President William Ruto rode to power on the hustlers’ platform, promising a paradigm shift in the State’s economic model.
He pledged a bottom-up approach that will enable hustlers to surmount operational barriers in their business environment and discriminatory policies of the State.
The plan would be to involve rural and urban poor in income-generating stimulus by easing the impact of market forces, and the State’s macroeconomic policies. This highly labor-intensive informal sector accounts for 80 per cent of the livelihoods of citizens, and are creative and innovative entrepreneurs.
Their major challenge is access to capital for start-ups or expansion. And to address this, Mr Ruto pledged in his campaigns to set up a Hustlers Fund.
Will the funds be provided to the hustlers for free? During the campaigns, that was the pledge. However, in recent weeks, the President has stated that it will be a loan with nearly 10 per cent interest, to be accessed through digital platforms and that there would no free money.
In his Madaraka Day speech, he stated that it will also be conditional to the borrower’s participation in a savings scheme. For every shilling saved, the Government will match double the amount. Details of the credit terms and the compulsory savings will probably be revealed later, before its launch in December.
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Clearly, the savings sweetener appears to be an attempt by the Government to enhance its domestic borrowing potential that his administration already signalled.
But of great significance to the hustlers will be how a cash-strapped small business will service its credit, and save money at the same time, how the Government will match the savings, when and after how long the total savings can be accessed.
And what will happen if the business environment changes and the business suffers losses? Will the collateral-free loan be written off by the State?
It is not the first time that the Government has set up a fund to provide cheaper credit to our Small, Medium and Micro Enterprises (SMMEs). Barely a year ago, the Government established an Sh2.5b Biashara Kenya Fund, merging the Women Enterprise Fund (WEF), Youth Enterprises Development Fund (YEDF) and Uwezo Fund, to provide loans at six per cent interest rate, through registered groups to marginalised segments of the society such as women, youth and persons with disabilities, generally the SMMEs.
WEF, set up in 2007, targeted women entrepreneurs with very small amounts of interest-free constituency–level loans, LPO and Bid Bond financing. YED, established in 2007, had similar objectives. Their impact was limited due to the amounts advanced, and the requirements to register as a group.
Fifteen years later, each fund disbursed around Sh15b only. Uwezo Fund, also an affirmative action programme established in 2014, disbursed Sh7b and was more successful with a 100 per cent uptake of amounts voted by parliament each year largely because it was free and less onerous in processing, and perhaps because it was managed by the Constituency Women MPs.
Medium & Small Enterprises Authority (MSEA) established in 2012 as a State corporation to promote, develop and regulate over 7.4 million micro and small enterprises in Kenya too has only received a token recognition in terms of resource allocation. Studies show that 90 per cent of SMMEs depend on funding from family members and friends. Commercial banks attach a higher risk profile to SMMEs although their default rate is lower than big businesses.
On 8th December, 2020 the Government set up the Credit Guarantee Scheme (CGS) to support Micro, Small and Medium Enterprises (MSMEs) in securing credit from several commercial banks. Three billion shillings was allocated to CGS, allowing the participating commercial banks to lend at least Sh12b to qualifying MSMEs. By Dec 2021, only Sh2.1b was advanced by the banks. In all these funds, the processing and registration requirements as well the high cost of finance was a major hindrance to its uptake.
Many nations give grants to small businesses. In the US, small businesses obtain up to $75,000 to “expand, or assist in the improvement and expansion of, domestic farmers’ markets, roadside stands, and community-supported agriculture programs.”
Several entities, including the federal government, state and local governments and private corporations provide funds for small businesses in specific industries that meet certain eligibility requirements. It also provides loan guarantees to small businesses and encourages local banks to work with start-ups or established companies that want to expand.
In all OECD countries, SMEs account for the vast majority of companies and receive grants and subsidies. In Denmark, the Government guarantees 70 per cent of the value of any new bank loans given to SMEs who have seen operating profits fall by more than 50 per cent due to Covid 19. In Germany, France and Switzerland, the public guarantee has been raised to 100 per cent for certain loan categories.
Big corporations have in the past been financed by Government through ICDC equity capital, joint ventures, commercial loans and asset financing.
Kenya Industrial Estates, Industrial Development Bank and Agricultural Finance Corporation are others Government financing platforms that have supported corporations. The State also provides various tax incentives for big corporations, in addition to billions in debt write-offs and cash bailouts.
These are extraordinary times. Many of the SMMEs are yet to recover from the effects of Covid 19. Our depressed economy and the high cost of living has aggravated the situation. The Government should reconsider its loan proposal and provide these hustlers funds as grants to qualifying businesses. It should be free, and with limited bureaucracy and requirements. They do not have an awful lot of time to chase institutions for conditional loans.
SMMEs activities have limited returns, are subject to external shocks and adverse economic conditions. Most are individual or family enterprenuers not willing to join chamas or groups. Fifty billion shillings annually can only have an impact only if it is replicated by county governments, and if banks undertake to give at least 20 per cent of all their lending to SMMEs through CGS.