The State-backed credit guarantee scheme, which seeks to enhance loan access to credit by micro, small and medium enterprises has registered sluggish growth to disburse a cumulative Sh6.2 billion by December 2023 since its launch three years ago.
The scheme, which seeks to share default risks with banks and thereby increase the pool of funds available for lending, had disbursed Sh5.8 billion as of June 2023.
“The credit guarantee scheme established in October 2020, continued to support additional credit uptake by vulnerable micro, small and medium-sized enterprises (MSMEs),” the Central Bank of Kenya (CBK) notes in new disclosures. “As at the end of December 2023, all seven banks had disbursed guaranteed loans to MSMEs amounting to Sh6.2 billion.”
The Treasury had provided a seed capital of Sh3 billion, a move that was expected to result in total lending of Sh12 billion. The scheme undertakes to absorb a loss of up to 25 percent of the principal in case of a borrower’s default. The maximum loan size per borrower is Sh5 million with a term of three years and up to five months grace period, with a discounted interest rate based on the businesses’ risk profile.
The disbursements so far represent just 0.79 percent of the value of active MSME loan accounts in the banking industry as of the end of December 2022 or Sh783.3 billion according to CBK’s annual banking supervision report.
The weak performance of the programme shows its challenges which have been highlighted previously, including the informality of small and medium enterprises and the low awareness of the product at the marketplace.
According to the annual performance report for the scheme covering the financial year to the end of June 2022, the Treasury lists the requirement for the registration of beneficiaries as a roadblock to the utilisation of funding under the scheme.
“Most MSMEs are informal and hence are not tax compliant and most of these enterprises are not registered by the relevant government agency, as required in the credit guarantee scheme regulations,” the exchequer stated. “Utilisation of credit guarantees as at June 30 2022 was at 35.9 percent and had started to stagnate towards the end of the financial year.”
Other factors listed as challenges affecting the implementation of the credit guarantee scheme include SMEs that do not meet the criteria off definition under the MSME Act, the misclassification of some small businesses and external shocks such as supply chain constraints.
The exchequer has also highlighted a moral hazard which presents the challenge of creating awareness on the credit guarantee while safeguarding the scheme.
The National Treasury has highlighted various remedial measures to revitalize the scheme including the on-boarding of additional financial intermediaries to the scheme to enhance uptake of credit guarantees across regions.
The exchequer also highlights the formalization of MSMEs and a review on the classification of the businesses as further remedial measures.
The credit guaranteed scheme is currently delivered through a risk-sharing agreement between the government and seven participating banks –Absa, Co-operative Bank of Kenya, Credit, DTB, KCB, NCBA and Stanbic.
The risk-sharing plan provides an incentive for the banks to offer better credit terms for qualifying businesses.
The scheme was formulated as a solution to MSMEs constrained access to finance, for capital and operational demands, market challenges and weak business strategies.
“Further, MSMEs that access credit face unfavorable loan conditions due to lack of sufficient collateral, high collateralization requirements, short payback periods, informal markets, inaccurate data and high-interest rates since they are viewed as risky by financial institutions,” the National Treasury added.
