Banking in Kenya & Its Challenges

Banking industry in Kenya
The Banking industry in Kenya is governed by the Companies Act, the Banking Act, the Central
Bank of Kenya Act and the various prudential guidelines issued by the Central Bank of Kenya
(CBK). The banking sector was liberalized in 1995 and exchange controls lifted.
The CBK, which falls under the Minister for Finance docket, is responsible for formulating and
implementing monetary policy and fostering the liquidity, solvency and proper functioning of the
financial system.
As at December 2008 there were forty six banking and non bank institutions, fifteen micro
finance institutions and one hundred and nine foreign exchange bureaus.
The banks have come together under the Kenya Bankers Association (KBA), which serves as a
lobby for the banking sector’s interests .The KBA serves a forum to address issues affecting
members.
Over the last few years, the Banking sector in Kenya has continued to growth in assets, deposits,
profitability and products offering. The growth has been mainly underpinned by;
 an industry wide branch network expansion strategy both in Kenya and in the East
African community region.
 automation of a large number of services and a move towards emphasis on the complex
customer needs rather than traditional ‘off-the-shelf’ banking products.
Players in this sector have experienced increased competition over the last few years resulting
from increased innovations among the players and new entrants into the market
Key issues facing the banking industry in Kenya

The main challenges facing the Banking sector today include;
 New regulations; For instance, the Finance Act 2008, which took effect on 1 January
2009 requires banks and mortgage firms to build a minimum core capital of KShs 1
billion by December 2012. This requirement, its hoped, will help transform small banks
into more stable organisations. The implementation of this requirement poses a challenge
to some of the existing banks and they may be forced to merge in order to comply.
 Global financial crisis experienced in late 2008 is expected to affect the banking industry
in Kenya especially in regard to deposits mobilisation, reduction in trade volumes and the
performance of assets.
 Others include declining interest margins
Challenges Facing SMEs in Kenya
It is generally recognized that SMEs (Small and Medium Enterprises) face unique challenges,
which affect their growth and profitability and hence, diminish their ability to contribute
effectively to sustainable development. In this article, the following challenges are briefly
discussed: Lack of Managerial Training and Experience, Inadequate Education and Skills, Lack
of Credit, National Policy and Regulatory Environment, Technological Change, Poor
Infrastructure and Scanty Markets information.
Lack of Managerial Training and Experience

Many SMEs owners or managers lack managerial training and experience. The typical owner or
managers of small businesses develop their own approach to management, through a process of
trial and error. As a result, their management style is likely to be more intuitive than analytical,
more concerned with day-to-day operations than long-term issues, and more opportunistic than
strategic in its concept (Hill 1987). Although this attitude is the key strength at the start-up stage
of the enterprise because it provides the creativity needed, it may present problems when
complex decisions have to be made. A consequence of poor managerial ability is that SME
owners are ill prepared to face changes in the business environment and to plan appropriate
changes in technology.
Majority of those who run SMEs are ordinary lot whose educational background is lacking.
Hence they may not well equipped to carry out managerial routines for their enterprises (King
and McGrath 2002).
Inadequate Education and Skills

Education and skills are needed to run micro and small enterprises. Research shows that majority
of the lot carrying out micro and small enterprises in Kenya are not quite well equipped in terms
of education and skills. Study suggests that those with more education and training are more
likely to be successful in the SME sector (King and McGrath 2002). As such, for small
businesses to do well in Kenya, people need to be well informed in terms of skills and
management. SMEs in ICT appear to be doing well with the sprouting of many commercial
colleges offering various computer applications. Further, studies show that most of those running
SMEs in this sector have at least attained college level education (Wanjohi and Mugure, 2008).
Lack of Credit
Lack of access to credit is almost universally indicated as a key problem for SMEs. This affects
technology choice by limiting the number of alternatives that can be considered. Many SMEs
may use an inappropriate technology because it is the only one they can afford. In some cases,
even where credit is available, the entrepreneur may lack freedom of choice because the lending
conditions may force the purchase of heavy, immovable equipment that can serve as collateral
for the loan.
Credit constraints operate in variety of ways in Kenya where undeveloped capital market forces
entrepreneurs to rely on self-financing or borrowing from friends or relatives. Lack of access to
long-term credit for small enterprises forces them to rely on high cost short term finance.
There are various other financial challenges that face small enterprises. They include the high
cost of credit, high bank charges and fees. The scenario witnessed in Kenya particularly during
the climaxing period of the year 2008 testifies the need for credit among the common and low
earning entrepreneurs. Numerous money lenders in the name of Pyramid schemes came up,
promising hope among the ‘little investors,’ that they can make it to the financial freedom
through soft borrowing. The rationale behind turning to these schemes among a good number of
entrepreneurs is mainly to seek alternatives and soft credit with low interest rates while making
profits. Financial constraint remains a major challenge facing SMEs in Kenya (Wanjohi and
Mugure, 2008).
National Policy and Regulatory Environment

The national policy and regulatory environment has an important impact on technology decisions
at the enterprise level. The structural adjustment programs (SAPs) implemented in many African
countries are aimed at removing heavy policy distortions, which have been viewed as detrimental
to the growth of the private sector. SAPs tend to severely affect vulnerable groups in the short
run and have been associated with the worsening living conditions in many African countries
(USAID 1991).
The findings in the study by Wanjohi and Mugure (2008) indicate that business environment is
among the key factors that affect the growth of MSEs. Unpredictable government policies
coupled with ‘grand corruption,’ high taxation rates, all continue to pose great threat, not only to
the sustainability of SMEs but also to the Kenyan economy that was gaining momentum after
decades of wastage during KANU era.
Technological Change
Change of technology has posed a great challenge to small businesses. Since the mid-1990s there
has been a growing concern about the impact of technological change on the work of micro and
small enterprises. Even with change in technology, many small business entrepreneurs appear to
be unfamiliar with new technologies. Those who seem to be well positioned, they are most often
unaware of this technology and if they know, it is not either locally available or not affordable or
not situated to local conditions. Foreign firms still remain in the forefront in accessing the new
technologies.
In most of the African nations, Kenya inclusive, the challenge of connecting indigenous small
enterprises with foreign investors and speeding up technological upgrading still persists (Muteti,
2005). There is digital divide between the rural and urban Kenya. With no power supply in most
of the rural areas, it is next to impossible to have Internet connectivity and access to information
and networks that are core in any enterprise. Thus technological change, though meant to bring
about economic change even among the rural lot, does not appear to answer to the plight of the
rural entrepreneurs.
Poor Infrastructures
Poor infrastructures pose a major challenge to small enterprises in Kenya. In Kenya, the
provision of better infrastructures has lagged behind over years. There are poor roads, inadequate
electricity supply. According to the proceedings of the National Investment Conference,
November 2003, Kenya still stands in need of better infrastructures. It has been the pledge
NARC government (when it took over from KANU in 2002) to improve the infrastructures, but
there is yet much to be done.
Scanty Markets Information

Lack of sufficient market information poses a great challenge to small enterprises. Despite the
vast amount of trade-related information available and the possibility of accessing national and
international databases, many small enterprises continue to rely heavily on private or even
physical contacts for market related information. This is due to inability to interpret the statistical
data (Muteti, 2005) and poor connectivity especially in rural areas.
Since there is vast amount of information and only lack of statistical knowledge to interpret and
Internet connectivity, small enterprises entrepreneurs need to be supported. With connectivity
being enhanced (by connecting Kenya globally through Fiber Optic Cable project) there is
renewed hope for the SMEs.
Conclusion and Recommendations

One major question we should pose is: what solution can be offered to the plight of small
enterprises in Kenya? For one, policies should aim to encourage and promote the development of
local technologies. Emphasis should be on the promotion of the local tool industry to reduce
reliance on imports. SMEs are said to face a "liability of smallness." Because of their size and
resource limitations, they are unable to develop new technologies or to make vital changes in
existing ones. Still, there is evidence that SMEs have the potential to initiate minor technological
innovations to suit their circumstances. However, for SMEs to fully develop and use this
potential, they need specific policy measures to ensure that technology services and
infrastructure are provided. Further, research and development institutions that are publicly
funded should be encouraged to target the technology needs of SMEs.
Secondly, the problem of access to information may be attributed to the inadequacy of SME
support institutions. This points to the need for a supportive policy to encourage the
establishment of documentation centers and information networks to provide information to
SMEs at an affordable price.
Thirdly, the government should come up with training centers for training managerial and
technical courses for the small enterprises entrepreneurs. Equally, there should be business
information centers.
Fourthly, government should come up with proper regulatory policies that are small enterprises
friendly since many of what we have in Kenya, frustrates every effort of a junior entrepreneur.
The policies we have seem to care for the well-established businesses.
Since majority of small enterprises lack finance, government should establish friendly small
loaning system. This would include low interests rates to ensure the continuity of these
businesses. SMEs have the potentiality of transforming the economy of a crippling nation. As
such, every effort should be made to boost their growth.

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Banking in Kenya & Its Challenges

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Banking industry in Kenya

Key issues facing the banking industry in Kenya

Lack of Managerial Training and Experience

Inadequate Education and Skills

National Policy and Regulatory Environment

Scanty Markets Information

Conclusion and Recommendations

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