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State to guarantee SMEs bank loans to fuel sector growth

Small traders cushioned from collateral demand by banks

In Summary
  • The move is expected to further fuel the sector that contributes 30 per cent to the country's economy, creating over 80 per cent of new jobs.
  • Commercial lenders have been hesitant in lending to SMEs, citing high risk, opting to lend to large firms and investing in secure government papers.
Interior CS Fred Matiang'i
OPERATION: Interior CS Fred Matiang'i
Image: FILE

Treasury plans to partially guarantee credit to small traders to ease their access to credit.

Opening the ongoing SMEs conference in Nairobi yesterday, Interior CS Fred Matiang'i said the move is expected to boost the sector that contributes 30 per cent to the country's economy, creating over 80 per cent of new jobs.

''The objective of this initiative is to encourage the banking sector to fund for longer tenors and increased loan limits in spite of limited collateral requirements,'' Matiang'i said.

 
 

He said many SME’s are not able to grow with short term working capital, and they need more long term and equity to support and finance technology upgrading, expansion and product innovation.

''Obtaining finance, be it mobile money or through the banking sector is not the key constraint. However, the constraint MSMEs face is accessing financing that is affordable and that is suitable to the current stage of their business, '' Matiang'i said.

In 2018, Treasury proposed credit guarantee scheme where the state was to provide third-party credit risk mitigation to the banks by absorbing a portion of losses on SME loans in the event of default.

This was expected to reduce their risk profile, keep loan prices low and ease access to credit.

Commercial lenders have been hesitant in lending to SMEs, citing high risk, opting to lend to large firms and investing in secure government papers.

The introduction of interest cap law in 2016 further crippled lending to businesses, with the private sector lending dropping to less than two per cent from 25 per cent.

However, after the repeal of the cap law last November, commercial lenders under the Kenya Bankers Association (KBA) started warming up to SMEs, launching a specific loan product for the sector.

 
 

They launched Stawi, an unsecured digital credit scheme offering loans ranging from Sh30,000 to Sh250,000 with repayment periods of one to 12 months, at an interest rate of nine per cent.

This, they said, was to rescue small businesses from high interest loans offered by predatory digital lenders.

Matinag'i said there is ongoing focused work being done to address the business environment

He cited recent launch of the Biashara Centre, in Kariobangi as a one stop shop, as a clear practical demonstration of this collaborative effort between government agencies and private sector to support SMEs.

He urged business bodies in the country like the Kenya National Chambers of Commerce and Industry (KNCCI) to ensure rural businesses are not left behind.

''KNCCI is in a unique position to present SME’s in rural centres. We encourage the Chamber to participate fully in the ongoing revamping of SME’s policy and regulations.