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Critical Success Factors in the Implementation of the MSME Credit Guarantee Scheme


Access to affordable and quality credit is a major challenge for Micro, Small and Medium Enterprises (MSMEs) in Kenya. The MSME survey conducted in 2016 revealed that about 29 per cent of MSMEs closed their establishments because of shortage of operating funds. The situation has been worsened by the COVID-19 pandemic, which has exposed the sector to more financial woes. Massive layoffs and shutting down of businesses have been reported, with the hospitality, education, trade and transportation sectors being the most affected. According to the Central Bank of Kenya, about 75 per cent of MSMEs were at risk of collapse as at April 2020 due to lack of cashflow.

To cushion the sector from the prolonged effects of the pandemic, the Government fast-tracked the establishment of the MSME Credit Guarantee Scheme (CGS), which is one of the projects under the Third Medium Term Plan. The President unveiled the establishment and operationalization of the CGS as part of the economic stimulus programme on 23rd May 2020 and the Scheme was launched on 8th December 2020. The objective of the CGS is to enhance access to credit by MSMEs by providing partial mitigation of default risks. The scheme requires that the government undertakes to pay the Participating Financial Institutions (PFIs) in the event of default on loans advanced to MSMEs.

The CGS comes in to complement other Government initiatives towards MSME financing. Such initiatives include establishment of affirmative action funds such as the Youth Enterprise Development Fund, Uwezo Fund and Women Enterprise Fund. The funds are designed to cater for the unique needs of youth and women, who form a significant proportion of the MSMEs in Kenya. The CGS will allow all MSMEs to participate and access credit from selected commercial banks.

Image source: MSEA

MSME financing in Kenya

The main source of capital for about 72 per cent of MSMEs in Kenya is family income or personal savings. Such capital is in most cases insufficient and unsustainable, hence limiting the enterprises from expanding to reach economies of scale. Less than 30 per cent of MSMES rely on bank loans as a source of financing investments and working capital. Even though financing from the banking sector is reliable, most banks consider MSMEs to be highly risky. Specifically, the micro and small enterprises often either fail to demonstrate creditworthiness or lack sufficient cashflow to sustain loan repayments. In addition, the MSMEs fail to meet the required documentation such as bank statements, audited financial statements, and financial projections. The sector therefore faces inadequate finances in most cases. The CGS is therefore intended to fill the gap by working closely with Participating Financial Institutions (PFIs) to extend loans to MSMEs to be partially guaranteed by the government.

The Credit Guarantee Scheme

As part of the preliminary preparations to operationalize the scheme, the government through amendment of the Public Finance Management (PFM) Act 2012 provided for the establishment of the scheme and development of Public Finance Management (Credit Guarantee Scheme) Regulations 2020. The National Treasury signed an agreement with seven (7) commercial banks (ABSA, Cooperative Bank, Credit Bank, Diamond Trust Bank, Kenya Commercial Bank, NCBA and Stanbic bank) who will act as financial intermediaries in provision of credit to MSMEs. The banks are expected to lend out their money and follow the normal bank procedures for lending to minimize default risk. The funds in the scheme will be used as compensation to banks in the event of default.

The design and structure of the scheme in terms of the coverage ratio, risk sharing, eligibility, loan limit and tenure of guaranteed amount have already been agreed. Coverage ratio, which is the proportion of exposure that is guaranteed by the scheme is 25 per cent. Risk sharing ratio, which defines how the CGS and the PFIs will share the repayment in the event of default is at 50:50. Loan limit is Ksh 5,000,000, and tenure of guaranteed amount is 36 months. The design features of the scheme consider the unique characteristics of MSMEs in Kenya, such as high levels of informality, low survival rates and the significant micro segment. This is to ensure successful implementation of the scheme.

Proposed areas of focus during implementation

As we move into the implementation phase of the project, there is need to pay special attention to certain issues to maximize on the impact of the credit guarantee scheme, including marketing the scheme, capacity building for members of the ecosystem, operational efficiency, trust building and risk management strategy.

Marketing: The experience in Pakistan revealed that marketing is the most critical success factor for a CGS. A strategic and effective marketing approach will ensure potential beneficiaries get to know about its existence and how they can benefit from it. It will also help in getting sufficient business volumes for the scheme to make it sustainable.

Capacity building for members of the ecosystem: The World Bank identifies technical knowledge in areas of credit analysis, risk management and portfolio management as essential for successful implementation of a CGS. The National Treasury and the banks need to collaborate in building capacity in these areas for the staff members of the scheme. The collaboration will also provide an opportunity for the participating financial institutions to invest in the CGS by providing funds for the trainings.

In addition, financial literacy among MSMEs is important in improving utilization of the borrowed funds. As such, training for the MSMEs is critical and need to be pursued especially by the participating banks who have an advantage of a wide coverage across the country. Training for MSMEs needs to consider their heterogenous nature in terms of literacy levels, gender distribution, level of technology and innovation, and unique challenges.

Operational efficiency: A review of the Credit Guarantee Scheme of Tanzania by the Financial Sector Deepening Trust indicated that efficient processing and payment of claims by Participating Financial Institutions is possibly the greatest determinant of the effectiveness and sustainability of the scheme. As such, there is need to put in place measures that will guarantee efficiency to limit frustrations by banks. Frustrations may arise because of slow processing of requests or changing of terms in the middle of a request. Frustrated banks may be hesitant to process new loans under the scheme.

Trust building: Trust between the scheme administrators and the participating banks is critical for smooth operations and proper coordination of the scheme. The banks, through the top management, should be able to buy in to the fact that MSME financing is profitable, and it is not something that the Government is trying to impose on them. The banks will want to be assured that the Government is dedicated to ensuring the scheme is efficient and will meet its obligations in a timely manner. The scheme administrator, on the other hand, needs to be convinced of the commitment by the banks to play their part in mitigating risk.

Trust can be achieved through continuous consultations, transparency and accountability in operations of the scheme.  The participating banks should always be brought on board when important operational issues are being discussed, especially when adjusting the scheme parameters. Continuous reporting by the banks to the scheme administrator and by the scheme manager to the administrator will be necessary in promoting accountability and transparency. This will also help in lifting credibility of the institution.

Risk management strategy: The risk of default among borrowers tends to increase when part of their loans is guaranteed, especially if the scheme is not designed properly. This is because part of the collateral for the loan does not belong to them. A risk management strategy is essential in reducing exposure of the scheme to default resulting from change in behaviour among borrowers.


The establishment of the MSME Credit Guarantee Scheme is timely and a good move by the Government towards bridging the financing gap experienced by MSMEs. Successful implementation will be critical in stimulating the economy in the wake of COVID-19 pandemic, as envisioned by H.E. the President. It is commendable that the Government has moved fast to put in place the necessary legal and regulatory framework, and to provide seed capital for the scheme. To ensure the CGS is effective and sustainable, the implementation framework needs to be informed by the proposed area of focus.

Authors: Hellen N. Simiyu, Young Professional, Productive Sector Department

Erick Ronoh, Young Professional, Partnership Departments

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