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SMEs receive Sh4b under State-backed credit facility

Small enterprises accounted for 60 per cent of the beneficiaries followed by micro-enterprises (25 per cent). and medium enterprises (15 per cent). [iStockphoto]

The government has released more than Sh4.12 billion to micro, small and medium-sized enterprises (MSMEs) under the State-backed Credit Guarantee Scheme (CGS).

The National Treasury says by August this year, small businesses had taken a total of 2,609 loans amounting to Sh4.12 billion since the scheme was launched a year ago by former President Uhuru Kenyatta’s regime in a plan to derisk access to credit for small traders.

The credit guarantee scheme encourages banks to disburse credit to borrowers they would otherwise turn away, confident that they will be compensated in case of defaults.

“The credit deployed to MSMEs by participating banks is now Sh4.12 billion and is expected to keep growing,” said outgoing Treasury Cabinet Secretary Ukur Yatani said in a statement.

“As the economy continues to revive from the recession occasioned by Covid-19, the utilisation of the guarantee capital is expected to increase.”

The fund was established to enhance access to quality and affordable credit for the growth and operations of MSMEs, which would otherwise find it difficult to access loans from commercial banks.

A select group of commercial banks issue the loans and can be compensated for up to a quarter of losses from defaults using the cash provided by the Treasury, which now stands at Sh3 billion.

The seven participating banks are Credit Bank, Absa, Diamond Trust Bank Kenya, KCB, NCBA Bank, Stanbic Bank, and Co-operative Bank of Kenya.

The loan limit is set at Sh5 million per borrower with a repayment period of 36 months.

“The credit facilities range from Sh30,000 to Sh5 million with an average portfolio size of Sh1,580,139,” said Yatani, adding that beneficiaries took an average of 25 months to complete repayment.

Small enterprises accounted for 60 per cent of the beneficiaries followed by micro-enterprises (25 per cent). and medium enterprises (15 per cent). 

At least 20 per cent of the beneficiaries were marginalised groups, including women, youth, and persons living with disabilities, said Mr Yatani. “Three hundred and eighty-three facilities amounting to Sh535.7 million have been fully repaid,” said the CS.

He revealed that the scheme will introduce products focusing on agriculture and manufacturing sectors to enhance its impact.

“The government has also initiated the process of converting the scheme into an independent legal entity with a window for private sector investment in order to enhance sustainability,” he said.

“This is in line with international best practices for public guarantee scheme.” The participating lenders independently review the ability of the small businesses to repay the loan and determine the applicable interest rates based on the risk of default.

In the event of default, the Treasury will cover up to 25 per cent of the loan, with the lenders shouldering the remainder of the loss under the third-party credit risk mitigation scheme.

The loans under the scheme are aimed at supporting working capital and the acquisition of assets for small credit-starved businesses.

Despite banking industry data showing over the years that the rate of default among small businesses was lower than that of corporates, banks continue to assign a higher risk profile to MSMEs, which usually prices them out of the market.

The participating lenders, have an open hand in pricing the loans based on the individual borrower’s risk but are encouraged to charge single-digit interest.

The latest data comes as President William Ruto moves to actualise his campaign promise of cheap credit to low-income groups, including jua kali artisans, boda boda operators and mama mbogas (greengrocers), popularly known as hustlers.

Dr Ruto’s government hopes to create a new fund to help small and micro enterprises access capital.

Hustler fund

He said the kitty would benefit low-income groups and will be deployed through credit societies and investment groups.

“We shall implement the Hustler Fund, dedicated to the capitalisation of micro, small and medium-sized enterprises through chamas, Saccos and cooperatives to make credit available on affordable terms that do not require collateral,” he said in his national address after being sworn in.

“We will commit Sh50 billion a year to provide MSMEs with 100 per cent access to affordable finance through Saccos, venture capital, equity funds and long-term debt for start-ups and growth-oriented SMEs.”   

President Ruto has anchored his agenda for the next five years on making credit affordable, especially to small traders who have in the past found themselves paying more for loans.

“Affordable credit makes a huge difference in the rate of business growth,” said Dr Ruto in a speech at the opening of the 13th Parliament last month.

He has in the past said this model will benefit millions of unemployed Kenyans as well as small and medium enterprises (SMEs).

The Treasury first floated the proposal for a credit guarantee scheme in May 2018 when it said it would guarantee commercial bank loans to SMEs as part of an effort to reduce the risk profile, keep loan prices low and ease access to credit.