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State lessens requirements for loan access to MSMEs

By Fredrick Obura | April 26th 2021


Micro Small and Medium Enterprises (MSMEs) play a crucial role in economic development in Kenya. They are a vital engine in the economy since they drive growth, create employment - especially among youth - and spearhead innovation.

They provide a customer base to larger companies across the supply chain and supply vital goods and services to companies and households, helping to keep the wheels of the economy in motion.

Many MSMEs have the potential to become tomorrow’s large corporations that the government needs to continue on its path to growth and prosperity.

Many studies reveal that MSMEs growth is constrained among others by lack of financial support, poor management, lack of training and experience, poor infrastructure, and low profits.

They are currently highly exposed to the negative impact of Coronavirus disease (COVID-19). So, supporting their survival is not only crucial for mitigating the economic systemic impact but also to sustain employment and to create the conditions needed for future growth, once the pandemic is over.

With reduced turnover and disruptions in the market and supply chains, many MSMEs still are unlikely to attract affordable and quality credit under the traditional arrangements. Interventions are therefore necessary to cushion the impact of COVID-19 on MSMEs

Among the several timely responses by the National Treasury and Central Bank of Kenya to bolster the economy is the Credit Guarantee Scheme for the Small and Medium Enterprises (SMEs).

The Sh3 billion stabilisation facility will enable the participating banks (Absa, Co-Op, Credit Bank, DTB, KCB, NCBA and Stanbic) to extend credit to Micro Small and Medium Enterprises that meet the requirements, including compliance with tax obligations and business permits and having a good credit standing. 

Nuru Mugambi, the Director of Public Affairs and Sustainable Finance Lead at Kenya Bankers Association. [Courtesy] 

In an interview, Nuru Mugambi, the Director of Public Affairs and Sustainable Finance Lead at Kenya Bankers Association said the programme plays a critical role in getting the sector back on its feet especially at a time when economic activities have been slowed due to the pandemic.

“This is a blended finance from donors, government and the private sector which is designed to sustain liquidity and keep the sector moving as you know MSME plays a critical role in our economy,” she says adding that the programme will help the sector get working capital, acquisition of assets and recovery from COVID-19 impacts.

“A Credit Guarantee is effectively an insurance that gives lenders the confidence to extend loans to high-risk borrowers at flexible terms and often faster than under ordinary circumstances,” explains Joshua Oigara, KCB Group Chief Executive Officer.

Through the scheme, banks are now able to disburse affordable loans faster, lend more and take on riskier SME borrowers. Benefits of the CGS to the borrower include attractive repayment periods, lower loan security requirements i.e. easier collateral requirements.

It also offers affordable interest rates and enables banks to lend to more MSMEs, who were previously considered risky.

“We hope that the participating lenders and borrowers will utilise this opportunity most responsibly to ensure that the objective of stimulating our economy and preserving and creating employment is realised. If all goes well with this first phase—and non-performing loans are kept to a minimum—in the next three years, we anticipate the National Treasury may make available an additional Sh10 Billion to the Scheme,” he says.

To access the money, the borrower must have been registered and hold a valid business permit or trade licence, a requirement that is captured in the Public Finance Management (Amendment) Bill, 2020.

These new regulations on the credit guarantee scheme are aimed at de-risking banks’ lending to small businesses without collateral.

“The lending banks and the borrowing MSMEs share the responsibility of ensuring the success of this program. In line with the gazetted CGS regulations, banks must ensure they undertake due diligence on the MSMEs’ ability to borrow, while the MSME has to ensure they operate in good faith by meeting their loan repayment on schedule.”

As is the case with any bank loan, the borrowing MSME must appreciate that if the loan repayments are not made as scheduled, banks will initiate the necessary debt collection steps, including legal action, to recover the money.

Covid 19 Time Series


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