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Tough loan guarantee terms for small firms

Treasury has set tough conditions for State-backed credit guarantees for small businesses affected by the Covid-19 pandemic. FILE PHOTO | NMG 

The Treasury has set tough conditions for State-backed credit guarantees for small businesses affected by the Covid-19 pandemic, locking out many firms that had hoped to benefit from the scheme.

Only micro, small and medium enterprises (MSMEs) with a maximum annual turnover of Sh100 million and 250 employees will qualify for loans guaranteed by the government, according to proposals in the Draft Public Finance Management Amendment Bill 2020.

Under this arrangement, the Treasury would provide third-party credit risk mitigation to commercial banks by absorbing a portion of losses on MSME loans in the event of default.

The proposed law also grants powers to the Treasury Cabinet Secretary to effect periodic reviews of the asset and investment limits for small businesses that would qualify for the loan guarantee scheme.

“The object of the Bill is to amend the Public Finance Management Act, 2012, in order to provide for guarantees by the Cabinet Secretary for loans advanced to micro, small and medium enterprises,” says the draft Bill.


Plans to grant loan guarantees to small businesses has been in the pipeline for two years now. The Treasury first floated the proposal for a credit guarantee scheme in May 2018 when it said it would underwrite commercial bank loans to SMEs as part of an effort to reduce the risk profile, keep loan prices low and to ease access to credit.

According the proposed law, microenterprises that qualify must have a turnover of up to Sh500,000 a year and employ not less than 10 people.


For manufacturing, such a business should have investment in plant and machinery or registered capital not exceeding Sh10 million while for the services and farming investment in equipment or registered capital should not exceed Sh5 million.

This the same definition set out in the Micro and Small Enterprises Act of 2012.

Small businesses are those that have a turnover of between Sh500,000 and Sh5 million, and employ between 10 and 50 people.

Conditions set in the draft rules include the requirement that a borrower must have complied with relevant tax laws, is registered by a county government and holds a valid business permit or trade licence. The introduction of the credit guarantee is seen as vital in saving the SMEs, which have been hit hard by the Covid-19 outbreak.

In May, CBK Governor Patrick Njoroge warned that up to 75 percent of small businesses risked collapse by the end of June because they lacked credit buffers and other resources to survive the Corona slowdown.

The Treasury has set aside Sh3 billion as seed capital to kick-start the scheme, which has received a €100 million (Sh11.7 billion) commitment from the European Union.

Kenya’s growth slowed down to 4.9 percent in the first quarter of this year from 5.5 percent last year, the slowest pace in eight years, hit by Covid-19.

This was the slowest first quarter growth since 2012 despite an overall rise in exports, according to data by the Kenya National Bureau of Statistics. “The economy was affected by the resultant uncertainty that was already slowing economic activity in some of the country’s major trading partners,” the KNBS said.

Kenya’s growth was largely weighed down by a 9.3 percent contraction in accommodation and food service – from a growth of 11 percent a year earlier - due to a sharp drop in tourists from major source markets.