How to make State credit guarantee scheme work for small businesses

Kenya’s small and medium enterprises (SMEs) have struggled the last five years owing to recurring challenges associated with technology, market intelligence, access to finance, polices, information and management, among others.

These challenges seem to be cyclical and underpinned by government action or inaction, including late payment of dues to SMEs, heavy local borrowing, slowdown from heightened political activities, a shrinking export market, a shrinking local market due to competition from cheap Chinese imports and incoherent tax system.

The government announced a raft of measures in 2019 that were meant to alleviate the challenges of the SMEs such as repeal of interest rate cap, payment of pending bills, setting up of an SME fund, a credit guarantee scheme, amendment of the competition law and establishing warehouses in free trade zones in East African countries.

Fast foward to 2020, and Covid-19 hit the country. Kenya, just like other countries, finds itself walking a tight rope having to close down to contain the spread of the coronavirus while at the same time taking measures to prevent a complete shutdown of the economy through a stimulus package.

The first measures that were announced were meant to provide SMEs with liquidity, including reduction in VAT from 16 percent to 14 percent, reduction of turnover tax from three percent to one percent and reduction of corporate tax from 30 percent to 25 percent.

Though commendable, the measures may not achieve their target given that over 79 percent of SMEs in Kenya are in the informal sector and may not enjoy the benefits.

I continue to advocate a comprehensive mapping of SMEs who are clustered in either formal or informal chama groups in various databases such as financial institutions, NGOs, government agencies and churches after which either soft loans, grants or a 50/50 mix of loan and grants can be channelled.

The government has announced a second stimulus package to enhance liquidity of SMEs with an additional Sh13 billion split between fast-track of VAT refunds, payment of outstanding pending bills and seed capital to operationalise the SME credit guarantee scheme.

According to data from the Kenya National Bureau of Statistics (KNBS) 79 percent of SMEs are informal, with majority in wholesale-retail followed closely by motor vehicle and motor cycle repair. How are they going to benefit from VAT refunds?

The credit guarantee scheme is a brilliant idea but if not well handled it may suffer execution paralysis.

First the scheme must be inclusive, bringing on board other SME and start-up investors such as angel investors, venture capitalists and private equity players from the supply side.

This means that government must concurrently provide tax incentives to these investors to further sweeten the value proposition.

Kenya is a very attractive destination to these investors going by the Partech 2019 investment report for Africa, which showed that the country attracted over 17 percent of the total venture investment in Africa despite a lack of significant investor incentives.

From the demand side the credit guarantee scheme must not only include SMEs but also start-ups — businesses that are founded on technology and have a higher probability of rapid growth over a short period of time as compared to SMEs.

Examples of such start-ups in Kenya are Sendy, which in a period of less than five years has over 10,000 active riders on its platform even during Covid-19, and Twiga Foods that supports over 5,000 farmers and 5,000 micro-small vendors.

This will also mean that Kenya must enact a Start-ups Bill similar to the ones in Tunisia and Senegal to enable the businesses participate in the credit guarantee scheme.

Further, the scheme must consider broadening its scope beyond credit to other instruments such as equity, convertible debt and preference shares.

The government should consider having the scheme sit in the Ministry of ICT's innovation agency and funds administered by a private custodian and investor admission committee composed of a mix of private and pubic players.

Otieno is MD of Viffa Consult.