By UHURU KENYATTA
Posted Sunday, July 24 2011 at 18:05

While reading the Budget Speech for the Fiscal Year 2010/2011, I proposed the establishment of a Sh3.8 billion Revolving Fund whose objective was to encourage the growth of micro- and small-enterprises (MSEs) to enable this important sub-sector to support industrialisation, employment creation and economic growth.

More importantly, the Fund is also aimed at enlisting the partnership of commercial banks to lower lending rates and cost of borrowing in general.

Consequently, the Fund for Inclusion of the Informal Sector (FIIS), also known as the SME Fund, was launched on March 14, 2011. The funds were disbursed to the participating banks on June 24, 2011.

The three banks, selected through a competitive tender process (Equity Bank, Co-operative Bank of Kenya and K-Rep Bank) signed agreements committing to lend the funds in line with the objectives.

The government recognises the critical role that small-and micro-enterprises play in the development agenda. It also acknowledges that a significant barrier to the growth of MSEs, most of which are owned by the youth, is access to credit.

Financial exclusion arising from lack of credit access and cost challenges eclipses the potential in MSEs to grow their businesses.

The Fund, therefore, aims to meet the twin objective of addressing youth unemployment and encouraging growth of micro and small enterprises (MSEs) as key drivers of economic growth and development.

Through the Fund, the government seeks to empower about 8.3 million Kenyans in the informal sector and ultimately bring them into the formal sector.

Through access to credit, the MSEs are expected to expand their businesses, increase savings, and ultimately promote them to the formal banking system, thus reducing unemployment and poverty.

The Fund has a capacity building component which aims at enhancing financial management skills of MSE entrepreneurs and entrenching best practices.

Ultimately, the Fund will address the financial sector’s policy goals under Vision 2030 that include increasing financial access.

It will also widen financial inclusion for the under-banked and unbanked, and increase the use of innovative delivery channels like M-banking.

•The Fund is a revolving one in which the government enters into credit facility agreements with selected banks for lending to MSEs through branches, authorised banking agents and other channels, particularly the mobile phone.

The seed money provided by the SME Fund reduces risks to banks and ensures they target the MSEs through admissibility criteria.

•The Fund solves the problem of access and cost of credit, the two main barriers to MSE financing and the drive to financial inclusion.

Bank loans of 36 months restrict financing and downward adjustments of lending rates. However, the MSE fund will move to five years and above, and at the same time commit the banks to charge no more than 8 per cent a year interest rate.

•The programme encourages the use of innovative technologies to lower the cost of financial transactions so that the savings translate into lower costs for the beneficiaries.

Mr Kenyatta is Deputy Prime Minister and Minister for Finance