The Kenya SME loan guarantee scheme is a piece of a bigger puzzle

The recent announcement by the National treasury to  guarantee commercial bank loans to small and medium size enterprises (SMEs) as part of the effort to reduce their risk profile, keep loan prices low and ease access to credit is noteworthy and commendable.

Although this is a good attempt to address the finance needs of SMEs it’s still not optimal in the sense that even with the credit guarantee; Banks are not the only financing entities to finance SMEs from set up to maturity.

A startup SME desiring to test a product idea and develop a prototype requires risk capital which banks may not offer. The SME is better off securing a grant to validate their product.

Similarly an SME with a viable product that has been tested but without revenue may still not be the right fit for banks given that they don’t have historical financial statements and collateral a major consideration for banks. The SME therefore must seek a person who evaluates based on potential and veracity of the business model; its highly likely that an Angle investor will be the right fit at this stage.

Banks can come in to finance SMEs who are already posting revenues and have been derisked by other financing entities making it easier for them to access loans.

A matter that must also be addressed is the viability of most businesses that are fronted by SMEs in Kenya. Taking an example of the Youth Fund; question we must ask is, why is the default rate so high?

Young entrepreneurs in Kenya still don’t value research and data. Businesses are started based on perceived success of neighbors.   This has led to a proliferation of car washes as an example every corner you turn. If one had borrowed funds to start a car wash in an estate where there are ten others what are the odds of breaking even let alone making profits enough to service a loan.

As part of financing startups and SMEs must join hubs and accelerator program where they can develop managerial capacity in order to manage teams and funds while at the same time test and develop viable and investable business models. SMEs will then receive appropriate funding based on their growth stage.

This means that Kenya must develop a coordinated Startup and SME financing policy that not only takes the SME loan guarantee scheme but also other players and potential players in the financing space such as Angle Investors, Fintech, Biashara Fund, Pension funds, Nairobi securities exchange GEMS, Private equity funds, Venture capitals and Wealthy individuals through family offices.