The government plans to guarantee mobile phone loans to small traders in a bid to increase supply of credit. Sacco loans are also to be made part of the State-backed credit guarantee scheme under which the State will pay part of the defaulted mobile loans.
The credit guarantee scheme introduced in 2020 has until now had a low uptake. The State-backed credit guarantee scheme was initially meant to provide greater credit access to small and medium-sized businesses, covering 25 percent of the credit in the event of default of the loan.
The loan has a limit of Sh.5 million per borrower, with a repayment period of 36 months in a bid to cushion them from the adverse economic effects of Covid-19.
At face value, this intervention by government to guarantee mobile phone-based loans looks like a good strategy to boost financial inclusion in a country where only about 40 percent of people have a bank account.
But a closer look shows that it’s misplaced. the fundamental question the Treasury, which is planning to roll this out, has not asked is: which problem is it solving with this intervention?
This question is important because the Treasury doesn’t seem to know which problem it’s trying to solve.
First, the Treasury is giving the impression that its plan is to increase access to credit through this intervention but is instead solving a different problem.
This intervention largely increases liquidity rather than provide access to credit as intended because intake of micro-loans through digital platforms is largely high and guaranteeing these loans can only increase more uptake and not open access.
So, when the government goes to the extent of paying part of the defaulted loans it’s simply intervening through positive reporting of borrowers on the credit reference listing for borrowers to borrow more.
Second, SMEs dominate the list of State-backed loans guarantee — not large corporates. This begs the question: Is the issue about access to cheap credit or simply credit?
According to the Finaccess Survey 2021, Kenyans employed and those who own businesses have the highest access to financial services, including credit. Those working as casuals and those engaged in agricultural-related activities largely rely on informal channels to access credit.
Now, the Treasury hasn’t mentioned who they will be targeting to de-risk in order to open credit access. The Treasury seems to be simply interested in increasing the uptake of State-backed micro-loans and not really opening access to credit.
If the government will generally be boosting supply of State-backed micro-loans, it will simply be increasing liquidity and not opening access to credit.
Third, the case for a government credit guarantee scheme is within the space of access to bank loans.
Banks have avoided providing credit to small traders because they lacked collateral to back the loans.
At the same time, banks have been shunning the disbursement of loans to small businesses under the credit guarantee scheme even after the government sought to assure them that it would cover for defaults.
One of the reasons banks have shunned lending to small business is the uncertainty of the Covid-19 effects on the economy. At the same time, many businesses have a low appetite for loans since the economy is still facing the Covid-19 uncertainties.
According to the FinAccess Survey 2021, more than half of business owners sampled said that the main challenge facing businesses was a reduction in customer numbers followed by limited access to credit, which was cited by only 33 percent.
Now, this conundrum cannot be unlocked by shifting focus to mobile loans.
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