Lack of credit support schemes chokes MSMEs

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SMEs exhibition at the Kenyatta International Convention Centre in Nairobi, Kenya, on February 24, 2020. PHOTO/COURTESY

In Summary

  • More than half of all countries across the world have a CGS, but in East Africa only Tanzania has established the scheme that is managed by the Bank of Tanzania.
  • Last April, in a State of the Nation Address, President Uhuru Kenyatta promised an SME credit guarantee scheme “in a few weeks” to exempt them from complex application procedures and collateral requirements.
  • A year later, the situation remains the same, and the Central Bank of Kenya this week revived the push for the Credit Guarantee Scheme to encourage banks to increase lending to MSMEs

The outbreak of Covid-19 has subjected micro, small- and medium-enterprises (MSMEs) in Kenya to more financial woes as lack of Credit Guarantee Scheme lock them out of funding opportunities.

As a result, MSMEs will not benefit from the mitigation measures deployed by the Central Bank of Kenya’s Monetary Policy Committee against impact of economic and financial disruptions caused by Covid-19 pandemic.

Last April, in a State of the Nation Address, President Uhuru Kenyatta promised an SME credit guarantee scheme “in a few weeks” to exempt them from complex application procedures and collateral requirements.

A year later, the situation remains the same, and the Central Bank of Kenya this week revived the push for the Credit Guarantee Scheme to encourage banks to increase lending to MSMEs.

If established, the scheme will receive funding from the National Treasury that would be used to repay banks in case MSMEs default on their loans.

More than half of all countries across the world have a CGS, but in East Africa only Tanzania has established the scheme that is managed by the Bank of Tanzania.

“Given the critical role of MSMEs in the economy, there is an urgent need for more interventions to support the sector by credit guarantee scheme to de-risk lending by banks and increase credit uptake in the sector,” said CBK governor Dr Patrick Njoroge, after Monetary Policy Committee (MPC) meeting held on Wednesday.

Data by the Kenya National Bureau of Statistics show that MSMEs comprise about 75 per cent of all businesses, contribute 25 per cent of gross domestic product and employ 7.5 million people. Despite their huge contributions to the economy and job creation, only 20 per cent have access to credit, with banks funding only nine per cent of the enterprises.

According to Dr Njoroge, the introduction of the CGS will significantly open lines of credit to MSMEs, which have been severely affected by the Covid-19 pandemic yet they cannot benefit from measures deployed by the MPC to mitigate the adverse economic and financial disruptions of the outbreak.

In its latest intervention, the MPC lowered the central bank rate to seven per cent to stimulate more credit to the economy that is reeling from the effects of the pandemic and whose growth the CBK projects to plunge to 2.3 per cent this year from 5.4 in 2019.

CBK cut the benchmark rate to 7.25 per cent in March and 8.25 per cent in January in deliberate measures to bring down interest rates and help ease the burden on businesses whose activities have been significantly disrupted by the pandemic.

PRIVATE SECTOR

Private sector credit grew by 8.9 per cent in the 12 months to March 2020, with the manufacturing sector accounting for 17.4 per cent, building and construction 9.5 per cent, trade 7.8 per cent, transport and communication 7.1 per cent and consumer durables 24.1 per cent.

The overall growth in private sector credit was supported by lowering of lending rate by commercial banks in response to reduction in the CBR, an improvement in liquidity and credit market conditions following the reduction in the cash reserve ratio.