CBK to police credit guarantee firms in expanded mandate

The Central Bank of Kenya in Nairobi.

The Central Bank of Kenya in Nairobi. PHOTO | FILE | NMG

Photo credit: File | Nation Media Group

The Central Bank of Kenya (CBK) is set for an expanded mandate after a move by the National Treasury to have the banking sector regulator oversee credit guarantee companies.

The exchequer wants the various credit guarantee schemes in the country, including its own unit, spun out into separate legal entities that will fall under the ambit of CBK.

Credit guarantee companies refer to businesses providing a guarantee to a lender through the absorption of all or a portion of the lender’s risk on credit facility made to a borrower in the case of default.

The National Treasury has moved proposed amendments to the CBK Act for purposes of regulation and supervision of credit guarantee business.

CBK shall be expected to issue new licences to the credit guarantee businesses while designating capital adequacy standards and related requirements for the firms, prescribing the minimum liquidity requirements and permissible and prohibited activities.

The apex bank shall also oversee the integrity of the credit guarantee business including anti-money laundering/combating the financing of terrorism standards, among other roles.

The formation of credit guarantee schemes as separate entities forms part of a new draft policy by the exchequer, which seeks to establish a regulatory framework for the operation of the entities in the country.

“In Kenya, existing credit guarantees have been operating without a comprehensive guiding policy and regulatory framework. It is against this backdrop that this policy has been developed as a structured guide for the implementation of vibrant credit guarantees in Kenya,” the National Treasury stated.

The exchequer’s own credit guarantee scheme is expected to be spun out to a new company to be known as the Kenya Credit Guarantee Scheme Company (KCGSC), which will replace the current Credit Guarantee Scheme (CGS) established in December 2020 with a similar objective of helping micro, small, and medium enterprises (MSMEs) secure affordable financing from formal financial institutions.

The firm will be a joint venture between the government and the private sector where the former is expected to play a reduced role in the running of credit guarantee firms by limiting its shareholding in the company to a minority.

The CGS has been faced with a myriad of challenges, limiting its utilisation and ability to achieve stipulated objectives.

In a report to the National Assembly in November 2022, the Treasury said only 35.9 percent of the total guarantees offered had been utilised by MSMEs, with some counties like Mandera having no beneficiaries.

The State-backed scheme has been running as a pilot since 2020 and had advanced Sh6.18 billion to 4,078 MSMEs as of the end of December 2023.

The exchequer says spinning out the entity into a company will ensure the improved operation of the guarantee scheme.

“The scheme as currently established is not sustainable since it operates as a unit of the National Treasury and relies on annual budgetary allocation from the exchequer. The pilot credit guarantee scheme provides the experience necessary to develop a sustainable credit guarantee delivering model in accordance with global best practices and principles of operating public credit guarantee schemes,” noted the Treasury and Planning Cabinet Secretary Njuguna Ndung’u.

The inclusion of credit guarantee schemes as entities regulated by the CBK is set to expand the mandate of the apex bank, which recently began licensing and regulating the operations of digital credit providers.

CBK licenses and regulates the operations of commercial banks, microfinance banks, non-bank financial institutions, mortgage finance companies, building societies, credit reference bureaus, foreign exchange bureaus, money remittance providers, and representative offices of foreign banks.

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