Living expenses in Kenya have been increasing at vast rates over the past few months, as seen in Figure 1 below. The inflation rate reached a high of 7.9% in the month of June, surpassing the ceiling rate the Kenyan Central Bank had estimated of 7% (Wamugu, 2022) .
The high rates of inflation in Kenya have been attributed primarily to the increasing fuel prices which have hiked up transportation costs, consequently impacting business operational costs. For instance, gasoline prices increased from 134.34KSH (1.14USD) per litre in May 2022, to 159.12KSH (1.35USD) per litre in June 2022 (Global Petrol Prices, 2022).
The shortage of fuel in Kenya is a significant challenge given transportation is an essential operational cost for most businesses; whether it is through service and delivery or importing materials needed for production. A study conducted amongst small and medium-sized enterprises (SMEs) and Microfinance Institution (MFI) clients found that some small businesses can accommodate and even benefit from moderate rates of inflation, easily passing on higher prices to their consumers, especially in the agricultural and manufacturing industries (Zaidi, Farooqi, & Naseem, 2008) . However, the study highlights that although low rates of inflation could be beneficial for some SMEs, inflation rates above 7 and 8 percent start to create significant challenges for SMEs (Zaidi, Farooqi, & Naseem, 2008).
Continued hikes in operational costs will eventually force businesses to further increase prices of their goods and services, potentially leading consumers to move to cheaper competitors in the market. SMEs will consequently be placed at a disadvantage in comparison to competition such as foreign businesses, which are known to undercut market prices in Kenya. For instance, Kenyan entrepreneurs have previously stated that Chinese imports are having a negative impact on small business growth, given Chinese enterprises are able to produce larger quantities, or import in bulk from China, and sell goods at much lower prices (Amunga, 2022). The impact of foreign competition on small business owners was also highlighted in an interview with Mkono partner Nairobits, when discussing small businesses in the fish market;
“We have had an influx of Chinese fish coming into the fish market, and because of the cheap introductory prices of the goods and services provided, they (young Kenyan entrepreneurs) are not able to stay afloat.” - Nairobits Representative
National vs. Microfinance Interest Rates
In April 2020, Kenya’s Central Bank capped interest rates at 7%. However, in May 2022 this rate was increased by 0.5%, marking the first interest rate increase since July 2015 (Trading Economics, 2022). Economies in nations across the globe have increased interest rates as reactionary monetary policy, meaning it will now cost more for businesses to take out loans. SMEs already face several barriers when accessing bank loans, such as the inability to provide collateral as small and new enterprises, as well as the rigid loan criterion required by formal banks which make it impossible to cater to different situations SMEs may be in.
Contrary to national interest rates set by the Central Bank to discourage spending and encourage saving, Microfinance interest rates are not heavily impacted by short term economic turns. Microloan interest rates depend mainly on operating costs, long term national rates of inflation, and political and economic stability (Lebos, n.d.). This allows MFIs to continue to provide their services without impacting their clients.
Microcredit scholars and supporters have long since stated that access to credit should be considered a human right. Muhammad Yunus, founder of Grameen Bank and also known as the founding father of microfinance, has been quoted on several counts stating that credit is a fundamental human right (United for Human Rights, n.d.). With the support of MFIs, entrepreneurs are not deprived of the right to access credit during unprecedented economic turns.
Lending a Helping Hand
Although MFIs have provided an alternative source to financing SME growth in Kenya, their exorbitant interest rates often outweigh the benefits they offer. MFIs with interest free structures such as Mkono are essential especially during unexpected economic crises. Mkono’s interest free loans, as well as the support and mentorship provided by the organization, continue to provide entrepreneurs with an opportunity to grow their businesses and increase SME growth in Kenya, even during challenging times.
“I have not had any experience with any other MFI only because of the high interest rates. The thing I appreciate most about Mkono is that it is not just giving a loan and moving on; the follow ups are really helpful and the coaching has been really helpful.” Mkono Client
“There is a lot of room for growth … in terms of employment. If we manage to scale, we could employ up to 1000 women which is what I hope for. So I think there is an opportunity for employment in the fashion industry.” Mkono Client
“As you know the most critical thing in any photography or production work is the quality. So the higher the quality, the better the output and the more clients you will attract because people come to you for what they see … Mkono was the first to give me a loan, which helped me to upgrade my cameras … We have gotten bigger projects because people trust us with higher quality.” Mkono Client
Amunga, V. (2022, March 11). Chinese Imports Edging Out Kenya’s Local Products . Retrieved from VOA News: https://www.voanews.com/a/chinese-imports-edging-out-kenya-s-local-products-/6480276.html
Global Petrol Prices. (2022, July 4). Kenya Gasoline prices, 04-Jul-2022. Retrieved from GlobalPetrolPrices.com: https://www.globalpetrolprices.com/Kenya/gasoline_prices/
Lebos, J. L. (n.d.). Microfinance interest rates, explained. Retrieved from Kiva: https://www.kiva.org/blog/whats-up-with-microfinance-interest-rates#:~:text=In%20countries%20with%20high%20inflation,the%20cost%20of%20the%20loan.
Trading Economics. (2022, June 30). Kenya Inflation Rate. Retrieved from Trading Economics: https://tradingeconomics.com/kenya/inflation-cpi
Trading Economics. (2022, June). Kenya Interest Rate. Retrieved from Trading Economics: https://tradingeconomics.com/kenya/interest-rate
United for Human Rights. (n.d.). Champion of Human Rights Muhammad Yunus (b.1940). Retrieved from United for Human Rights: https://www.humanrights.com/voices-for-human-rights/muhammad-yunus.html
Wamugu, L. (2022, July 1). Further Increase in Food Prices Pushes Kenya’s Inflation Rate to a 5-Year High of 7.9%. Retrieved from The Kenyan Wall Street: https://kenyanwallstreet.com/kenyas-inflation-to-a-5-year-high-of-7-9/
Zaidi, S. A., Farooqi, M. S., & Naseem, A. (2008). The Impact of Inflation on Microfinance Clients and its Implications for Microfinance Practitioners. Pakistan Microfinance Network No: 04, 1-12.