Under the CGS the Government will provide guarantee to groups & businesses that don’t have access to credit by covering a share of the risk of the loan. In case of default, the lender recovers the value of the guarantee. “Kenya has in the past recognized the potential benefit of a functional credit guarantee system,” he added. Banks often refuse loans to SMEs without collaterals because of the risk perception. According to studies, this problem is acute for start-ups given that most of them have been found to fail within the first couple of years. Banks, therefore, don’t want to take such risks.
According to a study by Organisation for Economic Co-operation and Development (OECD), the absence of bank loans to start-ups has meant that only 15.5 percent of Kenyan small businesses use bank finance, slightly lower than the 19.8 percent regional average.
The CGS may well be an alternative to the SME Fund which has seen its own ups & downs ever since it was set up last year. The MSME Bill 2011 is expected to put to rest any doubts that the SME Fund lacks any legal framework. The Kenyan Government introduced the fund with an initial allocation of Sh3.8 billion and it received an addition Sh1 billion this year. Commercial banks in the lending business are expected to provide at least five times the loan disbursed.