There are strong indications that there is now an opportunity in Kenya to pursue a new approach in the delivery of SME finance. The recent period of low interest rates and increased liquidity in the banking sector caused a renewed interest by banks in an expansion of lending activity and opening up new markets. A number of players have expressed specific interest in lending to the SME sector, including FINA Bank, Equity Bank (both FSD partners), K-Rep Bank, Standard Chartered Bank, CBA and Corporate Africa Factors. A pilot project with FINA Bank (funded by DFID/FSD) has given rise to a strong demand from this institution for technical support in designing new products. Equity is now looking to focus on the developing its lending activities and CAF have requested further technical assistance from FSD.

Proposed FSD support

The new programme of support for expansion of the supply of SME finance is envisaged taking a market development approach. The underlying premise to be tested and built on is that the primary constraint to SME finance in Kenya is lack of capacity among financial institutions to address the market effectively. By building capacity across the industry the aim will be to create a strongly competitive market for SME finance.

At the institutional level the creation of effective capacity will start with the adoption of a client driven approach. It is now widely accepted in most sectors and in the financial services industry in particular that a business focus on the client is critical to developing real value in products and services. This has been amply demonstrated in the micro-finance sector by the work of the MicroSave programme.

In order to develop client focussed SME finance capacity there is a need to significantly increase the basic understanding of the market in Kenya and identify new approaches to addressing the market building on the lessons from both international best practice and the Kenyan context. Creating usable results will necessitate developing these approaches through practical application within financial institutions. Capacity building needs relating to the delivery of client focussed SME finance will necessarily cut across an institution and is likely to encompass market research, product development, risk management, business processes, marketing and strategic management.

By distilling the lessons derived from this work into toolkits and case studies the basis will be laid for sustaining these results. Replication across the sector – essential to the creation of competition – can be accomplished by aggressive dissemination and training of local business service providers in the tools and techniques produced.

The four core components envisaged under the proposed programme are:

Research and lesson learning: A series of research exercises aimed at better understanding the current market for SME finance in Kenya and the region, analysing the results of past initiatives and distilling the lessons, and reviewing international experience in key areas (eg: potential SME finance products – leasing, factoring etc) to establish new approaches based on best practice relevant to the Kenyan environment.

Action research: Direct partnership with a small number of selected financial institutions to build capacity to address SME finance markets. This will be based on the use of existing tools and techniques, refinements to existing approaches and the development and testing of new ones (under component (c) below). The aim will be to both develop real on-the-ground capacity and learn how to build this capacity effectively.

Development of toolkits and resources: Closely linked to the action research and basic research components, toolkits and supporting training materials will be developed to address core issues relevant to building SME finance capacity. These are likely to range from developing SME lending products to broader institutional issues such as strategic marketing and risk management. The basis of this work will be the considerable amount of existing relevant material (notably from MicroSave).

Service provider development: Business service providers will be engaged in the programme from the outset to both minimise the core staff requirement of the programme and to provide action-learning opportunities for consultants in the material and approaches developed. It will be important to engage local service providers who will be able to deliver the results of the work to the wider market.