The Treasury is considering the establishment of a collaborative venture with financial institutions to mitigate lending risks for small businesses, including those emerging from the Hustler Fund, via commercial banks. The proposed Kenya Credit Guarantee Scheme Company (KCGSC) aims to provide a safety net for a portion of loans extended by commercial banks to financially strapped micro, small, and medium-sized enterprises (MSMEs).
In the draft 2024 Budget Policy Statement (BPS), the Treasury highlighted its commitment to supporting individuals and MSMEs excluded at the bottom of the pyramid through initiatives like the Financial Inclusion Fund and the Hustler Fund. To ensure sustainability, the Credit Guarantee Scheme (CGS) will undergo transformation into the Kenya Credit Guarantee Scheme Company (KCGSC), incorporating a clear credit guarantee policy framework for MSMEs.
Albert Mwenda, the Director-General for Budget, Fiscal, and Economic Affairs at the Treasury, shared that discussions are underway with the Central Bank of Kenya, the financial sector regulator, and other stakeholders for the incorporation of the new firm. Mwenda emphasized that the formation and operation of KCGSC will adhere to international best practices.
Mwenda stated, “Credit guarantees allow us to tap into abundant private sector liquidity to fund MSMEs while instilling financial discipline. We anticipate that MSMEs currently borrowing from the Hustler Fund will receive support from the scheme as they transition into the formal financial sector, enabling them to access larger volumes of credit at a lower cost to the government.”
Currently, the Treasury guarantees up to 25 percent of loans, meaning that in the event of a default, the CGS covers a quarter of the non-performing loan. However, the majority of the country’s 39 commercial banks have avoided participating in the current scheme. Notably, KCB, NCBA, Co-operative Bank of Kenya, Absa, DTB, Stanbic, and Credit Bank are the only lenders involved in the credit insurance scheme, where individual borrowing is capped at Sh5 million, and loan pricing is determined by the borrower’s risk profile.
Mwenda stressed the importance for participating lenders to consider the credit risk covered by the company in pricing qualifying facilities. The proposed KCGSC aims to cover a larger share of the loan than the existing state-run CGS, launched in December 2020, which fell significantly short of initial targets.
The Treasury had initially projected to unlock up to Sh40 billion for small traders under the CGS for the fiscal year ending June 2022. However, the budget was later reduced to Sh3 billion, targeting lending of about Sh12 billion, with cumulative loans at the end of March 2023 totaling Sh4.64 billion, just over a third of the target.
Despite the challenges faced by the current scheme, the Treasury remains committed to innovation and addressing the issues affecting the uptake of the fund. A recent report identified challenges such as unclear business classification within the definition of MSME, leading to discrepancies in fund access. Banks continue to assign higher risk profiles to MSMEs, despite lower default rates compared to corporates, as indicated by a 2016 survey from the Kenya National Bureau of Statistics. The survey found that about 71 percent of the 7.4 million MSMEs in 2015 received fewer loans than requested from banks, with approximately 86 percent relying on family and friends.
