Headteachers are shown jikos made by Rural Technology Enterprises during the Kenya Secondary Schools Heads Association conference held at Mombasa Wild Waters Centre last week. Photo/Gideon Maundu
What you need to know:
National Social and Economic Council has drafted law to mobilise Sh400 billion from banks.
The bill will set up a national fund to cushion banks against defaults by Small and Micro Enterprises (SMEs).
The National Credit Guarantee Authority will also be set up to develop and regulate credit guarantee schemes for county and national governments.
Hundreds of small firms are set to benefit from cheap loans as the government moves to mobilise Sh400 billion from banks to spur the creation of one million jobs annually as promised by the Jubilee administration.
The National Social and Economic Council (NESC) has drafted a legal framework for guaranteeing local financial institutions in the initiative driven by the Treasury and supported by USAid to boost lending to informal businesses.
The draft National Credit Guarantee Scheme Bill, unveiled in Nairobi last week, will set up a national fund to cushion banks against defaults by Small and Micro Enterprises (SMEs).
The National Credit Guarantee Authority will also be set up to develop and regulate credit guarantee schemes for county and national governments.
“This scheme, which has worked well for Asia and some of developed nations in Europe and the US, will significantly boost SMEs’ contribution to growth,” NESC Secretary Julius Muhia said at a workshop held in Nairobi last week to validate the Bill.
A survey conducted by NESC shows that SMEs (defined in the Bill as firms employing one to 300 workers) will significantly improve sales and raise their job creation ability once assured of steady cash flow.
According to the survey, the nine million SMEs in the country will on average increase their sales by 40 per cent and employment by 52 per cent if bank loans enable them to engage in credit-based trade transactions.
At the moment, 75 per cent of firms rely on cash sales to boost their working capital due to the difficulty they face in getting loans from banks.
“To encourage credit-based domestic transaction and set a good example, the government should develop guidelines for prompt payment of supplies made especially to the public sector,” Dr Muhia said.
He cited punitive measures for delayed payments, LPO assignments and the discounting of invoices that which have worked in other economies.
Even after the licensing of credit reference bureaus in the country, most banks still shun SMEs or offer to lend to them at exorbitant rates due to the high risk of default.
This is despite the fact that this segment of the economy accounts for 70 per cent of employment and contributes 25 per cent of GDP.
Under the National Credit Guarantee Scheme Bill 2013, the Kenya Credit Guarantee Fund will refund banks up to 80 per cent of non-performing loans extended to SMEs. This is expected to encourage more banks to look at SMEs favourably.
“If SMEs are able to get this financial support in the size and cost that they want, they will easily turn around this country,” said investment advisor James Murigu.
In the absence of a national guarantee scheme, various programmes such as Youth and Women Enterprise Development schemes, USAid’s Development Credit Authority, the World Bank’s MIGA and Equity Bank’s Kilimo Biashara have recorded mixed results in boosting access to bank credit.
Under the Sh8.5 billion USAid credit guarantee programme administered in partnership with KCB, for instance, banks which never used to finance SMEs were able to advance loans amounting to Sh28.9 billion.
“This shows that there’s a lot of money in Kenya’s banking system that can be unlocked by a credit guarantee scheme,” USAid Chief of Party Mark Rostal said, adding that a similar scheme from the agency would target water and renewable energy sectors.
He added: ‘‘These guarantee schemes usually have a long lasting effect on the economy but they should be implemented on the Public Private Partnership model.”
Experts have, however, criticised the schemes for concentrating on benefitting agribusiness at the expense of other sectors of the economy.
Recently, Treasury Cabinet Secretary Henry Rotich set aside Sh2 billion in the 2013/14 budget to create an agri-business fund to guarantee banks that lend to farmers.
Banks appointed to monitor government schemes have also been accused of holding cash and diverting funds, advanced at one per cent interest rate, to other high-return investments such as Treasury Bills instead of benefiting SMEs.
“As a result, an SME is either turned away or offered just a fraction of the amount applied for,” Ms Sarah Kanaiya, a consultant at Investeq Capital, said.
