NAIROBI, Kenya, Nov 16- The country could by the end of 2012 have a framework that would facilitate access to credit for budding entrepreneurs and Small and Medium Enterprises (SMEs).
This follows the drafting of a policy agenda by the National Economic and Social Council (NESC), on the transformative credit guarantee scheme, which is a promise to pay a loan in case of a default.
NESC Secretary Julius Muia said on Tuesday that having a well structured risk-sharing solution would help reduce the reliance on the government to provide the guarantees which absorb an important share of the borrower’s risk.
“If you have got a vibrant financial system, then you don’t have to go to government for those guarantees which would be provided by institutions in the private sector which have been set up specifically for that purpose,” he explained.
While the government has considerably invested in the African Trade Insurance (ATI) Agency, which provides political and credit risk facilities as well as its financial contribution in the Export Promotion Council, credit guarantee system has not been effectively established in Kenya.
This is despite the proven benefits of the scheme as one of the financial instruments that can support entrepreneurs such as those in export trade, ICT or infrastructure business as they are unique and are hardly understood especially by lending institutions.
However, once implemented, Muia exuded confidence that SMEs, contractors who engage in large infrastructure projects and exporters who are initially targeted by this scheme would get an alternative financing avenue for their projects.
In addition, it would provide a platform through which the government can access the money it needs to finance the flagship projects outlined in its development blueprint, Vision 2030.
“The solution that we are looking for should be able to provide sovereign and political risk guarantees so that we can implement the large Vision 2030 infrastructure projects because we recognise that over 70 percent of the investment and capital expenditure budget, has to come from outside government,” the secretary pointed out.
It is this conviction that saw the government hire a consultant to recommend the system that would best enable the government to achieve its goals and act as a catalyst for wealth and employment creation.
While presenting their findings, chief consultant Mary Miller pointed out that there’s great potential for these schemes in the country owing to the growing demand for credit and the reluctance of commercial banks to lend to relatively new businesses.
According to a recent study, bank financing in the country is at 17 percent with more than 50 percent of business owners preferring to raise capital on their own or borrow from friends.
However, the fact that many banks are increasingly establishing special segments to address SMEs issues and the liquidity in the market shows an interest and an opportunity that can be exploited in the creation of an effective credit guarantee scheme.
The government too should demonstrate its commitment by for example setting up an office at the Treasury to manage and coordinate all matters related to credit guarantee scheme in the country.
In addition, this office would manage terms of SMEs guarantee scheme, collect data on all guarantees issued by the government and assist in the structuring of the Public-Private Partnership –type guarantees.
This was one of the recommendations that the consultants came up with and which were in line with international best practices. Further, Miller proposed that banks could lend at the market rates to encourage borrowers to commit to servicing their loans.