Opinion: How collaboration unleashed $2B for Kenyan women-owned SMEs

The first time Paulina Otieno needed capital to set up a fashion business in Nairobi, she borrowed funds from her family. The next time she wanted money to expand the business, she approached banks but “the banks turned me away because my account didn’t look good.”  Without the loan, Otieno couldn’t afford to stock the larger volumes of fabrics she needed.

Worldwide, thousands of small- and medium-sized enterprise owners — especially women — struggle with accessing affordable financial products and support services to grow their businesses. They instead rely on friends and family for cash, limiting their ability to expand and create employment even though SMEs hold the most potential for creating formal jobs that drive countries’ productivity and growth.

In 2020, Kenya was in lockdown because of the COVID-19 pandemic, and Otieno sent her employees home on half-pay and moved business operations to her house. Distressed, she again approached the Kenya Commercial Bank, or KCB, for a loan that would enable her to import a wider variety of fabrics and lower the selling price. This time, the lender’s response was encouraging, and they processed the loan without asking for collateral.

Otieno is one of the thousands of SME clients who have benefitted from the rollout of a proposition by Women’s World Banking, or WWB, and KCB — the largest bank in Kenya. With funding from Argidius Foundation, WWB collaborated with KCB to study SME challenges and seek ways through which banks could better meet the financial needs of women-led SMEs.

A unique disadvantage to women

The proposition began with a field study that revealed collateral requirements as a major challenge barring clients from accessing bank loans. The project team found that SME owners in Kenya often had strong businesses with sufficient cash flows but lacked collateral. Most of them also operated informally, without the adequate documentation needed to get credit.

Using a gender lens, the collateral challenge can be seen as more prevalent among women in Kenya who collectively hold only 1% of registered land titles — or 5% for titles held jointly with husbands. This means that even when women have collateral such as land, they still need to get their husbands’ approval before the collateral is accepted — an additional barrier that men-led SMEs don’t face. This pointed to a huge untapped opportunity.

A more accessible way for women: A cash flow-based credit assessment

To address the collateral challenge, a new credit methodology was developed based on cash flow instead of collateral. The methodology was then tested during a six-month pilot phase in 2017 and 2018.

Naomi Ndele, head of SME banking and agribusiness at KCB, recalls: “We opted to use simpler ways to assess our customers’ ability to borrow by revising our criteria so as to utilize whatever records they had together with their bank statements.”

During the pilot phase, the team tested these new credit processes. They built the internal capacity of bankers and credit analysts to collect financial data and make decisions. During the rollout phase, KCB trained 566 relationship managers and implemented a regular credit panel review with the participation of credit analysts at the branch level. This helped to reduce turnaround time and increase the number of approved loans.

This approach solved the collateral problem and fostered a bond between SME clients and bankers who through visiting clients’ businesses gained a deeper understanding of them and thus made stronger credit recommendations. The evaluation of the pilot identified that lending to women-led businesses grew from 20% to over 50% when the proposition was rolled out. Customers also felt satisfied that their business needs were being addressed.  

KCB benefited too. The proposition met its business goals because the collateral-free loan grew its SME portfolio in a tough environment. KCB branches utilizing it continued to report higher loan approval rates, prompting other branches that weren’t part of the pilot to request training on the new lending methodology. The loans also had a higher repayment rate than traditional loans and the nonperforming loan percentage was below 2%, an indication that the method correctly identified borrowers with strong repayment capacities. Currently, the loan is KCB’s second most profitable product.

A relationship banking model

These customer-centric approaches transformed KCB bankers into relationship managers who listened, tailored products, and fostered relationships with clients. These relationship managers were dedicated to serving the needs of SME customers and as a result, provided a one-stop shop for all SME customer transactions within the bank. The piloting through branches and the staff training was done in phases. That increased client loyalty and made the staff own the changes within the bank. MSME customer satisfaction increased and their net promoter score rose from 2 to 47.

Strategic gender focus

The project team also trained the bankers on gender sensitization, addressing unconscious bias, its effects, and how to manage it. With help from IT, the KCB system was updated to gather data on the gender of stakeholders and assign gender to business accounts. The data is helping the bank understand its gender performance and make informed decisions to increase success among women-led SMEs.  

Disaggregation enabled KCB to know the number of its women accounts and process unique solutions for its different client segments. By studying its data, KCB served its customers better and secured them for longer. The bank also grew the number of women entrepreneur borrowers from 9% to 21%, according to data from the WWB grant report to the Argidius Foundation.

Pairing nonfinancial services with finance

Being a member of KCB’s business club,  Biashara Club, always had its perks, such as seminars and good foreign exchange rates. Yet, clients were dissatisfied. They desired more information on practical business challenges including taxation and regulation and wished to network more.

The project team began to manage Biashara Club through KCB’s customer relationship management system. They built rules into the system to enable it to show the customers who belonged, their areas of interest, and events attended. With the new system in place, the club relationship managers no longer had to pore through paper files to extract data on their members. They got it with one click of a button.

A strategic partnership between KCB and the African Management Institute then provided a blended training course for select SME customers with a focus on women-owned businesses. The training was enriched with information on practical business challenges including taxation, regulations, and branding.

The improvements increased awareness of Biashara Club among customers and the membership of women-led micro, small, and medium-sized enterprises went up from 25% to 38%, an indication that renewed offering was meeting customer needs. Some 3,422 new members also joined the club from the proposition branches, growing the total membership to 11,091 as of December 2019.

These results prove that constraints to women’s financial inclusion go beyond a lack of access to financial services and that nonfinancial support services should be integral to serving SME customers.

Toward a new equilibrium

To close the credit gap for women-owned SMEs in emerging markets, financers need to create gender-inclusive products and customize policies, processes, and systems to align with women’s needs. They must also study their female customers’ needs through data analysis and qualitative research, which will help identify behavioral differences.

In KCB’s case, this complex solution required buy-in at all levels of the institution. That meant training staff, increasing the quality and frequency of communication between departments, as well as coordination and collaboration among staff. Institutions looking to roll out similar projects must display the same intentionality across all levels and implement it across all their branches.

“Alignment with all stakeholders is key, especially for this kind of project that required separating business processes by gender. Businesses have different competing needs, so buy-in and alignment with the executive is what will get such a project prioritized. Staff training is also key because it enables new work processes to be communicated clearly. All in all, there is need for patience because some of the returns on investments are not immediate and there’s need to persist and wait for the model to come to maturity,” advises Ndele. These lessons are summarized here.

It took KCB two years to implement a full rollout of the proposition across its branch network. They did it progressively in phases, finally scaling up to all 210 branches, according to Ndele. After each phase, learnings were evaluated and used to improve processes.

Just three years after the full rollout of the proposition, KCB has disbursed $500 million against it as of December 2022. The bank has also committed $2 billion, in a five-year strategy, for its women entrepreneurship agenda aimed at economically empowering women-led and owned enterprises in Kenya through the Female Led and Made Enterprises program, which will enable women entrepreneurs to grow and overcome business challenges by providing working capital and nonfinancial needs.

KCB’s business case is strong and the lessons learned from the project are being applied in six other financial institutions in East Africa and Latin America. This confirms that deliberate action by system practitioners, policymakers, and financiers can nudge whole systems toward a new equilibrium that works better for women.

Two years after receiving the KCB loan, Otieno's business has grown. She now imports volumes of fabric and has employed more employees to run the dressmaking, embroidery, and accounts departments of her business. Paulina George Fashions has also moved to a building with a larger floor space. “We now bring in goods every week; the shop is packed,” she beams.

Her next plan is to bring in full container load, or FCL, shipments. Sharing container space is expensive and costs her 10 times more than she would pay if she had her own container. “Bringing in a FCL means that my customers will enjoy the same good quality at half the current price. That will increase sales and my turnover will be higher, but first, I must approach KCB bank with my cash-flow records to ask for a bigger loan.”

For more information, case studies, evaluation reports, and further publications on KCB’s financial innovation here.