This is my take on ‘Stawi’, the new subsidised lending scheme where the Central Bank of Kenya (CBK) has partnered with five commercial banks to launch a mobile loan product targeting small and medium business operators.
History and experience in this country have taught us that subsidised credit schemes based on co-mingling of public funds with private capital have not had a very good record in terms of impact. The most spectacular failure was the so-called pre-export finance facility of the early 1990s when the CBK opened a special window where commercial banks could access credit and then onlend it to exporters at subsidised rates. It opened wide opportunities for arbitrage and was badly abused.
When you give commercial banks public funds to lend to small and medium enterprises (SMEs) at subsidised rates the first big problem you will face is with reporting: how to track and trace the money to determine that the subsidised money will only be lent to your target group.
Because money is fungible and since the banks will have to co-mingle the public funds with capital and deposits they get from their other operations, tracking success of the programme can only happen through separating, identifying and segregating the SME loan book into lending from public funds and the lending from the commercial banks’ other operations.
Stemming arbitrage can be a big headache. In the case of the pre export finance facility of the 1990s, unscrupulous banks lent back the public funds extended to them under the scheme to the government by investing in Treasury Bills. Several years ago, the government, with support of international lending institutions, implemented the Small-Scale Coffee Improvement Programme (Scip), which was designed to channel subsidised credit to coffee co-operative societies.
The impact - in terms of increased access of credit to the sector was satisfactory. But theprogramme’s most memorable impact was the high levels indebtedness into which it plunged the smallholder coffee sector.
Increasing access to credit to the SME sector is a very good thing indeed. But the product that’s been rolled out is a case of putting political ambition before feasibility. If the government is serious about tackling the problems facing SMEs, it must change the approach and do the following.
First, accept that the institutions it has established to support the SME sector have become worthless and dysfunctional.
Secondly, we must go back to the idea of introducing a single SME agency by bringing together all government institutions in this space including the Youth Development Fund, Women Development Fund, Uwezo Fund, the Micro and Small Enterprises Authority and the Kenya Industrial Estates (KIE). Indeed, the new scheme by the CBK and the commercial banks is plunging into crowded territory.
Creating a single SME agency was one of the key recommendations of the Presidential Task Force on Parastatal Reforms in 2013. We must accept that we had superior systems and arrangements for SMEs in the past. Once upon a time, we had a graduated financial model for the SME sector. The first place to go when an SME wanted credit was the District Loans Board which advanced small business loans of up to Sh3 million. If your business grew to a level where you needed not only more money but sheds and workshops, the next stage was to go to KIE where support for small businesses included provision of sheds.
If your needs exceeded KIE and you had now graduated into a mature business that required loans of up to Sh50 million, you went to the Industrial Development Bank (IDB). Beyond IDB, you were now considered qualified for a mix of financing solutions - larger and long tenor loans and equity financing. You headed to the Industrial Commercial Development Corporation (ICDC).
Instead of fancy products like the one unveiled by the CBK, why don’t we start debating introduction of a working credit guarantee system where public funds can be leveraged and used to unlock even more money from the banking system. A comprehensive policy document on a credit guarantee scheme has been lying somewhere in a government office since 2016. The Presidential Task Force recommended creation of Biashara Bank as a single consolidated SME agency. It has not happened.