High Interest Rates: How do they impact Small Businesses in East Africa?

JOHANNESBURG (Capital Markets in Africa) – Small & Medium Businesses in East Africa should be looking at ways to maximise their efficiency and improve debt management to navigate the risks that high interest rates pose for their businesses.

That’s the word from Billy Owino, Regional Director for Sage East Africa (www.Sage.com), the market leader for integrated accounting, payroll, and payment systems. He says that business builders feel the pressure of rising interest rates more severely than their larger counterparts. Big business and government policymakers should look at ways of helping smaller businesses manage the challenges they face as a result of high interest rates.

Owino notes that Small & Medium Businesses are central to the region’s economy, generating a large proportion of income, tax revenues, and jobs. In Kenya, for example, Small & Medium Businesses are estimated to account for more than 80% of job opportunities. A vibrant Small & Medium Business sector creates inclusive growth and tax revenue – which is why governments in the region see small business as a priority.

Defending East African currencies
Though interest rates have started to ease somewhat across East Africa, they remain relatively high in countries such as Uganda and Kenya after central banks acted in the past two years to protect currencies from depreciation. For many Small & Medium Businesses, this has been a handbrake on growth, says Owino.

On the one hand, higher interest rates mean that many consumers have less money to spend, particularly on luxury goods. On the other, it means that many small businesses are paying more to service overdrafts, car loans, commercial mortgage repayments and credit card debt.

Unlike large businesses, many small businesses need access to credit to fund growth or bridge temporary blockages in their cash flow because they don’t have big cash reserves, says Owino. High interest repayments might affect the sustainability of those who are already operating on tight margins—raising the risk of default, foreclosure, and even bankruptcy.

Interventions from government and big business
Governments in the region have taken some steps to counteract the effects of high interest rates on consumers and small businesses. The Kenyan government, for example, introduced a law capping bank interest rates at 4 percentage points above the central bank’s benchmark rate.

Though this has helped to contain interest rates banks charge their customers, there is a danger of unintended consequences such as banks charging other fees to make up for the income they lose, says Owino. Another idea with a potential to make a difference is government helping to fund small businesses through small business funds.

“By supporting business builders with loans at low interest rates, governments can help create jobs and tax revenues for tomorrow,” says Owino. “Many development banks run by government and international multilateral institutions such as the International Finance Corporation are making a difference, but access to finance is still low among East African Small & Medium Businesses.”

If you are running a Small & Medium Business in East Africa, high interest rates are likely to be part of the landscape for a while to come. But there are some ways to improve your debt management to minimise the impact on your business:

• Cut costs: Look for ways to reduce wastage and inefficiency in the business so that you can service debt faster or avoid taking a loan in the first place. A robust accounting system can help you better understand your expenses so that you can find ways to cut costs.
• Speak to your suppliers: Sit down with your major suppliers and try to negotiate favourable credit terms. If you can get 30 days to pay for stock, interest-free, that’s preferable to using an overdraft.
• Stay in touch with your creditors: Rather let your lenders know immediately when you are struggling to make your repayments. This will give you an opportunity to negotiate new terms rather than incurring massive penalty interest and harming your relationship with the bank or suppliers.
• Prioritise:  Pay off the debt with the highest interest rates first.
• Be proactive in the management of your own debtors: Make sure your own credit control and collection processes are sound.

Owino adds: “Sage in East Africa will be working hard to get the issues Small & Medium Businesses face onto the agenda for the continent’s economic leaders and decision makers. We believe there is much that could be done to mitigate the effects of high interest rates. Addressing these challenges at the highest levels could help unleash the potential of Africa’s entrepreneurial wealth creators.”