In order to qualify for the credit facility, one must have a net salary of at least Sh10,000. Further, you should be running an account with KCB for at least six months or statements covering six months from your present bank.

Of equal importance is an appointment letter from your employer, a copy of your payslip, as well as your national ID.

Business Loan — SME business loan

To qualify for this facility, the business must have been operational for at least three years. It must also have banked with KCB for at least six months.

The bank offers up to a maximum of Sh20 million for those who qualify with a term of repayment that stretches up to four years. The interest rates are between 28 and 29 per cent, depending on the customer’s repayment terms and the calculated risk.

Standard Chartered bank

Personal Loan

You can get a minimum amount of Sh100,000 and a maximum amount of Sh4 million (for priority customers) and Sh3 million (for preferred and personal customers)

The bank’s interest rates is at an average of 23 per cent. Under an ongoing promotion, personal loans can attract rates of between 19 per cent and 21 per cent. Insurance fee is calculated based on the amount borrowed. The repayment period goes up to 60 months.

For you to qualify, you should have a minimum gross salary of Sh15,000 a month for scheme loans and Sh40,000 a month for personal loans. Proof of income (certified copy of payslip) is required.

For a scheme loan, a letter of introduction from your employer is required. Non-Standard Chartered customers need to produce an introduction letter from their employer on company letterhead and six months original bank statements from current bankers.

They also need to provide a copy of the ID/passport, proof of income (certified copy of payslip), proof of residential address, and one passport-size photograph.

Business Loan

There is no minimum or maximum amount as the loan depends on business structure and the risk involved. An annual turnover of at least Sh6 million is required, plus proof of at least three years of operation. You should also provide the company documentation, that is, registration, signatories.

For security, one is required to provide land documentation, proof of fixed deposits, or treasury bonds.

The repayment period depends on the amount loaned.

Equity bank

Personal Loan

The minimum amount is Sh30,000 while the maximum amount is Sh3 million. The term of repayment is up to 72 months. The lender charges the interest rate at between 24 and 25 per cent.

In terms of eligibility, say for government employees, their salary should have passed through Equity Bank for at least a month. Employees in the private sector should have completed their probation. For security, the money is deducted before the client receives their salary — the check-off system.

Business Loan

For entrepreneurs, the minimum amount one can borrow is Sh5,000 and the maximum is Sh3 million. This facility attracts an interest rate of 24 per cent.

The bank insures loans of amounts above Sh100,000. The security provided includes household items, business stock, log books, and title deeds. One should have operated the business for at least one year. The loan is serviceable for a term of up to 18 months.

The bank runs “Fanikisha Fedha” under the Women’s Enterprise Fund facility. It targets women’s groups over two years old. The interest rate is at 24 per cent per annum with an insurance fee of 0.325 per cent, a registration fee of Sh500 per member, a pass book of Sh100, and a loan appraisal fee of 2 per cent of the amount borrowed.

Barclays Bank

Personal Loan

You can borrow up to a maximum of Sh3 million. The interest rate is at 23.5 per cent base lending rate. Also 18 per cent applicable to some personal and business loan facilities. To qualify, the existing customers provide their original national ID and latest payslip. Non-customers must provide proof of an active salaried account for six months. The term of repayment runs up to 72 months.

Business Loan

Two categories exist here. One is the unsecured business loan, where one can ask for a maximum amount of Sh2 million (unsecured). The interest rate is at 23.5 per cent base lending rate and 18 per cent is applicable to some personal and business loan facilities. The term of payment ranges from 12-36 months.

Existing customers must provide original national ID and latest payslip. Non-customers provide an active salaried account for six months.

The second one is the secured business loan, where the maximum amount is based on serviceability of the loan. The interest rate is at 23.5 per cent base lending rate. There is also 18 per cent applicable to some personal and business loan facilities. One is also subjected to a one-off arrangement fee.

The term of payment runs between 12 to 60 months. For eligibility for both loan categories, you must provide your business licence. The firm should have been running for at least one year, with a business account. Provide also certificate of registration and articles of association.

Twelve months bank statements required for non-customers.