When it was launched in December 2020, the Treasury’s credit guarantee scheme for micro, small and medium-sized enterprises (MSMEs) was meant to open up access to bank loans for the sector that has struggled to attract credit due to risk concerns.
By the end of last year, disclosures by the Central Bank of Kenya (CBK) show, MSMEs had taken up a cumulative Sh4.4 billion in loans under the scheme from the seven participating lenders—Absa, Credit Bank, KCB Group, NCBA, Diamond Trust Bank, Stanbic Bank and Cooperative Bank.
This means that the lenders have only accessed about Sh1.1 billion worth of guarantees out of the initial Sh3 billion set aside by the Treasury for the scheme.
The government offers cover for a quarter of the principal lent to the small businesses, meaning that the Sh3 billion seed fund ought to unlock lending worth at least Sh12 billion. The maximum loan limit is set at Sh5 million per borrower, with a repayment period of 36 months.
MSMEs' struggle to access credit was amplified by the Covid-19 pandemic that hurt business performance. The expectations of a loosening of purse strings for them have, however, not materialised, at least not to the extent that the planners of the guarantee scheme anticipated.
A number of small enterprises, especially those that have tried and failed to get loans from banks previously, have preferred to continue accessing funding from non-bank actors such as saccos with whom they have built relationships that allow them to get money at reasonably lower rates compared to bank loans.
The Treasury’s most recent report on the scheme covering the 2021/2022 fiscal year, tabled in Parliament in November, 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, a business could qualify to be classified as a micro-enterprise by the number of employees on its books, while on basis of turnover, it would fall under the definition of a small or medium enterprise.
On the bank’s side, there is also the risk of misclassification of MSMEs under the broad economic sectors that banks use to define borrowers. For instance, the Treasury said, some enterprises in education, agriculture and healthcare end up being classified as trade enterprises, and may, for instance, be denied loans based on cash flow trends that differ from those expected of a trading company.
Most of the small businesses are also not tax-compliant, which locks them out from accessing the fund. Some therefore prefer to source capital elsewhere, fearful of hefty tax arrears demands if they were to formalise in order to qualify for the guarantees.
The Treasury also highlighted an imbalance in the distribution of funds favouring large urban centres, primarily due to the larger presence of the participating banks in these areas compared to far-flung counties.
Nairobi County, for instance, took up 52 percent or Sh1.73 billion out of the Sh3.3 billion that had been disbursed to MSMEs under the scheme by June 2022.
Kiambu, Mombasa, Kisumu and Nakuru, which follow Nairobi in terms of the urban population, together accounted for another 20 percent or Sh656 million worth of the disbursed loans. Meanwhile, Wajir, Mandera and Marsabit failed to register any loans in the period, owing to a lack of presence of the participating banks, and also the limited number of MSMEs in these areas.
Another factor has been the deteriorating quality of the banking sector loan book, where non-performing loans remain elevated even as the economy continues to recover from the lows of 2020.
At the end of last year, the ratio of gross NPLs to loan book for the banking sector stood at 13.3 percent, forcing banks to maintain or tighten credit standards across many lending sectors.
The solution, according to the Treasury, lies in onboarding a larger number of financial intermediaries into the scheme in order to widen the geographical reach of the fund.
In some of the predominantly rural counties, microfinance institutions and Saccos have a far wider reach compared to commercial banks.
