KEPSA pushes banking consolidation and more cash-flow lending to SMEs

The Kenya Private Sector Alliance (KEPSA) has called on commercial banks to improve their lending to private businesses, stressing that many firms are struggling to secure working capital in today’s tough economic conditions.

Speaking at the KEPSA Platinum CEOs Breakfast forum, the alliance urged banks to increase the portion of their loan books devoted to private sector lending from around one percent to 15 percent.

In addition to calling for increased lending, Kepsa recommended major reforms in the banking sector, including reducing the number of banks from 38 to roughly 15.

This consolidation, they argued, would lead to stronger financial institutions with greater capacity to support the needs of businesses.

"The need for significant reform within Kenya's banking sector was highlighted, advocating for consolidation from 38 to approximately 15 banks," the alliance said in a resolution adopted at the forum.

KEPSA criticized the current preference by banks for investing heavily in government securities, a practice it described as "lazy banking." The alliance called for a shift toward lending more to the private sector to help grow the economy.

“A strong push was voiced for a transition from ‘lazy banking’ (government security investments) to increasing private sector credit, with a target of 15 from the current one per cent,” the statement said.

The forum further emphasized the importance of changing how banks evaluate loan applications. Instead of demanding collateral, which many SMEs and startups struggle to provide, banks should focus on cash-flow-based lending.

This would make it easier for smaller businesses to access much-needed capital.

However, lending growth to private businesses has been slow in recent months despite cuts by the Central Bank of Kenya to reduce borrowing costs. Factors such as rising interest costs and a stronger Kenyan shilling, which decreased demand for foreign currency loans, have limited credit growth.

Latest data from the Central Bank shows outstanding loans to the private sector increased only 0.2 percent, reaching Sh3.838 trillion in March, compared to Sh3.829 trillion the previous year.

This modest growth equals an increase of Sh8.6 billion in credit available to households and businesses.