Treasury's soft loans plan offers small firms lifeline

Small and mid-sized firms are Kenya’s biggest employers. FILE PHOTO | NMG 

Small traders will from July get house loans from local banks at an annual subsidised interest rate of seven percent or nearly half the prevailing market rates.

This is part of a broader move to help them cope with Covid-19 pandemic related difficulties.

The affordable loans for small and micro firms are the product of a newly established credit guarantee scheme and Treasury-backed plan which will offer banks additional cash for onward lending to the small firms. Treasury will lend the money to financial institutions at subsidised annual interest rates, enabling them to offer loans at below seven percent — lower than the average market rate of 12.1 percent. The scheme is intended to help small traders like barbershops, hotels and pubs, which have had to close under coronavirus lockdown measures.

Similarly, the government will provide guarantees of loans given to Kenya-based small and medium-sized businesses, meaning the government commits to repay banks a share of the loans should the small traders default.

“We and our partners, including banks and institutions like the EU, will provide cash for onward lending at below seven percent,” Treasury Secretary Ukur Yatani told the Business Daily in an interview. “There is also an element of guarantees for loans disbursed to small traders and coming from commercial banks.”


In addition, the Treasury has offered Sh3 billion as seed capital to kick-start the scheme that has received a €100 million (Sh11.7 billion) commitment from the European Union while commercial banks will top up additional sums for the SME loans.

On Friday, the Central Bank of Kenya said that the World Bank and the Africa Development Bank were also coming on board on the guarantee scheme.

Small and mid-sized firms are Kenya’s biggest employers and the Treasury has tipped them to get back to hiring in an environment where big companies are shedding jobs and freezing fresh employment.

Small firms, especially those in informal sectors, account for the bulk of jobs in Kenya and have in recent years emerged as the biggest drivers of new hiring.

Despite the offers made by the Treasury to bail out the small firms, many of them have complained that loans are coming through too slowly and that some banks have imposed tough criteria on granting credit on fears of default in a business environment where companies have seen a plunge in sales due coronavirus restrictions.

Another stumbling block for many firms is taking on additional debt when the future remains uncertain amid a cash flow hitch that has forced the firms to lay off workers.

Eligibility for the subsidised loans has not yet been decided - namely, how small does a business have to be to qualify for the credit.

“We are in talks with the government to introduce a loan guarantee scheme. This will be particularly helpful in increasing lending to small and medium-sized firms,” Joshua Oigara, the chief executive of KCB Group #ticker:KCB told the Business Daily ahead of Treasury’s disclosure.

Lending to SMEs has traditionally been seen as presenting more risk of default compared to lending to large, established private firms and government-owned institutions.

This has seen some banks opt to insure some or all of their SME loan portfolios.

The economic fallout brought by the coronavirus has made SMEs’ financial position even more precarious.

Without the government stepping in to shoulder some of the credit risk, banks are unlikely to expand their lending to the small businesses that face the biggest challenge in funding their working capital and expansion projects.

Before the emergence of Covid-19, the number of formal jobs generated by the economy fell to a seven-year low in 2019, dimming the hopes of school and college leavers in a year when only 78,400 new formal jobs were reported.

However, the decline was counterbalanced by the growth in informal jobs, which rose from 744,000 in 2018 to 767,900 last year, according to the Kenya National Bureau of Statistics (KNBS).

The rise in informal jobs highlights the growing importance of the Jua Kali sector as an employment creation machine in Kenya.

But the sector has been hardest hit by the coronavirus-related hardships. Kenya has reported 1,200 positive Covid-19 cases and 50 deaths.

The World Bank forecasts that Kenya’s economic growth will slow down to 1.5 percent this year, and contract one percent in the worst-case scenario.