Savings and Credit Cooperatives (SACCOs) in Kenya are developing business intelligence to help them serve their members. When it comes to providing loans to small and medium enterprises (SMEs), SACCOs are becoming very cautious amid the COVID-19 pandemic.
Fortune SACCO Chief Executive Officer Amos Kimotho said the pandemic has affected most of the SME environment, adding that Fortune SACCO is serving membership on a case-by-case basis. His sentiments point to the fact that the COVID-19 pandemic has proved to be a disruptor affecting how business is being conducted.
SMEs have not been an exception, and various sectors have been adversely affected-which also impacts their financing. A WOCCU rapid survey on the financial services industry players in Kenya between April and May 2020 that looked at nine financial institutions-including banks, SACCOs and credit-only institutions-shows that the pandemic has disrupted SACCOs' SME-financing strategies.
Economic Impact of COVID-19 Pandemic on SMEs in Kenya
Interestingly, the SACCOs surveyed perceive that SMEs in the tourism, restaurant, hotel, transportation and trade sectors are, and will continue to be, worst hit by the pandemic in both the short and long term. This is also being aggravated by a government directive on maintaining social distancing and the closure of public markets and county borders, limiting market hours and disrupting local and international supply chains.
SMEs in the trade sector are impacted due to limited purchasing power, as most people focus their resources on health care and food. In this regard, the SMEs in these sectors will take more time to recover-prompting the need for long-term financial products, loan rescheduling and payment holidays.
Conversely, SACCOs are skeptical to lend to SMEs in the aforementioned sectors. They are deemed as risky at the moment, because they are likely to tie up capital or even result in losses. On the other hand, SACCOs perceive that SMEs in the agricultural and farming, and manufacturing sectors will experience the fewest losses in the short- and long-term period-warranting fewer long-term financial products. That's because those industries are run on a small scale, meaning a quick business turnaround will be imminent once the situation normalizes.
SMEs in manufacturing, especially textile and artisan activities (commonly known as Jua kali), are likely to expand, benefit and grow in number as a result of COVID-19 pandemic. This can be attributed to the need for personal protective equipment (PPEs) such as gloves, masks, hand washing stations and cleaning products (sanitizers, soap, water tanks), and respiratory equipment.
The agriculture and agribusiness sectors are also likely to grow and benefit from the pandemic, given the continuous need for household food supplies.
SMEs in the financial services sector, especially digital financial services, have the potential to grow as more people embrace mobile wallet and cashless transactions platforms like online banking and plastic cards. The professional/personal/household sector is also considered low risk and has the potential to grow because the population is mostly restricted in their homes and need personal services.
In light of this, SACCOs agree that developing short-term credit facilities, and financing farmers, food systems and manufacturers of essential commodities is critical in strengthening supply chains. Moreover, most of the SACCOs agree it is vital to offer credit to SMEs that need to invest in safety equipment, such as handwashing stations, respiratory equipment and cleaning products.
How SACCOs can manage financial risk with SMEs during the pandemic
SACCOs are therefore looking into ways of managing the loss of business and potential financial risk from SME and other customers in such a pandemic period. SACCOs are keen on promoting the use of existing mobile and online financial services or seeking support to equip them to accelerate those services.
"Umbrella bodies such as WOCCU (World Council of Credit Unions) should aid SACCOs to acquire strong management information systems. Most of these systems are capital intensive and a challenge to many SACCOs. The Kenya Union of Savings and Credit Cooperatives (KUSCCO) should encourage all SACCOs to adopt mobile and online financial services as well," said Kimotho, who added that SACCOs should vigorously train their members on cashless transactions.
SMEs, being great economic players, continue to look for bailouts and cushions from both government and private financial institutions. SACCOs cannot be left out of these incentive packages. Equipping SACCOs to provide leniency to small- and medium-sized businesses (MSMEs) facing short-term challenges, such as offering extended grace periods and short-term loans, is very important.
"CAK (Cooperative Alliance of Kenya), on the behalf of the SACCO fraternity, is seeking guaranteed lines through development partners, offering moratoriums for member loans for the period affected. We have lobbied for the government to introduce a Sh10 billion SME Credit Guarantee Scheme to cushion SMEs. This will be best implemented through SACCOs," said CAK Executive Director Daniel Marube.
Moreover, KUSCCO, World Council's direct member organization in Kenya, is intensifying weekly online training for SACCO staffers to ensure relevant measures are in place to safeguard liquidity management-ranging from guarantees, special funds and insurance cover to indemnify them. KUSCCO is also strengthening the Central Finance Fund (CFF) as a fund pool that would allow SACCOs with excess liquidity to deposit their money there, while SACCOs with liquidity challenges could access needed funds.
In conclusion, as the survey indicates, it is imperative for SACCOs to segment the SME sectors they lend to, based on the impact of the pandemic, for risk mitigation. The supply side needs to be responsive to the demand side by developing innovative products that are delivered in the most efficient and low-cost methods possible.
Consequently, the sectors hardest hit by the pandemic on the demand side will lag for some time due to lack of access to credit, based on their risk profile.
This post was written by members of the WOCCU Kenya team implementing the Technology & Innovation for Financial Inclusion (TIFI) Project, a USAID Cooperative Development Program (CPD)-funded activity.