How SMEs are losing out on cheap loans

A youth wearing 'Money Heist ' face mask takes stock next to second hand shoes for sale in Kasarani estate,Nairobi. [Elvis Ogina,Standard]

A report by the National Treasury has found that micro and small enterprises are missing out on the government's cheap loans due to their informal set-up or structure that does not meet requirements in the Public Finance Management (PFM) Act and the MSE Act.

The report also notes that due to their informal set-up, they are tax non-compliant and hence cannot access the funds.

The report submitted to the National Assembly on November 9, 2022 documents the uptake of the government's credit under the Credit Guarantee Scheme which is run by the National Treasury.

The report is titled, The Annual Performance Report for MSMEs Credit Guarantee Scheme 2021/22 Financial Year.

Since its inception in 2020 as a counter to the effects of Covid-19 on the economy, the report states that awareness of the scheme is still low among the targeted businesses. As of June 30, 2022, the Credit Guarantee Scheme (CGS) had disbursed Sh3.9 billion to 2,490 MSMEs across 46 counties and 11 sectors.

Over 1,501 small enterprises benefited as well as 381 medium enterprises and 608 micro-enterprises. Small enterprises received Sh2.3 billion, medium received Sh592.8 million and micro received Sh431.9 million.

Guaranteed facilities

Enterprises owned by women, youth and persons living with disabilities received 20 per cent of the total number of guaranteed facilities disbursed. Women beneficiaries were 327, youth 164, and persons living with disabilities were nine.

"The beneficiaries of the CGS (Credit Guarantee Scheme) so far support a minimum of 13,901 jobs," the report reads.

The report notes that utilisation of the credit guarantee as at June 30, 2022 was at 35.9 per cent and had started to stagnate towards the end of the financial year.

"It is also noteworthy that Mandera County is yet to record a beneficiary under the CGS. This may be because only KCB Bank among the seven PFIs (participating financial institutions) has a branch presence in Mandera County," the report reads.

The other participating financial institutions are Diamond Trust Bank, NCBA Bank, Cooperative Bank, Absa and Stanbic.

Another challenge cited in the report on the implementation of the CGS is that most MSMEs are informal and hence not tax compliant. Most of these enterprises, the report says, are not registered by the relevant government agency as required by Regulation 10 of the CGS Regulations.

"Most of the enterprises do not fully fulfil the definition criteria set out in the PFM Act, 2012, and the MSE Act, 2012. Consequently, an enterprise could be micro by the number of employees while according to turnover, it could be classified as a small or medium enterprise," the report says.

The report also notes that the definition of what an MSME is by bankers may also have an effect on the uptake of the loans. "For instance, some enterprises involved in health care services, education and agricultural value chain are being classified as trade," it adds.

The legal definition of what an MSME is, the report notes, has been a challenge as an enterprise can be micro by one criterion and small by another.

"The scheme is consulting with relevant government institutions on this legal definition, noting that if the definition was administered in the strict sense it would lock out many MSMEs," the report notes.

"In the meantime, the National Treasury is considering a policy direction which requires the annual turnover to prevail as the measure of enterprise size for purposes of reporting on CGS."

There is also a challenge in creating awareness of credit guarantees while safeguarding the CS from the risk of being misused. The Covid-19 pandemic and the ongoing Ukraine-Russia war have also been cited as a challenge to the update of the credit. "This has affected global supply chains, negatively affected economies and businesses, including Kenyan MSMEs," the report says.

Most of the MSMEs that have benefited from the CGS are from urban areas with a high concentration in Nairobi. In total, 46 counties have benefited, while in the 2021/22 financial year, the number of counties reduced to 43.

"This could be explained by the concentration of MSMEs in urban centres and PFI branches across the counties implying high demand of credit in these regions," the report says. "Mandera County is yet to record beneficiaries under the CGS."

Northern counties

The report says the CGS will continue to work with PFIs that have a presence in the Northern counties, including Mandera, in order to increase the uptake of facilities in those areas.

"The National Treasury and development partners are also undertaking targeted outreach and awareness campaigns to increase uptake across all the counties," the report says.

The CGS was necessitated owing to the impact the Covid-19 pandemic had on small businesses which are estimated to be 7.4 million and employ in excess of 14 million according to Kenya National Bureau of Statistics (KNBS).

The CGS works by the National Treasury sharing risk with PFIs to support these businesses to access affordable loans.

These PFIs or banks act as intermediaries in vetting and qualifying a business first as an MSME and second as deserving of the credit. The maximum loan amount is Sh5 million for a tenor of three years with a grace period of up to five months.

The CGS has benefited businesses across 11 sectors namely: trade, transport and communication, building and construction, manufacturing, tourism restaurants and hotels, real estate, financial services, mining and quarrying, energy and water, personal and household, and agriculture.

"In FY 2021/22, trade sector continued to receive a disproportionately high share of CGS facilities at 78.8 per cent. This percentage is higher than the sector limit of 40 per cent as per the CGS agreement," the report notes.

Transport and communication comes second with 6.4 per cent followed by building and construction 3.5 per cent.

A disproportionally small number of credit facilities, the report says, was allocated to agriculture (1.7 per cent) and financial services (0.2 per cent) sectors in FY 2021/22 which it infers to the definition of sectors in the banking industry.

"For instance, agriculture is restricted to on farm activities and excludes MSMEs in the value chain," the report states.