The Treasury will not fully guarantee loans given to small and medium enterprises (SMEs) under the State-backed Credit Guarantee Scheme if a proposed law sails through in Parliament.
The Public Finance Management (Amendment) Bill, 2020 before the National Assembly says the Treasury will only take a portion of the losses in case an SME defaults on payment of the loans.
This means that a small business must provide collateral for the loans that include assets like machinery and other property.
The Treasury will not fully guarantee loans given to small and medium enterprises (SMEs) under the State-backed Credit Guarantee Scheme if a proposed law sails through in Parliament.
The Public Finance Management (Amendment) Bill, 2020 before the National Assembly says the Treasury will only take a portion of the losses in case an SME defaults on payment of the loans.
This means that a small business must provide collateral for the loans that include assets like machinery and other property.
The Bill was tabled in Parliament last week as the State speeds up efforts to cushion SMEs from the adverse of the Covid-19 by providing third-party credit risk mitigation for commercial loans with an initial budget of Sh3 billion.
“A guarantee for credit extended to micro, small or medium enterprise shall be given under a scheme established by the Cabinet Secretary for the partial mitigation of default risks for credit extended to micro, small or medium enterprises,” the Bill reads in part.
The proposed law further gives powers to Treasury Secretary to set out the conditions for the guarantee of the loans and the size of losses that the State will absorb in case of a default.
Treasury PS Julius Muia did not disclose what portion of losses the State would take in case of a loan default, adding that revealing the amounts risks leading to defaults.
“With regard to the guarantee, you cannot disclose the amount because it can lead to the problem of moral hazard,” he said yesterday.
“Banks will assess the creditworthiness of the SMEs then determine the risk to take. We as the Treasury, we have provided Sh3 billion.”
The MPs are set to debate and approve the proposed law, which among others, stipulates that targeted SMEs must have an annual turnover of not more than Sh100 million and a workforce of between 51 and 250 workers.
The European Union has already committed €100 million (Sh11.7 billion), boosting the State-backed credit guarantee scheme.
The Treasury first floated the proposal for a credit guarantee scheme in May 2018 as part of an effort to reduce the SMEs risk profile and ease access to credit.
The Central Bank of Kenya has been pushing for the speedy roll-out of the fund in a bid to help SMEs hard-hit by the Covid-19 pandemic to stay afloat.
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