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Private equity the way to go for small enterprises

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Private equity the way to go for small enterprises

Private equity investors provide business
Private equity investors provide business funding over the medium or long term. FILE PHIOTO | NMG 

Establishment of a successful business venture is an aspiration for many young people, especially with the current crisis of unemployment facing the country.

Successful business ventures help to create job opportunities, improve living standards and contribute to economic growth.

Consequently, the Central Bank of Kenya (CBK) targets a credit growth rate of between 12 percent and 15 percent for Small and Medium Enterprises (SMEs). Last year, credit growth was 3.4 percent for the sector, with the slowdown being attributed to the capping of interest rates.

Funds required to grow a business mainly come from business profits, borrowing from family or friends and borrowing from banks and other financial institutions. However, these sources of finances may be difficult to access particularly for SMEs.

With capping of interest rates in September 2016, a stifling effect in the credit market was created as banks became more cautious in their lending.

“The interest rate caps have hampered access to credit by growth sectors, particularly Small and Medium Enterprises,” said Dr. Patrick Njoroge, CBK governor.

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However, with new measures under Chapter 49 of the Banking Act, bank executives risk fines of up to Sh100,000 or a two-year jail term for failure to allocate 20 per cent of their lending to SMEs.

In spite of the new measures, the allocated percentage may not be enough for small and medium business ventures. This has made Private Equity (PE) a suitable alternative and a sure bet for business growth.

Private equity investors provide business funding over the medium or long term. In exchange for the cash injection, the investors get a stake in the business.

There are various forms of PE investments including venture capital, leveraged buyouts and mezzanine capital.

Over the years, it is notable that PE has increasingly become a suitable alternative source of financing for high growth potential SMEs. PE investments have helped the small businesses to achieve their expansion objectives and provide strategic advice in their various stages of development.

“I knew of private equity funding in 2015 from an investment seminar at the Nairobi Six-Eighty Hotel. I took a bold step to apply and since then it has helped me grow my business,” said Nelson Mutwa, an entrepreneur.

However, there may be some challenges by entrepreneurs taking on PE funding, with one of them being fear of losing control of the business by involving other parties.

Such fears hold founding entrepreneurs from advancing to growth stage, as they opt to have low returns but remain in full control of their nascent businesses.

Although involving investors means having a smaller piece of a large pie, it can be a sure bet in taking your business to the next level.

Ms Kagundu is Executive Director, Fusion Capital Limited.

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Kenya to import mitumba after coronavirus pandemic

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LUKE ANAMI

By LUKE ANAMI
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Kenya is set to lift the ban on imports of second-hand clothes once the Covid-19 pandemic is over, the Industry, Trade and Co-operatives Cabinet Secretary Betty Maina has said.

The Cabinet Secretary last Wednesday announced an immediate temporary suspension of the importation of second-hand clothes as a measure to stop importing the SARs-Cov-2 virus that causes Covid-19 disease.

Ms Maina said the action taken is in line with the conditions as set out by the Kenya Bureau of Standards (Kebs).

“The government has suspended importation of second-hand clothes with immediate effect to safeguard the health of Kenyans and promote local textiles in the wake of coronavirus,” said Ms Maina.

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“Most of the Mitumba imports come from China and Pakistan, countries which are the epicentre of the coronavirus pandemic. The decision is intended to safeguard Kenyans against the spreading of the coronavirus and is therefore a health issue,” she said.

In an interview with the The EastAfrican, Ms Maina said the Kebs will enforce the suspension as we wait for the situation to improve.

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“It is a requirement by the Kebs to take such an action in times of an epidemic like the Covid-19,” she said.

A recent study by the US Centres for Disease Control and Prevention shows that the virus can stay longer on different surfaces, including clothes.

Ms Maina, however, said the temporary ban will not in any way affect the policy on Mitumba imports from the US.

Under the African Growth and Opportunity Act, Kenya sold about Ksh40 billion ($400m) worth of textiles and clothing to the US.

“This does not in any way affect our policy on our imports from the US. The decision is strictly an urgent measure to curb the spread of the coronavirus,” added Ms Maina.

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World Bank pushes G-20 to extend debt relief to 2021

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World Bank Group President David Malpass has urged the Group of 20 rich countries to extend the time frame of the Debt Service Suspension Initiative(DSSI) through the end of 2021, calling it one of the key factors in strengthening global recovery.

“I urge you to extend the time frame of the DSSI through the end of 2021 and commit to giving the initiative as broad a scope as possible,” said Malpass.

He made these remarks at last week’s virtual G20 Finance Ministers and Central Bank Governors Meeting.

The World Bank Chief said the COVID-19 pandemic has triggered the deepest global recession in decades and what may turn out to be one of the most unequal in terms of impact.

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People in developing countries are particularly hard hit by capital outflows, declines in remittances, the collapse of informal labor markets, and social safety nets that are much less robust than in the advanced economies.

For the poorest countries, poverty is rising rapidly, median incomes are falling and growth is deeply negative.

Debt burdens, already unsustainable for many countries, are rising to crisis levels.

“The situation in developing countries is increasingly desperate. Time is short. We need to take action quickly on debt suspension, debt reduction, debt resolution mechanisms and debt transparency,” said Malpass.

ALSO READ:Global Economy Plunges into Worst Recession – World Bank

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Kenya’s Central Bank Drafts New Laws to Regulate Non-Bank Digital Loans

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The Central Bank of Kenya (CBK) will regulate interest rates charged on mobile loans by digital lending platforms if amendments on the Central bank of Kenya Act pass to law. The amendments will require digital lenders to seek approval from CBK before launching new products or changing interest rates on loans among other charges, just like commercial banks.

“The principal objective of this bill is to amend the Central bank of Kenya Act to regulate the conduct of providers of digital financial products and services,” reads a notice on the bill. “CBK will have an obligation of ensuring that there is fair and non-discriminatory marketplace access to credit.”

According to Business Daily, the legislation will also enable the Central Bank to monitor non-performing loans, capping the limit at not twice the amount of the defaulted loan while protecting consumers from predatory lending by digital loan platforms.

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Tighter Reins on Platforms for Mobile Loans

The legislation will boost efforts to protect customers, building upon a previous gazette notice that blocked lenders from blacklisting non-performing loans below Ksh 1000. The CBK also withdrew submissions of unregulated mobile loan platforms into Credit Reference Bureau. The withdrawal came after complaints of misuse over data in the Credit Information Sharing (CIS) System available for lenders.

Last year, Kenya had over 49 platforms providing mobile loans, taking advantage of regulation gaps to charge obscene rates as high as 150% a year. While most platforms allow borrowers to prepay within a month, creditors still pay the full amount plus interest.

Amendments in the CBK Act will help shield consumers from high-interest rates as well as offer transparency on terms of digital loans.

SEE ALSO: Central Bank Unveils Measures to Tame Unregulated Digital Lenders

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