The Treasury plans to help set up a private sector-led company to de-risk lending to credit-starved small traders after the successful launch of a similar firm for homeowners.
The planned entity, which will take a similar approach as the Kenya Mortgage Refinance Company for home loans, targets to partially cover Sh100 billion in loans extended to cash-strapped micro-, small- and medium-sized enterprises (MSMEs).
Acting director-general for Budget, Fiscal and Economic Affairs at the Treasury Albert Mwenda said the launch of the pilot State-backed Credit Guarantee Scheme last week would provide useful market information to help set up the proposed third-party credit risk mitigation fund.
“Ultimately, we intend this scheme to be (led and) managed by the private sector,” he said, adding the approach was backed by evidence across the world showing risk assessment for borrowers should be left to the lenders.
“This scheme will ultimately be anchored in a private company owned jointly by banks and government. It will really be a public-private sector scheme and that is more sustainable.”
The Treasury will cover up to 25 per cent of the loan in the event of default in the pilot phase, which was in June allocated Sh3 billion, with the lenders shouldering the remainder of the loss.
The allocation to the guarantee fund will rise to Sh10 billion in the financial year starting July 2021 following approval by the Cabinet in September.
While the Treasury has capped credit to be covered under the scheme at Sh5 million, participating lenders have an open hand in pricing the loans based on individual borrower’s risk.
President Uhuru Kenyatta on Saturday asked KCB, NCBA, Co-op, Absa, DTB, Stanbic and Credit Bank — participants in the pilot phase of the scheme — to charge single-digit interest.
The KMRC, a firm formed through a partnership between the Treasury and financial institutions to mobilise long-term funds for onward lending to homeowners, has built a credit line of nearly Sh40 billion from, among others, the World Bank Group and African Development Bank.
Banks continue to assign a higher risk profile to the MSMEs which usually prices them out of the credit market despite industry data showing the rate of default among small businesses has over the years been lower than that for the corporates.