Review models of SME funding

So, where are the big ideas on the best ways of managing the ‘Hustler Fund’— one of the signature policy programmes for President William Ruto’s administration?

The other day, I sat at an auditorium at the Nairobi Securities Exchange (NSE) following proceedings at a ceremony where President Ruto had been invited to launch the NSE marketplace. One of the keynote speakers at the event, Co-operative Bank CEO Gideon Muiruki, made a very strong case for the cooperative movement, arguing that the sector was best placed to roll out a well-managed and sustainable affordable credit scheme for marginalised groups.

Here is a summary of the facts he placed on the table in that speech while driving his point. First, the sector has a membership of 13 million and 22,000 saccos, secondly, the Cooperative Bank itself has 1.9 million customers in the SME market segment, thirdly, the sacco sector has 550 front service offices serving SMEs that are unable to raise bankable collateral, fourthly, that Cooperative Bank and the saccos in its network offer the largest ‘Lipa na M-Pesa’ services in both volume and value- currently terminating Sh500 billion Lipa na M-Pesa transactions in a year.

He said the estimated volume is that Lipa na M-Pesa termination by the bank and the saccos in its ecosystem would shortly reach Sh65 billion per day. His parting shot was on the issue of socially responsible business. Mr Muriuki argued that the cooperative movement was the best place to manage the Hustler Fund because co-operatives were a socially responsible business by design.

He opined that the movement’s commitment to the principle of capitalism with a human face was the reason Cooperative Bank broke ranks with other listed companies to distribute dividends to shareholders when the economy was in the middle of the Covid-19 pandemic. He disclosed that in the financial years 2019 and 2020, the bank distributed Sh11 billion to shareholders.

By any measure, Mr Muriuki’s delivery was a powerful pitch for the cooperative movement, offering food for thought to the new administration. We have tried too many experiments with SMEs. A few years ago, the government experimented with the idea of lending to SMEs through commercial banks by giving the banks money at four percent for on-lending to SMEs at eight percent.

Then there was the time the Central Bank of Kenya touted a product called ‘Stawi’— a subsidised lending scheme where the monetary authority partnered with five commercial banks to launch a mobile loan product targeting SMEs.

History and experience in this country have taught us that subsidised credit schemes based on co-mingling of public funds with private capital have not had a very good record in terms of impact.

When you give commercial banks public funds to lend to SMEs at subsidised rates the first big problem you will face is with reporting: how to track and trace the money to determine that the subsidised money will only be lent to your target group. Because money is fungible and since the banks will have to co-mingle the public funds with capital and deposits they get from their other operations, stemming arbitrage can be a big headache.

For the Hustler Fund to be implemented successfully, the approach will have to change. First, we must accept that the institutions we have established to support the SME sector have become worthless and dysfunctional.

Secondly, we must go back to the idea of introducing a single SME agency by bringing together all government institutions in this space including the Youth Development Fund, Women Development Fund, Uwezo Fund, the Micro and Small Enterprises Authority and the Kenya Industrial Estates. We must not forget that the process of implementing a full-fledged credit guarantee scheme for SMEs is also at an advanced stage. What happened to Biashara Bank?

Once upon a time, we had a graduated financial model for the SME sector. The first place to go when an SME wanted credit was the District Loans Board, which advanced small business loans of up to Sh3 million. If your business grew to a level where you needed not only more money but sheds and workshops, the next stage was to go to KIE where support for small businesses included the provision of sheds. If your needs exceeded KIE and you had now graduated into a mature business that required loans of up to Sh50 million, you went to the Industrial Development Bank (IDB).

Beyond IDB, you were now considered qualified for a mix of financing solutions — larger and long-tenor loans and equity financing. You headed to the Industrial Commercial Development Corporation. Let’s debate all options so we can avoid reinventing the wheel.

The writer is the former managing editor of The EastAfrican newspaper.