17.1 billion shillings has been set aside by African Guarantee Fund (AGF), a Mauritia based institution, to back Kenyan banks lending to small and medium-sized enterprises (SMEs) by insuring lenders against defaults.
AGF will guarantee half of the value of a loan balance to an SME borrower and charge banks a fee of between 1.5 to three percent for risk guarantee.
The 17.1 billion shillings allocated for Kenya is expected to enable banks to be able to lend about 34.3 billion shillings to small and medium-sized enterprises.
Already, Ecobank and Nic bank has already struck a deal with AGF, which has so far issued risk guarantees amounting to 5.1 billion shillings.
Over the years, banks have preferred to lend government-owned institutions and larger firms as they see SMEs as defaulters.
A large percentage of African Guarantee Fund’s income is earned through its risk guarantee business and on average, the institution has experienced a default rate of two percent, according to Jules Ngankam, the Deputy Chief Executive of AGF.
In the past, banks would accommodate risk borrowers by charging them very high-interest rates. However, the government, World Bank and International Finance Corporation have recently set up a multi-billion-shilling loan to serve the SMEs.