This archive report was first published on 7 May 2020.
As Kenya grapples with the health and economic impacts of Covid-19, economist Mohamed Wehliye has outlined a plan to mitigate the long-term damage to the economy.
Published on May 7, 2020, Wehliye's proposal involves a collaborative effort between the government, the Central Bank of Kenya (CBK), and commercial banks to provide low-cost loans to small and medium-sized enterprises (SMEs).
The plan, which Wehliye believes will be 'money worth spent as investment in SMEs now = taxes tomorrow,' involves a KES 100 billion loan guarantee program. The National Treasury would partner with the European Investment Bank (EIB) and the World Bank (WB) to provide lenders with a 90% guarantee on each loan, with the lender's participation in the credit risk sharing at 10%.
The funding for the program would come from a combination of sources, including KES 50 billion from the reserves released by the CBK back to the banks and KES 50 billion from participating lenders. This would result in a 50% discount on funding for the lenders, who would assume only 10% of the credit risk.
As a result, the interest rate for these loans should be at a maximum of 5%, with a loan size limit of up to KES 50 million per customer. The loan tenure would be a maximum of 5 years, with a 6-month grace period for interest and principal requirements.
The facility would be available to viable businesses and would target specific sectors critical to the economy, such as hospitality, horticulture, trade, and service, as well as public transport and the food chain.
To manage the risk of moral hazard, directors of these companies would be asked to sign personal guarantees, and other risk management measures would be put in place to prevent abuse of the cheap access to funds.
According to Wehliye, it is in the interest of the banking sector to support measures to save businesses and stimulate the economy, as the credit risk building up in the system and the probable many years of recession will eventually also kill their own businesses.
