The Treasury has revealed plans to set up a company in partnership with financial institutions to de-risk lending to small businesses, including those who graduate from the Hustler Fund, by commercial banks.
The proposed Kenya Credit Guarantee Scheme Company (KCGSC) will guarantee a share of the loans commercial banks will advance to cash-strapped micro, small and medium-sized enterprises (MSMEs).
The joint venture between the government and private sector is expected to unlock higher-value loans to individuals and groups whose financial needs will grow beyond the limits provided by the Hustler Fund – President William Ruto’s flagship financial inclusion programme.
“The government will continue supporting individuals and micro, small and medium enterprises (MSMEs) excluded at the bottom of the pyramid through the Financial Inclusion Fund, or the Hustler Fund,” the Treasury wrote in the draft 2024 Budget Policy Statement (BPS).
“The government will also convert the Credit Guarantee Scheme (CGS) into the Kenya Credit Guarantee Scheme Company (KCGSC) to ensure sustainability and develop a credit guarantee policy whose objective is to provide a clear framework for a sustainable model for credit guarantee scheme for MSMEs.”
Director-general for Budget, Fiscal and Economic Affairs at the Treasury Albert Mwenda said talks were progressing with the Central Bank of Kenya, the financial sector regulator, and other stakeholders on incorporating the new firm.
The formation and ultimately operation of KCGSC will be guided by international best practices, he said.
“Credit guarantees enable us to leverage on abundant private sector liquidity to finance MSMEs while also inculcating financial discipline,” Mr Mwenda told the Business Daily.
“We expect that MSMEs currently borrowing from Hustler Fund will be supported by the scheme as they graduate into the formal financial sector. This will enable them to even get larger volumes of credit at a less cost to the government.”
The Treasury currently guarantees up to 25 percent of the loans.
This means in the event of a default, the CGS repays a quarter of the non-performing loan under the current scheme which has been shunned by the majority of the country’s 39 commercial banks.
KCB, NCBA, Co-operative Bank of Kenya, Absa, DTB, Stanbic and Credit Bank are the only lenders participating in the credit insurance scheme where borrowing by a single entity is capped at Sh5 million. The lenders have an open hand in pricing the loans based on the individual borrower’s risk profile.
“It is critical for participating lenders to demonstrate that the credit risk covered by the company is considered in the pricing of any qualifying facilities,” Mr Mwenda said. “We, therefore, expect that there will be a demonstrable benefit in the overall interest charged to borrowers under the company alongside other benefits such as relaxed requirements.”
The proposed firm will cover a larger share of the loan than the State-run CGS, launched in December 2020 but whose performance has hugely fallen short of initial targets.
The Treasury had projected to unlock up to Sh40 billion to small traders under the CGS for the financial year ended June 2022 after it initially allocated Sh10 billion towards the scheme. It, however, slashed the budget to Sh3 billion, targeting lending of about Sh12 billion.
That also underperformed by far, with cumulative loans at the end of March 2023 standing at Sh4.64 billion, just over a third (38.67 percent) of the target.
Some 2,997 MSMEs in 46 counties – excluding Mandera where KCB is the only bank with a branch – had accessed the State-guaranteed loans by last March 2023.
“We have reviewed the global practices in the area and are ready to innovate further for the benefit of Kenyan businesses,” the Treasury budget and fiscal affairs chief said.
The Treasury’s most recent report on the scheme covering the 2021/2022 fiscal year, tabled in Parliament in November 2022, identified several other challenges affecting the uptake of the fund.
These include the unclear classification of businesses within the definition of MSME under the Public Finance Management Act and MSE Act of 2012, which ultimately determines the amount they can access from the fund.
For instance, the Treasury noted, that a business could qualify to be classified as a micro-enterprise by the number of employees on its books, while on the basis of turnover, it would fall under the definition of a small or medium enterprise.
Banks continue to assign a higher risk profile to the MSMEs which usually prices them out of the credit market despite industry data showing the rate of default among small businesses has over the years been lower than that for the corporates.
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 for from the banks, with about 86 percent forced to rely on family and friends.
