Plans by the Capital Markets Authority (CMA) to help small and medium-sized firms access credit through the Nairobi Securities Exchange (NSE) by guaranteeing the debt sounds good but raises a lot of questions.
Who will fund the scheme, for instance?
One assumes that a new levy will be introduced on the NSE, adding to investors’ cost of operations. This will increase the cost of doing business on the bourse, adding to the recent introduction of a 14 percent VAT on commissions and fees on transactions.
The scheme will also need to be large enough to support substantial credit issuance, again raising questions about the extent of funding it.
The CMA should first put in place a thorough due diligence process to vet companies seeking to raise funds in the capital markets.
It is not feasible that the credit markets can simply be stabilised and grown by guaranteeing the liabilities.
It is worth remembering that even in the case of bank deposits, the largest and most critical financial assets, only a small portion of the funds is guaranteed by the State as a lot of effort goes into ensuring banks remain sound.