Strategy for successful implementation of Kenya’s SME credit guarantee scheme

Kenya’s SMEs have struggled the last five years owing to a barrage of recurring factors other than the traditional challenges of technology, market intelligence, access to finance, ill supportive polices, information and management capacity among others.

These new waves of challenges seem to be cyclical underpinned on government action or inaction such as late payment of dues to SMEs, heavy local borrowing, slowdown due to heightened political activities, shrinking export market, shrinking local market due to competition from cheap Chinese import and incoherent tax system among others.

The Kenyan government announced a raft of measure in 2019 that were meant to alleviate the challenges SMEs continued to face such as repeal of interest rate cap, payment of pending bills, set up of SME fund, credit guarantee scheme, amendment of competition bill and set up  warehouses in free trade zones in east African countries among others.

Fast track 2020, Covid-19 hit the country and Kenya, just like other countries finds itself walking the right rope of closing down to contain the spread of the coronavirus while at the same time taking measures to prevent a complete shut down of the economy through economic stimulus package.

The first measures that were announced meant to provide SMEs with liquidity which included reduction in VAT from 16 to 14%, reduction of Turnover tax from 3 to 1% and reduction of corporate tax from 30 to 25% though commendable still may not achieve its target given that over 79% of SMEs in Kenya are in the informal sector hence may not be a able to enjoy the benefits.

I continue to advocate for a comprehensive mapping of SMEs who are clustered in either formal or informal chama groups in various databases such as financial institutions, NGOs, Government and churches afterwhich either softloans, grants or a 50/50 mix of loan and grants can be channeled through these chama groups.

Be that it may, government announced a second stimulus package to enhance liquidity of SMEs with an additional Ksh 13 Bn split between Fastrack of VAT refunds, payment of outstanding pending bills and seed capital to operationalise the SME credit guarantee scheme.

My first reaction to the package was that according to data from KNBS 79% of SME are informal with majority in wholesale-retail followed closely by motor vehicle and cycle repair, how are they going to benefit from VAT refunds.

The credit guarantee scheme is a brilliant idea but if not well handled may suffer execution paralysis.

First the credit guarantee scheme must be inclusive from the get go to include other SME and Start-up investors such as angel investors, venture capitalist and private equity players from the supply side so that its not a financial institution only conversation.

This means that government must concurrently provide tax incentives to these investors to further sweeten the value proposition. Kenya is a very attractive destination to these investors going by Partech 2019 investment report for Africa where Kenya attracted over 17% of total venture investment in Africa despite lack of significant investor incentives.

From the demand side the credit guarantee scheme must not only include SMEs but also starts ups which are businesses that are either founded on or based on technology and have a higher probability of rapid growth over a short period of time as compared to SMEs. Examples of such in Kenya include Sendy which in a period of less than 5 years has over 10,000 active riders on its platform even during covid-19 and Twiga Foods which supports over 5,000 farmers and 5,000 micro-small vendors.

This will also mean that Kenya must enact a start-ups bill to recognize start-ups similar to Tunisia and Senegal in order for them to participate in the credit guarantee scheme. Further the scheme must consider broadening its scope beyond credit to other instruments such as equity, convertible debt and preference shares among others.

Finally, the guarantee scheme should consider having the scheme sit in the ministry of ICT innovation agency, funds administered by private custodian and investor admission committee composed of a mix of private and pubic players with majority being the former.