CBK mulls Ksh.100B plan to cushion SMEs against pandemic

The Central Bank of Kenya (CBK) says it is working with member banks on a scheme to cushion micro, small and medium enterprises (MSMEs) against shocks arising from the Covid-19 pandemic.

According to the reserve bank, the scheme which is still in development will serve to make funding available to the micro business which would otherwise miss out on traditional banking loans.

“The credit guarantee scheme would be in the order of Ksh.100 billion. There is a an urgent need for a correctly structured scheme to ensure SMEs can borrow at affordable rates. If current credit risks are priced in, interest rates charged would be high. We are working to address this,” CBK Governor Patrick Njoroge told a webcasted news conference Thursday.

The proposed credit guarantee scheme would serve to cushion commercial banks against drawbacks associated with lending to the risk prone economic segment including losses emanating from loan defaults.

CBK Governor Patrick Njoroge says challenges faced by SMEs go beyond just the availability of financing to the business units to include risks posed by low economic activity.

“At this moment the biggest concern for SMEs is not so much finance but orders. Even if you give them finance what will they do with it if they are no orders coming to them? ” he posed.

According to the World Bank, a credit guarantee scheme provides third-party mitigation to lenders through the absorption of a portion of the lender’s losses on loans made to SMEs in case of default in return for a fee.

The move by the reserve bank makes for part of its interventions to boost the availability of funds in the economy as it moves to prevent the health crisis from blowing up into an economic crisis.

On Wednesday, the CBK Monetary Policy Committee (MPC) lowered the bank’s benchmark rate by 0.25 percent to 7 percent as it noted the need to cushion the economy further by ensuring greater liquidity through the tough economic environment.

“In light of the continuing adverse economic outlook, the MPC decided to augment its accommodative monetary policy stance,” the CBK noted.

Further, the bank observed the continued transmission of its past policy action as credit to the private sector credit rose to a 45-month high rate of 8.9 percent in March with the greatest beneficiaries of the new loans being manufacturing, trade and transport sectors.

Moreover, the banking sector’s asset quality improved as gross non-performing loans (NPLs) fell to 12.5 percent in March from a high of 12.7 percent in February.

Additionally banks released Ksh.15.3 billion worth of Covid-support loans to businesses out of a kitty of Ksh.35.2 billion realized from the lowering of the commercial banks cash reserve ratio (CRR) at the end of March.

The commercial banks further restructured loans totalling to Ksh.81.7 billion with nearly one thirds of the loans benefiting the tourism and hospitality sectors.

The CBK has insisted its continued engagement with banks to support both new loan issuances and loan restructuring against pockets from frustrations from members of public on credit denial by banks.

“Some of the borrowers were somehow waiting for a blanket statement, it won’t work like that. You have to present yourself to your bank and then have that discussion explaining how you have been affected by the pandemic and then work out a relation or outcome which both yourself and the bank are satisfied with,” Dr. Njoroge said.