Manufacturers seek higher loan limit in credit guarantee scheme

Manufacturers want the State-funded credit guarantee scheme (CGS) for small businesses to be increased by Sh15 million and the repayment period extended to eight years. This proposition aims to improve capital access among micro, small, and medium enterprises (MSMEs), which are the beneficiaries of this scheme. Apart from providing a five-year tax moratorium for MSMEs to enhance their cash flow, the Kenya Association of Manufacturers (KAM) also wants 20 per cent of the allocations under the scheme to be ring-fenced for businesses in manufacturing. These proposals are contained in the newly launched Manufacturing Priority Agenda 2025 by KAM, which details policy recommendations towards improving the performance of the sector. Among them is SME development since a majority of businesses in the country fall into this category. Apart from the five-year tax moratorium for SMEs, the lobby wants the enactment and implementation of other pending SME-enabling legislation, such as the start-up policy. KAM also proposes increasing funding to institutions such as the Kenya Industrial Enterprises (KIE), the Kenya Development Corporation (KDC), and the Kenya Industrial Research and Development Institute (KIRDI). Further, KAM has asked for the development of tailored Hustler Fund products specifically for SMEs to be expedited. Grace period To increase the loan amounts to Sh20 million under the credit guarantee scheme, the association has asked for the recapitalisation of the fund. The current limit is Sh5 million with a repayment period of three years, including a five-month grace period. KAM data on the performance of the scheme as of October 2024 shows 4,157 small businesses have benefitted from the Sh6.35 billion disbursed since the launch of the scheme in December 2020. Of the disbursed amount, Sh4.19 billion has been repaid, with 26,348 jobs created as a result of the scheme. KAM says in the Manufacturing Priority Agenda 2025 document that the scheme has achieved a leverage ratio of Sh2.32, which means that every shilling committed by the government has unlocked private sector credit worth Sh2.32 to SMEs. "This proves that the CGS initiative is a cost-efficient tool to target support SMEs in accessing finance," says KAM in the document. "However, it is important to note that manufacturing SMEs able to access are just 117 (2.8 per cent) of the 4,157 MSMEs accessing the guarantee." Interest rates for loans under the scheme are dependent on a business's credit profile. The scheme works by guaranteeing to pay banks a portion of the outstanding principal amount in incidents of default. This, according to the National Treasury, is meant to incentivise banks to lend to these businesses, which are deemed high-risk. According to the Annual Performance for MSMEs Credit Guarantee Scheme 2023-2024, by June 2024, the scheme had disbursed Sh6.2 billion to 4,121 MSMEs across 46 counties in 12 sectors. Small enterprises are the largest category of beneficiaries at 58 per cent (2,387 businesses), followed by micro at 28 per cent (1,154 enterprises), and medium at 14 per cent representing 580 enterprises. By then, a total of 2,529 facilities were fully paid, representing credit amounting to Sh3.4 billion. According to the breakdown in the report, of the 12 sectors the facilities under the scheme are distributed, trade takes the lion's share of 72 per cent. "This percentage is higher than the sector limit of 40 per cent as per the CGS agreement," the report points out. Trade is followed by building and construction (8.4 per cent), transport and communication (6.2 per cent), and manufacturing (5.8 per cent). KAM says in the document that SMEs' growth and development should be ensured by ensuring access to affordable credit and markets and improving their governance frameworks as they grow. "Some of the measures that can be deployed to increase access to finance include giving a 5-year tax moratorium to SMEs to enhance cashflow and foster sustainability; enacting and implementing other pending SME enabling legislations/bills such as the start-up policy; ring-fencing 20 per cent of Credit Guarantee Scheme funds specifically for the manufacturing sector," says KAM. It adds: "Recapitalise the credit guarantee scheme to increase loan amount to at least Sh20 million and term loan repayment up to eight years." On record, Kenya has 7.4 million MSMEs, as documented by the Kenya National Bureau of Statistics (KNBS). These businesses employ close to 15 million people. The actual number of MSMEs in the country is, however, estimated to be around 18 million, according to the State Department for MSME Development, since the majority of these businesses operate informally. "Formal SMEs can account for as much as 40 per cent off gross domestic product (GDP) in emerging economies. When informal SMEs are considered, the impact is considerably greater," says KAM. KAM notes access to finance is a key constraint to SME growth, citing it as the second most cited obstacle among these businesses in emerging markets and developing countries. "Despite the vibrant Kenyan financial sector, the need for financing among SMEs persists over the years," says KAM. The lobby quotes the International Finance Corporation's 2019 data that estimates an annual unmet need among Kenyan MSMEs of Sh4.0 trillion. It also quotes the Central Bank of Kenya MSME report that indicates banks extended only Sh783.3 billion in 2022 to these businesses. The establishment of the credit guarantee scheme by the government in 2020 was cognisant of these challenges. The Kenya Kwanza administration under the Bottom-up Economic Transformational Agenda (BETA) points out the need to upscale the scheme into a fully fledged financial institution to be known as Kenya Credit Guarantee Company to reach more businesses. This has been noted by the National Treasury and Economic Planning Cabinet Secretary John Mbadi, who says the scheme needs an independent legal entity to carry out its mandate effectively. As the scheme expands, he notes, it becomes necessary for the team implementing to focus on the work of the scheme entirely, with little or no interference from other competing assignments. "It is in this regard that the National Treasury is at an advanced stage of establishing the Kenya Credit Guarantee Company to enhance sustainability of the framework," says the CS in the Annual Performance for the MSMEs Credit Guarantee Scheme 2023-2024 report.

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