The National Treasury will 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.
The
proposed credit guarantee scheme will provide third-party credit risk
mitigation to the banks by absorbing a portion of losses on SME loans in
the event of default.
Details of the scheme are being
firmed up through consultations with commercial banks and other
stakeholders, but the Treasury believes the scheme will unlock credit to
the SMEs, which have been most hit by credit rationing that followed
the imposition legal caps on cost of loans nearly two years ago.
“The
credit guarantee scheme is a policy tool to direct credit to SMEs thus
contributing to sustainable economic development and job creation,”
Treasury principal secretary Kamau Thugge told the Business Daily in
an interview. “The start time and amounts (of the credit guarantee
scheme) are yet to be determined,” he added. Sri Lanka launched a
similar scheme in 2016 that saw the government contribute Rs500 million
(about Sh318 million) in initial capital alongside assistance of
selected financial institutions. Under the Sri Lankan scheme, 75 per
cent of the principal amount borrowed is guaranteed by the scheme in the
event an SME defaults.
Treasury’s plan comes as it races to devise a reform package
that would convince parliamentarians to repeal the popular interest rate
capping law, which has seen commercial banks shy away from lending to
individuals and small business.
Kenya introduced
interest rate controls in September 2016 with the enactment of a law
that limits lending rates to not more than four percentage points above
the Central Bank Rate in response to the high cost of credit that saw
banks lend to private businesses and individuals at more than 20 per
cent.
Central Bank of Kenya (CBK) data shows that
private sector credit grew 2.1 per cent in the 12 months to February
this year, slightly lower than the 2.4 per cent in December last year.
Commercial
banks pumped more money into government securities in the year to
December 2017, even as they tightened credit to private enterprises and
individual customers, according to industry data. Financial statements
for the year ended December 31, 2017 show that the top eight Kenyan
banks invested Sh83.9 billion or 15 per cent more in government debt for
a total of Sh625.1 billion even as lending to the private sector grew
by a paltry 2.1 per cent in the same period, having been the biggest
loser in the credit market following the coming into force of a law
capping interest rates.
Dr Thugge said the credit
guarantee will aim to ease financial constraints that SMEs and start ups
face and increase their creditworthiness. “It’s a mechanism where a
third party (the guarantor) pledges to repay some or the entire loan
amount to the lender in case of borrower default,” said Dr Thugge.
“The
guarantor assumes part or all the credit risk, reducing the risk faced
by the financial intermediaries thus making it possible for borrowers
that might otherwise face challenges in accessing external finance to
obtain credit or to improve the terms and conditions under which they
borrow. Credit guarantee can therefore contribute to expansion of SME
Finance.” The Treasury has promised the International Monetary Fund
(IMF) a repeal of the interest rate capping law, in response to a sharp
decline in credit growth, leaving consumers under a cloud of uncertainty
over the future cost of loans.
Commercial banks have
argued that they are unable to properly price customer risk, especially
for SMEs that tend to carry a higher default rate.
Borrowers,
who paid exorbitant credit costs before the rate cap, will be watching
keenly to see how the Treasury navigates the sensitive and emotive issue
either with a partial review or repeal.
The Treasury
has since revealed that commercial banks could be allowed to put a risk
premium on customer loans for self-assessed probability of default in
planned amendments to the rate cap law.
Treasury chief
administrative secretary Nelson Gaichuhie said at a recent banking
forum in Nairobi that the proposed loan pricing model will include a
flat base rate but an additional risk component allowing banks to
differentiate rates for different customers based on risk.
The
proposed amendments have however elicited sharp reaction from various
groups, including consumer lobbies who insists that banks will abuse the
risk component to inflate the cost of loans.
At the
height of bank lobbying against the rate caps in 2015, Kenyan lenders
proposed the creation of a Sh30 billion pool of funds for lending to
SMEs at friendly interest rates.
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