Why SMEs should smile despite virus

Two recent developments have given the country’s small and medium-sized businesses a reason to smile despite the gloom brought by Covid-19 pandemic.

The first is President Uhuru Kenyatta’s revelation that his administration has allocated Sh3 billion as initial seed capital for the SME credit guarantee scheme. Treasury has already sought parliamentary approval to roll out the scheme, after Treasury Cabinet Secretary Ukur Yatani reads out the budget estimates on June 11, 2020.

The second is the European Union’s commitment to pump Sh11.7 billion into the scheme once it becomes operational. The belief that the scheme will be adequately funded to meet the needs of SMEs is borne out of the Central Bank Governor, Patrick Njoroge’s disclosure that financiers are already lining up to pump more money into the scheme.

Indeed, the International Finance Corporation — an investment arm of the International Monetary Fund — has already pumped Sh535 million into the Kenya branch of Bank of Africa (BoA) worth of insurance for money it lends to SMEs.

Denying loans

The proposed risk-sharing facility will cover credit risk taken by BoA on its portfolio of SME loans which amount to Sh 1 billion.

The establishment of the credit guarantee scheme removes yet another hurdle cited by commercial banks for denying loans to SMEs. The hope now is that the government will move with speed to, first, pass on the message to banks that they are now expected to do their duty to kick-start the moribund economy.

This message will be even more powerful if the government does its part by paying off all pending bills as promised and take steps to ensure no new ones are accumulated. Pending bills usually wreak havoc on SMEs because of their weak finances as compared to big companies.

The State will also do well to hear the cry of the small and medium-sized construction companies, including in the jua kali sub-sector, to include them in the credit scheme.

This might force the architects of the scheme to find ways of accommodating a section of individuals left out of the banking system because many of them are illiterate and cannot navigate their way around banking procedures.

Like their counterparts in SMEs, they do not have collateral that lenders demand as a pre-condition for even considering loan applications.

The borrowers would do well to remember that they are not getting free government money but cash that must be paid back in time as it comes from bank deposits sourced from Kenyans. The funds lent out also come from bank shareholders funds and these investors expect a good return on their investments.