The Government Wants Banks to Lend to Small Businesses Again, This Time With More Money and Fewer Excuses
Treasury is reaching for scale after discovering that good intentions and seed capital were never the binding constraint
Kenya’s credit guarantee scheme is about to get much larger on paper. The National Treasury plans to raise seed capital from Sh3 billion to more than eight times that amount, with the stated aim of pushing commercial banks to lend up to Sh50 billion to small businesses. It is an audacious number, especially when set against what the programme has actually achieved since its launch in late 2020.
Four years on, cumulative lending under the scheme sits a little above Sh6 billion. That figure alone does not damn the policy, but it does complicate the narrative that scale was the missing ingredient. Capital was available. Banks did not rush in anyway.
The expansion therefore reads less like a routine budget adjustment and more like a wager that the constraints holding back small business credit can be overcome through institutional redesign, not just money.
How the Scheme Was Supposed to Work, and How It Did Not
The logic behind the Kenya credit guarantee scheme has always been straightforward. The State absorbs part of the risk so banks can lend to firms they would normally avoid or price aggressively. In theory, this should lower interest rates and widen access to credit for micro, small, and medium enterprises that operate without hard collateral.
In practice, banks remained selective. A 25 percent loss cover did not erase concerns about borrower quality, documentation, and recovery in default cases. Many MSMEs, especially informal ones, struggled to meet even softened bank requirements. Awareness of the product was uneven. Some lenders treated the scheme as an add-on rather than a core channel.
By the time the programme reached its fourth year, it had neither failed outright nor proved persuasive enough to change lending behaviour at scale. It hovered in an awkward middle ground.
Treasury’s Two-Track Credit Push
The current expansion plan sits alongside another State-backed effort, the Hustler Fund. That programme targets individuals and very small traders through digital channels, promising fast, low-value loans with minimal friction. Treasury now talks about disbursing Sh100 billion to 30 million Kenyans through that route.
On paper, the two initiatives serve different borrowers. The Hustler Fund handles micro credit. The guarantee scheme is meant to support bank lending to growing enterprises that need larger sums and longer tenures. Together, they form a ladder.
The missing detail is how borrowers move from one rung to the next. Without a clear pathway, the risk is that digital loans become a cul-de-sac while banks continue to treat MSMEs as marginal clients, even with State backing.
The Turn Toward Private Risk Carriers
The most consequential change is not the size of the Treasury allocation but the Central Bank’s push to license private credit guarantee companies. Under draft regulations, these firms will need at least Sh1 billion in capital and will be supervised much like banks, with strict capital adequacy rules.
This marks a quiet admission that underwriting credit risk is not a natural strength of the public sector. Private guarantee providers will price risk, charge fees, and stand ready to absorb losses on defined portions of loan books. In theory, this introduces discipline and speed. Claims should be clearer. Incentives should align more cleanly.
Yet nothing comes free. Guarantee fees will add to the cost stack. Someone will pay, whether banks, borrowers, or both. The promise of cheaper credit for MSMEs could thin out once these costs are factored in.
The Math Beneath the Ambition
Unlocking Sh50 billion in lending sounds transformative until the arithmetic is unpacked. Even modest default rates can generate substantial contingent liabilities for the State when volumes rise. Informal businesses remain vulnerable to economic swings, tax changes, and supply disruptions. Recovery processes are slow.
If defaults cluster during a downturn, Treasury may find itself supporting losses at precisely the moment fiscal space tightens. This is not a reason to abandon guarantees, but it is a reminder that they are not neutral instruments. They move risk, they do not erase it.
Banks Have Long Memories
One underappreciated factor is institutional memory inside banks. Credit committees remember how long it took to process claims under earlier programmes, how documentation gaps complicated recovery, and how internal compliance teams reacted. Expanding capital does not automatically reset those experiences.
For the new phase to gain traction, guarantee mechanisms will need to be predictable, fast, and boring in the best sense. No drama. No improvisation. Just rules that work the same way every time.
What a Working System Could Look Like
If private guarantee firms take root and the State refocuses on oversight rather than execution, a more functional ecosystem could emerge. Banks might begin to treat guaranteed MSME lending as a repeatable product rather than a policy obligation. Borrowers with decent records could graduate from digital loans to bank credit without starting from zero each time.
That outcome is plausible, but not automatic. It depends on details that rarely make headlines: claim settlement timelines, dispute resolution, data sharing, and how aggressively banks are supervised when they sit on the sidelines.
An Expansion That Raises the Stakes
Kenya’s decision to enlarge its credit guarantee scheme raises the stakes of an experiment that has already tested patience. The move toward privately run, tightly regulated guarantee providers suggests lessons have been absorbed, even if imperfectly.
Whether this becomes a genuine engine of MSME finance or a larger version of a hesitant programme will hinge less on budget lines and more on execution. The money is easy to announce. The hard work begins once lenders, regulators, and borrowers all have skin in the same transaction, and none of them can easily walk away.
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