Tuesday, June 18, 2024

Empowering women entrepreneurs: A guide to credit guarantee schemes in Kenya

By Brenda Kerubo - Project Manager, WYLDE International

Women entrepreneurs in Kenya encounter substantial hurdles in securing credit, an essential resource for their business growth and sustainability.

The Micro, Small, and Medium Enterprises (MSMEs) sector is particularly impacted, with a 2016 survey indicating that 29% of MSMEs closed due to a lack of operating funds.

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The COVID-19 pandemic has intensified these financial struggles, with the Central Bank of Kenya reporting that by April 2020, 75% of MSMEs were at risk of collapsing due to cash flow issues.

Family income or personal savings, the primary capital source for 72% of MSMEs, often falls short, and less than 30% of these businesses rely on bank loans.


Banks usually consider MSMEs, especially micro and small enterprises, to be high-risk due to their inability to demonstrate creditworthiness or sustain loan repayments.

Kenya is home to approximately 7.41 million MSMEs, with 1.56 million licensed and 5.85 million unlicensed.

According to the Economic Survey 2023, the MSME sector employed about 16 million Kenyans, creating over 700,000 jobs in 2022, which constituted 86.1% of all new jobs.

MSMEs represent about 98% of all businesses in the country and contribute approximately 30% to the GDP. These statistics highlight the sector’s crucial role in the economy, fostering economic prosperity and improving social well-being.

Access to affordable and quality credit remains a significant challenge for MSMEs in Kenya.

Most MSMEs depend on informal sources like chamas, family, and friends for loans, with minimal reliance on formal sources such as commercial banks, SACCOs, and microfinance institutions.

The lack of structured business operations, high levels of informality, limited information, and weak collateral bases make it difficult for MSMEs to access formal credit despite their critical economic role.

Family income or personal savings, which are the main capital sources for 72% of MSMEs, are often insufficient and unsustainable, limiting their growth potential. Less than 30% of MSMEs rely on bank loans for financing investments and working capital.

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Banks generally view MSMEs as highly risky, particularly micro and small enterprises, due to their inability to demonstrate creditworthiness or sufficient cash flow to sustain loan repayments.

Additionally, MSMEs often fail to meet required documentation standards, such as bank statements, audited financial statements, and financial projections, leading to inadequate financing.

Despite their significant contributions to the economy, MSMEs in Kenya struggle with access to affordable finance.

Lack of collateral, informality, and information asymmetry are major constraints identified in various studies. MSMEs, mostly in the informal sector, are deemed extremely risky by lenders and are thus considered credit unworthy.

Many MSMEs cannot provide information on their creditworthiness due to inadequate accounting records and collateral, leading to uncertainty about their expected returns and cash flow positions.

In the absence of a risk-sharing mechanism, this results in the exclusion of most MSMEs from the credit market, prompting the government to implement interventions to promote financial inclusion.

To address this funding challenge, many countries have successfully implemented credit guarantees as a policy tool to promote MSMEs by providing access to quality and affordable credit.

This strategy, supported by various development organizations and multilateral agencies, involves governments, development agencies, or private sector organizations providing guarantees to financial intermediaries.

If borrowers default, guarantors reimburse an agreed percentage of the unpaid loan to the lenders, transferring part of the credit risk from the lender to the guarantor. This risk mitigation mechanism encourages financial intermediaries to lend to MSMEs.

Credit Guarantee Schemes (CGS) have emerged as a crucial mechanism to bridge this financing gap.

By working closely with Participating Financial Institutions (PFIs), CGS facilitate access to credit for MSMEs, including women-owned enterprises, by providing partial guarantees on loans.

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How Credit Guarantees Work

Credit guarantees serve as a risk transfer and diversification mechanism. By covering part of the default risk, they secure repayment of all or part of the loan in case of default, thus lowering the lender’s risk.

Essentially, credit guarantees absorb a significant share of the borrower’s risk. They can be defined by their fund capitalization structure, ownership structure, and delivery model.

For instance, the European Union (EU) has successfully used credit guarantees to support MSMEs in accessing financing.

These guarantees are provided to financial intermediaries, encouraging them to increase lending to viable businesses that might otherwise struggle to obtain formal loans.

This has contributed to the growth of the MSME sector by increasing total assets, sales, employee numbers, and productivity.

Credit guarantees mitigate situations where borrowers with an equal probability of default have unequal chances of obtaining credit due to insufficient collateral.

The primary objective of credit guarantees is to enhance access to affordable credit for MSMEs that were previously unserved or underserved by formal financial institutions.

They aim to achieve financial, social, and economic additionality, and build a supportive business environment that corrects market failures.

Without credit guarantees, competent lending institutions would typically avoid lending to high-risk segments to maintain strong loan portfolio performance.

A well-structured credit guarantee provides an incentive for lending institutions to extend credit to MSMEs through a risk-sharing arrangement.

Studies by the Organization for Economic Cooperation and Development (OECD) suggest that credit guarantees facilitate access to external financial resources without diminishing the financial responsibilities of the borrower.

Financial intermediaries supported by guarantees adhere to strict standards and issue loans based on thorough risk analysis.

The guarantee supplements collateral requirements, reducing the regulatory capital needed. The process of issuing guaranteed loans enhances risk analysis with local knowledge from banks about competition, technological developments, and marketing.

Credit guarantees are expected to stimulate entrepreneurship, create jobs, build a more inclusive financial structure, and promote attractive credit conditions.

They are a key policy tool used by many economies to ease MSME access to credit while limiting the burden on public and private finances.

By reducing the risk to financial institutions associated with small-scale lending, credit guarantees encourage lenders to extend more funds to MSMEs, enabling banks to develop the knowledge and technology to make small-scale lending profitable.

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Status of Credit Guarantees in Kenya

A 2014 report by the National Economic Social Council (NESC) estimated the total value of credit guarantee schemes in Kenya’s banking sector at approximately Ksh 30 billion.

This constitutes 2.6% of the total reported net loans and advances and about 3.5% of gross loans advanced to the business sector. Despite this, the guarantee facilities represented less than 1% of Kenya’s GDP.

In response to the COVID-19 pandemic, the Kenyan government launched the Credit Guarantee Scheme (CGS) for MSMEs in 2020 as part of the Economic Stimulus Program to support MSMEs’ access to quality and affordable credit.

The scheme aimed to help MSMEs stay afloat and safeguard employment during and after the pandemic.

Anchored on the Public Finance Management Act 2012, the pilot scheme was implemented in partnership with seven financial intermediaries.

The scheme covers part of the risk associated with lending to MSMEs, incentivizing banks to offer better credit terms to qualifying MSMEs.

By December 31, 2023, the scheme had facilitated private sector lending to various sectors of the economy, benefiting MSMEs across 46 counties.

About 20.3% of the guaranteed facilities were extended to vulnerable segments, including women, youth, and persons with disabilities.

During this period, approximately Ksh 6.18 billion was lent to target beneficiaries using the financial intermediaries’ resources. N

otably, 71% of the guaranteed facilities went to new borrowers who had not previously accessed credit from participating banks, indicating that credit was extended to previously excluded MSMEs.

Around 87% of the outstanding credit facilities were performing well according to the Central Bank of Kenya’s risk classification.

Additionally, Ksh 2.4 billion in facilities were fully repaid, releasing a guaranteed value of Ksh 600 million for allocation to more MSMEs.

Despite these achievements, the trade sector received most of the facilities (76%), while agriculture (2%) and manufacturing (2.6%) received relatively low allocations despite their significant contributions to the economy.

The scheme has yet to reach the targeted 30% outreach to enterprises owned by women, youth, and persons with disabilities.

Steps to Access Credit Guarantee Schemes

Research Available Schemes: Identify the schemes that align with your business needs and eligibility.

Prepare Necessary Documents: Gather all required documentation, including a detailed business plan and financial statements.

Application Process: Submit your application through the participating financial institutions associated with the scheme.

Understand Roles: Be aware of the roles and responsibilities of both the financial institutions and the guarantee agencies to navigate the process effectively.

Tips for Maximizing Benefits

Build a Strong Business Plan: Clearly outline your business model, market analysis, and financial projections.

Understand Financial Management: Ensure proper financial management to meet repayment obligations and grow your business.

Network and Seek Mentorship: Engage with other entrepreneurs and mentors to gain insights and support.

Leverage Additional Support Services: Utilize training, advisory services, and networking opportunities provided by the schemes.


Credit guarantee schemes play a vital role in empowering women entrepreneurs in Kenya by facilitating access to much-needed credit.

These schemes address unique challenges, promote financial inclusion, and support business growth.

Women entrepreneurs are encouraged to explore these opportunities, leverage the benefits, and contribute to Kenya’s economic development.

By understanding and utilizing credit guarantee schemes, women entrepreneurs can overcome financial barriers, achieve business success, and inspire future generations of women in business.


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