There is an urgent need for the Treasury and commercial banks to address the challenges plaguing the nascent credit guarantee scheme if it is to achieve its goal of unlocking capital for small businesses.
The model, launched in December 2020, is designed to leverage the government’s seed funding to provide much larger loans to micro, small and medium-sized enterprises (MSMEs), which are widely acknowledged as the key to jobs and economic growth.
The government offers to cover for a quarter of the principal lent to the small businesses and provided initial funding of Sh3 billion.
This was in turn expected to unlock lending to the tune of Sh12 billion. 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 government’s Sh3 billion.
This is far from satisfactory given that there are many MSMEs that are still starved of capital.
The subpar performance of the scheme has been due to several issues, which the Treasury and banks should address to salvage the noble idea.
One of the recurring challenges is the misclassification of the MSMEs, with categorisation by various measures such as turnover having a major impact on access to and size of loans.
We believe it is possible to come up with a system that reduces complexity and focuses on the most important issues like cash flow and profitability in determining access to loans.
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