SME credit guarantee a piece of a larger jigsaw – Experts

Stakeholders in the micro, small and medium enterprises (MSME) space have welcomed the establishment of a credit guarantee scheme by government terming it as the first step in the elevation of the cash-strapped economic sector.

Linus Wahome, the proprietor of Manpro Systems Limited, an SME in the construction economic segment terms the move as a lifeline to many of the micro-enterprises if implemented effectively.

“If there is access to initial capital and cash-flow, this will be a lifeline to many businesses. The challenge would be in the procedure of accessing the facility,” he said.

The appreciation of the expected credit arrangement further transcends beyond the micro-sector with commercial banks viewing the pronouncement as an SME de-risking strategy having shunned lending to the sector over perceived exposure to risks.

The Kenya Bankers Association (KBA) equated the guarantee scheme to a through-pass in soccer where SMEs would now be emboldened to approach commercial lenders as government shoulders part of their risks.

“It more or less of a through pass to a micro enterprise and it fosters discussions with a potential financier. At the end of the day however, it is not a 100% guarantee as the lender still takes up some risks and is likely to take up necessary steps to assure of the borrowers credit worthiness,” KBA Chief Executive Officer Habil Olaka told Citizen Digital.

Viffa Consult, a Kenyan-based SME consulting firm, meanwhile assesses intervention in the micro-enterprise sector to beyond just cash-crunch challenges to centre its concerns on the potential and viability of local businesses.

The consultancy raises the alarm on the lack research/data driven entrepreneurship in the country particularly amongst the youth where many adopt a copy and paste model in their venture to self-employment.

“Businesses are started based on perceived success of neighbours. This has led to the proliferation of car washes on every corner you turn. If one had borrowed funds to start a car wash in an estate where there are ten others what are the odds of breaking even let alone making profits enough to service a loan?” Viffa Consult Managing Director Victor Agolla posed.

According to Mr. Agolla, the support for SMEs should extend beyond just financing to include a coordinated Start-up and MSME financing policy which includes other players in the financing space.

The proposed players include angle investors, financial technologies (fintech), private equities (P.E.), venture capitals, pension funds and even the Nairobi Securities Exchange (NSE) Growth Enterprise Segment (GEMS).

Further to addressing MSME funding is the upholding of corporate governance in the entities where a majority of the enterprises wither and fall-off in their infancy.

As part of financing start-ups, Viffa Consult recommends the mandatory creation of SME hubs and accelerator hubs to develop managerial capacity and test/develop viable business models to facilitate the receipt of appropriate funding based on the enterprise’s individual growth stage.

While the lenders and the SME consultancy suggest an integral model to finance businesses through the pronounced credit guarantee scheme, economist Ken Gichinga rips up the script to link the ongoing credit access difficulties by enterprises to the ongoing stay of interest caps to commercial banks’ lending.

According to Mr. Gichinga, only a drastic measure such as the complete repeal of the interest capping regime or a more substantial stimulus package by government, would re-ignite growth in Kenya’s private sector.

“The credit guarantee scheme is a mere alternative to the lifting of the interest caps. The thinking in 2016 by parliament was to avail cheaper loans to the economy. This did not happen as banks chose to instead pack their funds into government paper,” he said.

Private sector credit has been on the slide since 2015, this as government increased its appetite for domestic borrowing to plug the fiscal deficit, crowding out the private sector ability to access credit in the process ahead of the introduction of the capping law.

The latest available data from the Central Bank of Kenya (CBK) shows private sector credit growth at 3.4 percent at the end of February 2019 from a 5-year average high of 12.5% at the onset of the rate cap.

Commercial banks have in the meantime continued to reap benefits from investing in the government’s fixed income tools which offer higher and less-riskier returns in comparison to lending to the general economy.

Equity Bank who at the end of March announced a 5 percent growth in full-year profits for 2018 for instance grew its loan book in the National Treasury by an additional Ksh.33 billion, underscored the persistent surety in returns from trading in government paper.

“The government has continued to pay out a higher interest than the public which essentially translates to 14 percent by assessing the latest infrastructure bond issue,” said Equity Group Managing Director James Mwangi.

SMEs have from the scenario ended up on the receiving end of depressed credit in spite of their contribution to the economy.

The entities provide employment to an approximate 14.9 million Kenyans while contributing to an estimated 28% of the country’s gross domestic product (GDP)

President Uhuru Kenyatta made the pronouncement of the credit guarantee scheme to SMEs during his State of the Nation Address on Thursday, April 4 in what he termed as a move towards deepening their credit access without the complexity of application procedures and collateral requirements.

latest stories