By Steve Umidha
SMEs play a key role in developing economies, but the global pandemic crisis snow threatens their survival, and limiting their growth. Lack of liquidity also limits their growth as most companies are trimming their workforce and closing altogether.
The Chief executive of Credit Bank Ms. Betty Korir however believes that the recently formed Credit Guarantee Scheme (CGS) will offer the needed solution for the struggling small businesses.
Q1: After the approval from cabinet to establish the Credit Guarantee Scheme, no radical steps have been pursued to enhance credit access to the small and medium enterprises. Is it possible to know where the bottle necks are and what more needs to be done to effect it?
While credit guarantee schemes take some time to deploy, we welcome the government’s move to enhance access to credit for SMEs. There is a framework in place and there have been consultations amongst the seven participating banks and several already have a pipeline under this program.
Q2. The biggest challenge for SMEs as well as some corporates has been access of credit. How does the Credit Guarantee scheme address this challenge and how do enterprises qualify? Can more innovative ways be established in assessing customer risk so as to advance more credit?
The purpose of credit guarantee schemes is to:
- Influence credit allocation to make it easier for SMEs who ordinarily may not qualify for the lending;
- Protect consumers in the event of default;
- Support financial stability against a backdrop of increased risk.
While assessing customer risk, first the lender needs to look at the nature of the business the customer is in so as to determine the nature of the financing structure. Some of the innovative practices we’ve seen include Receivable Lending – where lenders lend against receivables or expected cash flows, Reverse Factoring – which is a practice where you look at the counterparty who is going to purchase the goods and lend to the SME client based on their buyer’s credit standing, and what I’d call Deferred Payments Model – which is using tenured letters of credit, meaning you don’t have to pay in the interim duration [until hypothetically 180 to 360 days] which gives the borrower time to build their cash flow.
Q3. As banks make credit accessible to SMEs, what challenges are you encountering and what would you advise SMEs to do so as to ease their process of accessing credit from banks?
SMEs are potentially deemed to be risky, especially at this time due to COVID-19, as their business models do not provide for a cushion against the recession.
This elevated risk has resulted in high default across most of the sectors that drive our economy. I would advise SMEs to ride on the current platform of the credit guarantee scheme and also talk to their bankers to understand how best to protect their margins. Banks have so far restructured 54 percent of the total banking portfolio, which signals a willingness to engage with clients to help them through this tough period.
Q4. How best can SMEs improve on their operation structures so as make their business predictable in terms of future performance consequently making it easier for lenders to advance them credit?
First and foremost SMEs need to work on their corporate governance framework. There needs to be a clear separation between management and shareholders. They also need to demonstrate management understanding of the dynamics in their business and their sector. The third area is an endeavor to keep accounts so as to have a clear view on performance and cash flows, which are very critical.
Solvency is also very critical for lenders, it is a measure for lenders to determine a borrowers’ ability to repay their debts. Solvency is influenced by the equity (or owners’ contribution) versus debts. Liquidity is another key area, as that is where payments come from. Ultimately they need to pay attention to the structure of their asset base and their governance framework.
Lenders require documentation from borrowers because first and foremost we are regulated and are accountable to our shareholders and investors. The regulatory framework ensures that lenders are not taking on uncalculated risks to the detriment of the depositors, shareholders and broader financial system – for soundness and stability of the industry. The Government has been considerate to SMEs by layering in a different risk standard from accounting standards; as such, SMEs are accommodated by fostering proportionate adherence to documentation standards and other regulatory requirements.
Q5. How sustainable is the Credit Guarantee Scheme in our economy considering the high default rate that comes with SMEs?
The government’s aim with the scheme is to create a financial systemic safety net for SMEs, and such programs are typically a targeted intervention.
Q6. Are there any other Development Agencies that are supporting this Scheme?
The current Kenyan SME program is supported by World Bank and other partners. There are several other funds supported by sovereign wealth funds and the African Development Bank that include funding and technical assistance to make SMEs investor ready and make their projects bankable.
Q7. We have seen the government front many projects in order to de-risk MSME’s. The projects are launched but end up hitting dead end even before attaining the desired objective. Is it because of the leadership or lack of commitment from people charged with the role? For example, STAWI, and currently, the credit guarantee scheme, with the pilot of seven banks there is no clear roadmap of steering it to the next level.
The Credit Guarantee Scheme is a noble intervention. It’s important to note that these programs are successful when all parties play their role, including government, lenders and the borrowers. In some cases there is a perception by borrowers that government supported lending programs are “free money” and we need to move away from this perception as a society. We hope this current credit guarantee program will be a success and as the lenders we are committed to its success; and we hope that borrowers will utilize the guarantee scheme to enhance their credit access.
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