OPINION: Credit Guarantee Scheme by Government for SMEs is Timely
Earlier in April 2019 during his State of the Nation address, President Uhuru Kenyatta announced that the government would introduce a public credit guarantee scheme for small and medium enterprises (SMEs) in Kenya. I believe that this is a great move that will deepen access to credit for Micro, Small & Medium Enterprises (MSMEs) because finance has been a perennial pain point for small businesses in Kenya. Additionally, they have been on the receiving end in the face of contracted credit as the result of the interest capping.
Research data from a recent study shows that only 20 percent of African MSMEs had access to credit and banks funded only nine percent of MSMEs. The Kenya National Bureau of Statistics reports that SMEs continue to make a significant contribution to the economy. In Kenya, MSMEs comprise about 75 percent of all businesses, contribute 25 percent ($8.07 billion) of the GDP and employ 7.5 million people (30 percent). Additionally, they account for 80percent of employment and contribute to over 92 percent of new jobs created annually in the formal and informal sectors.
Sadly, however, good statistics only end there. Majority of the MSMEs in Kenya do not get to celebrate their third anniversary. 46 percent per cent die within their first year. According to the Kenya National Bureau of Statistics, about 400,000 SMEs die every two years in Kenya. The move by the government of Kenya to introduce the scheme will enable MSMEs to overcome the complexity of loan application procedures, collateral requirements and the lack of credit history that are the contributing factors for banks shunning away from lending to the segment. The credit guarantee scheme will de-risk the opportunity for commercial banks. Our experience at Invest In Africa – (IIA) has taught us that guarantee schemes are not a straightjacket solution. For this to work, an ecosystem around supporting the MSMEs holistically must be in place.
Firstly, the capacity for MSMEs to absorb finance requires that their financial literacy is enhanced before disbursing the funding hence training must be a pre-requisite. Such training programs should be targeted at the micro-enterprises individual growth stage and should incorporate hand-holding components of business mentorship.
Secondly, financial data on MSMEs, which is critical in credit appraisals, is scanty. To resolve this, the government could establish partnerships with online platforms where the MSMEs can be registered and credit information data can be built in on such platforms to capture and provide in supporting lending.
Thirdly, the need to involve procurement entities in improving sustainability performance by bridging the payment gap. Buyers (procurement entities) can provide advance payment to MSMEs against which the banks can lend and use it as collateral.
Additionally, the scheme should target formalized businesses that meet the basic compliance, for example, tax compliance, county trading licensing as the minimum. Such businesses should have been in existence for at least three years.
Preference should be given to youth and women-led businesses to support affirmative action as an incentive for promoting entrepreneurship. There is a current crisis in Kenya where the youth unemployment rate stands at 11.4 percent of the population.
It will also be imperative to have a solid legal and regulatory framework and have stakeholders involved in the design to seek inputs from other industry players such as investors, financial institutions, capacity building agencies among others. Further, the corporate governance and risk framework should be designed, while at an operational level, monitoring and evaluation of the processes for the scheme will need to be established.
In order to boost sustainability of the scheme, the government should be an enabler in the implementation process and take measures in ensuring it is effectively designed and implemented. The government should also take its time to draw critical lessons from other countries because Credit guarantee schemes are present in more than half of developing countries.
Wangechi Muriuki, country manager, Invest In Africa-Kenya