Kenya’s small businesses keep the economy running. They create jobs, fuel local trade, and support entire communities. But despite how important they are, many don’t survive beyond their early years, and a big part of the problem is access to financing. A Havard Business reviw points out that most startups don’t make it to their fourth year, partly because getting credit is hard and the terms are often just too harsh.
In late 2020, the Kenyan government introduced the Credit Guarantee Scheme (CGS) to help solve this. Instead of giving money directly to small businesses, the scheme encourages banks to lend by promising to share the risk. If a borrower qualifies under the program and ends up defaulting, the government steps in and pays part of what’s owed. It’s not a full cover, but it’s enough to make lenders feel more secure offering credit to smaller or riskier businesses.
Even with that, getting a loan as a micro, small or medium business in Kenya is tough. Banks generally see MSMEs as risky and often ask for heavy collateral, short repayment timelines, and high interest rates. So even when businesses do get approved, the terms can be too difficult to manage. The Treasury has said this clearly: many small businesses that borrow are hit with unfair terms because they don’t have assets to secure their loans. Kenya Bankers Association has also flagged this issue, pointing out that lenders hold back because they worry these businesses won’t pay back, especially when there’s no collateral on the table.
And with the economy facing more pressure in the last few years, things haven’t gotten easier. Lenders have become even more cautious, and small businesses are the ones losing out. This is exactly what the Credit Guarantee Scheme is trying to fix. By covering part of the risk, the scheme makes it easier for banks to offer better loan terms; larger amounts, longer timelines, and lower collateral requirements. It’s not a fix-all, but it’s a step toward helping small businesses get the kind of financing they actually need to grow.
Also read: What NCGC will (and won’t) do for Nigerian lenders
Challenges for Kenyan MSMEs
While the Credit Guarantee Scheme is a step in the right direction, it exists because the odds have long been stacked against small businesses trying to access credit. Kenya’s MSMEs may power a significant share of the economy, but many are still locked out of formal lending. Banks tend to be cautious with this segment, often treating small businesses as too risky to lend to without steep conditions. As a result, many entrepreneurs face high interest rates, short repayment timelines, and large collateral demands that are out of reach.
According to the Treasury, even when MSMEs do secure loans, the terms are often burdensome. A business might receive an offer, but it could be too small to be useful or too expensive to repay without strain. The Kenya Bankers Association has echoed this, pointing out that the combination of risk perception and lack of collateral has, for years, made credit inaccessible for many MSMEs.
These challenges have only deepened in recent times. With the economic shocks of the past few years, including the pandemic and inflationary pressures, banks have grown even more cautious. For small business owners, this has meant fewer financing options at a time when they’re most needed. The CGS was introduced to help reduce this credit gap, giving lenders more confidence to work with small businesses by offering a partial guarantee. But while it offers some relief, it does not erase the structural challenges that MSMEs continue to face in the financial system.
The Credit Guarantee Scheme
The CGS is an official government program, anchored in law (the Public Finance Management Act (Amendment) No.2, 2020 and related regulations). Its mandate is two-fold: to encourage lenders to make new loans to MSMEs and to make credit more affordable. As the Treasury puts it, CGS’s objectives include “encouraging additional lending to MSMEs” and “facilitating the financing of MSMEs by partially guaranteeing credit advanced to the enterprises”. In other words, the scheme exists so that a portion of each covered loan is underwritten by the state. To be clear, this is not free money – every loan must be repaid by the borrower, but it gives banks an extra layer of security.
Under CGS, the National Treasury signs risk-sharing agreements with participating banks and fintechs. When a bank makes a qualifying loan to an MSME, the Treasury guarantees to pay back part of the remaining principal if the borrower defaults. This risk-sharing structure is essentially like insurance on the loan: “a Credit Guarantee is effectively an insurance that gives lenders the confidence to extend loans to high-risk borrowers at flexible terms”. In practice the government’s cover is limited (for example, to a share of each loan). Official guidelines state that banks and Treasury share defaults (often roughly 50:50) up to defined caps. Crucially, the enterprise still applies for a normal bank loan under the CGS. The scheme simply promises partial reimbursement to the credit provider if things go wrong.
Who can benefit and what’s covered?
The CGS is targeted squarely at registered MSMEs in Kenya. To qualify, a business must be formally registered (with up-to-date permits and tax compliance) and borrow for business purposes only. Eligible uses include working capital, buying equipment, or rebuilding after a crisis. Ineligible uses (like personal consumption) are expressly prohibited. The scheme has a loan size limit of KSh 5 million, reflecting its focus on small loans. Women-, youth- and disability-owned enterprises are especially encouraged to apply, underscoring the inclusiveness goal.
There is no restriction by sector, in fact, early reports show wide coverage. By March 2022, for example, CGS-backed loans had reached businesses in 46 counties across 11 different sectors (from manufacturing and trade to agribusiness and services). This broad spread suggests that formal MSMEs of many kinds can tap the guarantee. The Treasury has indicated it will onboard additional financial institutions over time, but initially the CGS started with seven participating banks: Absa, Credit Bank, Diamond Trust Bank, KCB, NCBA, Stanbic, and Cooperative Bank. These banks appraise loan applications as usual (checking creditworthiness, business plans, etc.), but when they approve an MSME loan that meets the criteria, they tag it under CGS. At that point, the government guarantee applies.
Also read: What is the National Credit Guarantee Company (NCGC)
How CGS affects lending
For banks and other lenders, the CGS changes the loan design and risk management in practical ways. First, by cutting the potential loss on each loan, the scheme makes it viable to lend to businesses that would once have been considered too risky. Banks can develop new MSME loan products up to the KSh 5 million limit knowing part of each loan is backed by the Treasury. In many cases, this leads banks to relax collateral demands or extend longer terms. The Treasury notes that under CGS “borrowers may negotiate with the banks to be considered for a reduced collateral requirement”.
In other words, a small business might qualify for a CGS-backed loan with less personal guarantee than normally needed. The scheme also encourages banks to offer more competitive rates and flexible repayment, since their downside is cushioned.
However, banks still perform full credit checks and require compliance. A CGS loan is not automatic. Borrowers must meet all standard bank conditions (good credit history, valid business license, tax compliance, etc.). The CGS just adds a layer: when approving a loan, the bank records it as a CGS facility. If the borrower later defaults, the Treasury will reimburse the agreed share of the unpaid principal. Lenders must also follow Central Bank of Kenya regulations on risk classification and provisioning, though those rules may allow some flexibility given the guarantee support. Overall, credit risk management now involves tracking which loans are government-guaranteed and ensuring the guarantee conditions are met.
For borrowers, the process feels much like a normal business loan. They apply through their bank’s branch or portal. The banker will determine if the business qualifies as an MSME and if the loan purpose fits the scheme. If it does, the bank processes the application under CGS rules. The loan contract will note the guarantee arrangement. Importantly, borrowers have full responsibility to repay. The CGS is not a grant. All loans must be repaid under agreed terms. Misuse of funds is taken seriously: if a borrower uses the loan for non-business purposes or commits fraud, they can face penalties (including fines or imprisonment). In short, the guarantee helps secure the loan for the bank, but it does not remove the borrower’s obligations.
Early results and impact
Kenya’s CGS is new, but early data show it is already moving the dial on MSME finance. In the first year (2020/21) the Treasury put KSh 3.0 billion into the scheme as seed capital. Participating banks were instructed to leverage that into MSME lending, and they did. By December 2021 the banks had advanced KSh 3.34 billion in CGS-backed loans to 2,139 enterprises. Those loans ranged from KSh 30,000 up to the 5 million limit, with an average size around KSh 1.56 million. Loans were generally for about two years on average. The impact grew in 2022: by August that year, 2,609 businesses had been reached with a total of KSh 4.12 billion in financing. This means the banks had already exceeded the original KSh 3.0 billion guarantee by deploying over KSh 4.0 billion in credit. Along the way the scheme helped employ over 11,000 Kenyans in supported businesses.
These results suggest that the CGS is indeed encouraging banks to lend more and reaching diverse sectors. For lenders, it shows that a relatively small public fund can be “multiplied” many times over in actual loans. For small business borrowers, it means some of them who would have been turned away are now getting credit. Over time, as the CGS expands and other partners (like the World Bank, AfDB and USAID) provide technical support, the expectation is that even more credit will flow to the MSME economy.
Also read: What is Lendsqr, and how does it work?
Complementary efforts and next steps
The CGS is one of several initiatives to shore up MSME finance in Kenya. Banks have also restructured existing loans (especially during COVID), and development agencies often run matching grant or capacity programs. But the CGS is unique in being a government‐backed loan guarantee built into the legal framework. It complements rather than replaces these other efforts. For example, a Kenyan MSME might benefit from a financial literacy program and then go to a bank for a CGS-backed loan. So far the scheme is limited to formal enterprises and loan sizes up to KSh 5 million, but the Treasury has indicated it could consider raising limits or adding more institutions in the future. Any lender or business that meets the statutory definition of an MSME could potentially tap it.
For banks, the CGS also means adjusting product design. They may introduce new “CGS SME loan” products, train credit officers on the scheme rules, and build the guarantee claim processes into their systems. Lendsqr’s loan management software, for instance, can help lenders automate these checks, ensuring applicants are in compliance (valid permits, tax status, etc.) and flagging which loans are covered. Both banks and borrowers should keep in mind that CGS loans will still count as part of the bank’s loan portfolio and must follow normal accounting and provisioning rules. In other words, the scheme gives a cushion, but not an exemption.
Making the most of the Credit Guarantee Scheme
The Credit Guarantee Scheme offers a way to deal with some of the credit challenges that have weighed down small businesses in Kenya for years. It does this by reducing the risk for banks when lending to MSMEs that would typically be seen as too risky or too small. With the government agreeing to cover part of the loan in case of a default, lenders have more reason to approve applications they might have previously rejected. For business owners, this means there is now a clearer path to applying for formal credit, especially if they’ve been locked out due to lack of collateral or limited financial history.
That said, the scheme still requires that both lenders and borrowers understand how it works. Lenders need to adapt their loan products and approval processes to align with the guarantee terms. Borrowers also need to be ready with the right documentation and basic business records. It’s not automatic, and it won’t fix everything, but it creates a more workable environment for both sides.
If you need help figuring out how to take advantage of the scheme whether you’re a bank looking to adjust your lending approach or a small business trying to meet the criteria, you can reach out to us at support@lendsqr.com.
