Companies

State-backed loans for SMEs capped at Sh5m

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Credit Bank CEO Betty Korir signs the Credit Guarantee Scheme agreement with the Treasury on December 8, 2020 in Nairobi. Looking on is the Kenya Bankers Association chairman Joshua Oigara (left), National Treasury CS Ukur Yatani (third left) and Treasury PS Julius Muia ( seated right). PHOTO | SALATON NJAU | NMG

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Summary

  • Seven banks have signed up to the first phase of the scheme to help cash-strapped MSMEs get part of capital to sustain operations.

The Treasury has capped at Sh5 million the loan under the State-backed Credit Guarantee Scheme launched yesterday to help small traders recover from Covid-19 shocks.

Seven banks have signed up to the first phase of the scheme unveiled by Treasury secretary Ukur Yatani to help cash-strapped micro-, small- and medium-sized enterprises (MSMEs) get part of capital to sustain operations.

In late May, the central bank said such businesses needed urgent help to survive, noting that many were at risk of closing at the end of June if they received no help.

The participating lenders will independently review the ability of the small businesses to repay the loan and determine applicable interest rate based on risk of default.

In the event of default, the Treasury will cover up to 25 percent of the loan with the lenders shouldering the remainder of the loss under the third-party credit risk mitigation scheme which was initially allocated Sh3 billion by lawmakers in June.

The Cabinet in September, however, approved Sh10 billion as the total cover for the commercial loans taken by the MSMEs under the scheme for this financial year ending June 2021 and the one that follows.

“It has not been an easy journey getting the banks here. It has been a very tough process of consultation,”Mr Yatani said.

“But I thank them for accepting to walk with us because they not only have the responsibility to make profit for their directors, but also to contribute to the economy and well-being of our businesses.”

Reduced sales largely as a result of disruptions arising from Covid-19 pandemic, the minister added, has locked many MSMEs out of the credit market under “traditional arrangements” (usually use of bankable collaterals), necessitating State intervention.

Despite banking industry data showing over the years that the rate of default among small businesses is lower than that for corporates, banks continue to assign a higher risk profile to the MSMEs which usually prices them out of the market.

Findings of a 2016 survey by the Kenya National Bureau of Statistics (KNBS) concluded that about 71 percent of the 7.4 million MSMEs in 2015 got less loans than they had applied from the banks, with about 86 percent forced to rely on family and friends.

Treasury principal secretary Julius Muia said he expects KCB, NCBA, Co-op, Absa, DTB, Stanbic and Credit Bank to charge successful businesses interest at below market rates “in line with global practice”.

A PILOT

“This is just a pilot of the seven banks who are here. The ambition is to reach the entire industry of 40 banks and microfinance lenders as we go forwad,” said KCB Group chief executive, Joshua Oigara who is also the Kenya Bankers Association chair.

Lawmakers have enacted the Public Finance Management (Amendment) Bill 2020 to provide the legal framework for the scheme.