Why State’s credit scheme is a double-edged sword for SMEs

A credit guarantee scheme proposed by the National Treasury to assist small businesses access cheap loans will also help the government to kill two birds with one stone.

Treasury plans to use the Sh3 billion kitty to uplift micro, small and medium enterprises (MSMEs) that have been devastated by Covid-19 to access cheap capital, thus saving millions of livelihoods.

However, there is also a price to pay for this life-saving offer. Small businesses that benefit from the yet-to-be-unveiled scheme will have to be registered with the county government and have complied with all the country’s tax laws.

“The borrower (must have) been registered by a county government and hold a valid business permit or trade licence,” reads part of the Public Finance Management (Amendment) Bill, 2020.

This is a boon to the Exchequer whose coffers have been running dry as the stringent containment measures to curb the spread of the Covid-19 pandemic keep people in their homes rather than in productive activities.

Tax collection in May was a five-year low, with the Kenya Revenue Authority (KRA) netting Sh90 billion, the lowest since May 2015 when the taxman netted Sh83 billion.

New regulations on the credit guarantee scheme are aimed at de-risking banks lending to small businesses without collateral.

The Kenya Mortgage Refinance Company (KMRC), which Treasury Cabinet Secretary Ukur Yatani said will be instrumental in maintaining adequate liquidity among primary housing mortgage providers (banks and Saccos), will also play a critical role in the credit guarantee scheme.

“This new company (KMRC) is also expected to play a significant role in the  structuring of the proposed National Credit Guarantee Scheme in order to  create an effective backstop mortgage guarantee component to cover the losses incurred by lenders on future home loans,” said Mr Yatani in his Budget speech this month.

A 2016 survey by the Kenya National Bureau of Statistics (KNBS) indicated there were close to 1.56 million licensed MSMEs. Of these, less than half are registered as taxpayers for turnover tax in KRA’s online system, i-Tax.

Another almost six million MSMEs, according to the survey, were unlicensed. Most of them, according to the survey, were operating at the household level.

These businesses - a good number of which have also been negatively affected by the pandemic - will have to regularise their businesses by getting permits from the county government and be tax compliant if they are to be saved from financial ruin.

In the current financial year, the government rolled out the turnover tax that targets small businesses making less than Sh5 million a year.

The businesses are expected to pay a tax of one per cent on their monthly sales, having been reduced from three per cent as part of Uhuru’s tax relief measures aimed at helping businesses and households navigate the tough economic times.

The re-introduction of the turnover tax has elicited mixed reactions, with critics saying it will cripple MSMEs.

However, KRA insists that this is only aimed at ensuring everyone pays their fair share of tax. Out of around 20 million people eligible to pay tax, only 3.7 million are tax compliant.

The headache for KRA, which has perennially been missing its target, has been on how to bring most of these unlicensed businesses into the tax bracket.

A Central Bank of Kenya (CBK) decision on Thursday to extend a fee waiver on mobile transactions of Sh1,000 or less to the end of December this year is also being seen through the prism of a government that is keen on monitoring each and every transaction for ease of gaining a slice.

CBK Governor Patrick Njoroge noted that while the business-to-business transactions “marginally” declined, more than 1.6 million new customers have since started using mobile phones to send and receive money.

KRA, which has been sweeping all sorts of data including electricity bills in its efforts to turn consumers into taxpayers, will be more than happy to add the mobile phone subscribers to its database.  

In Nairobi, there is a silver lining for the taxman. This is after the tax authority was appointed the revenue collection agent for the county government following the National Government’s takeover of some key City functions from embattled Governor Mike Sonko.

The deal will see the taxman get its hands on critical data such as the business licences issued by the county government.

With many small businesses on the verge of collapse, Treasury hopes that most of them will walk themselves into the taxman’s net, a win-win situation for the National Treasury that also wants to narrow the budget deficit, which has widened due to increased uptake of debt.

However, the bureaucratic processes involved might lock out MSMEs from the credit guarantee scheme with most of them discouraged by the tedious registration, paying for the licence as well as paying and filing tax returns.

With the guarantee scheme, the government will pay part of the loan taken by MSMEs in what is aimed at cushioning banks against possible default by high-risk small businesses.

Unlike big corporations, small businesses have little, if any, collateral such as land or buildings against which lenders can extend a loan.

It is worse for the millions of Jua Kali businesses that do not even have a record of their trading activities, which banks can use to appraise their credit worthiness.

The scheme was unveiled early this year by President Kenyatta so as to incentivise banks to lend to small businesses who have been hit hard by the adverse effects of the pandemic.

Dr Njoroge said most MSMEs urgently need the scheme as they do not have fat balance sheets to last them more than two months.

In the 2016 KNBS survey, six out of 10 licensed businesses said they had no reason for taking loans compared to 46 per cent among the unlicensed enterprises.

However, more unlicensed than licensed businesses said the loans were too expensive and they had inadequate collateral, meaning they needed a guarantee scheme more.

But in a grim businesses environment where demand for goods and services has been depressed, most banks have clammed up with the billions of shillings that have been poured into their coffers by the government.

Instead, most of them have been parking the excess liquidity in government debt or lending to corporations with adequate security.

For the 12 months to May, private sector credit grew by 8.1 per cent, a decline from nine per cent in April.

Njoroge attributed this growth to a number of monetary and emergency measures that the regulator has put in place to deal with the adverse effects of the pandemic.

Borrowers whose income has been disrupted by the pandemic have an option of negotiating for the restructure of their loans with their banks.

By end of May, personal loans valued at Sh199 billion were rescheduled, giving distressed borrowers some breathing space as they tried to find a footing in a volatile environment.

In total, loans valued at Sh680 billion have been restructured with real estate and tourism the major beneficiaries.

Meanwhile, several lenders have stopped giving mobile loans, popular among consumers and small businesses such as Mama Mboga and Jua Kali artisans, fearing increased default.

Digital lenders such as Branch and Tala have also stopped lending.  

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