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Embrace new Sh5b SMEs fund but get it right

The government is set to launch a Sh5 billion fund  for small and medium enterprises (SMEs).

This sounds like a fantastic idea, as the one of the biggest drawbacks in growing SMEs is lack of access to capital. The formal financial system deems SMEs too risky to lend to. But wait a minute.

This is the fourth fund that the government is establishing to ease access to credit for SMEs. Have any lessons been learnt from the past experiences? If so, how are the lessons being applied to ensure the new initiative succeeds?

If the mistakes of the past are not taken into account when designing this fund, it will just be another slush fund for corrupt procurement cronies and consultancies which add no value.

It is not too late to rethink the fund strategy and get it right. There are three funds run by the government. They are the Youth Enterprise Development Fund, Uwezo Fund and Women Enterprise Fund.

What has worked? What is the impact? What have been the pitfalls? How many businesses have emerged from the billions spent on these funds?

Further, attempts to create another fund of Sh3.8 billion for SMEs through the Micro and Small Enterprises Authority was a fiasco as the money is still stuck in three banks that breached the conditions of their partnership with the government. The problem clearly is not just lack of appropriate financing but lack of vision.

The way this fund is structured will be the critical factor in determining whether it will achieve the intended impact, or will merely be another controversy-ridden body mired in corruption. The following aspects need to be an integral part of the design of this fund.

First, define the parameters of impact from a business perspective. The parameters  should articulate jobs created, turnover growth, profitability and scalability. Current emphasis by these funds is on how much money has been disbursed to how many groups. This is a sterile statistic and reveals no impact.

Secondly, create timeframes for these businesses to move to move to the next level. They cannot stay in the nursery forever, and must make room for new businesses to be nurtured.

Third, this new fund must be open to all entrepreneurs. The last three funds have locked out men, focussing on youth and women. Nothing wrong with that, but men entrepreneurs also deserve assistance from money they pay as taxes to grow their businesses. This “discrimination” has locked out huge entrepreneurial energy from making an impact on growth of jobs, wealth creation, and delivery of goods and services.

Fourth, funds should be invested in SMEs that demonstrate high probability of success. Vetting teams should be set up which have members experienced in business, credit appraisal and background reviews to determine the integrity, focus and character of the intended beneficiaries.

Work with existing businesses as default. It is easy to evaluate existing businesses since the dynamics of the business can be discerned, it is possible to evaluate its needs and identify and manage risk.

Importantly, the prospective entrepreneurs targeted must demonstrate their passion for growing their businesses by applying for the financing and working to meet the set out criteria. In business, the adage easy come easy go, is a truism.

Fifth, the fund must establish very elaborate follow up mechanisms to keep tabs on beneficiaries. Follow up is critical to keep the beneficiaries on the straight and narrow, but also to assist them whenever they get into problems.

Lastly, insulate the fund from ministry structures. The best mode of operation would be to set up an independent oversight board that is competitively recruited, remunerated well and given key performance indicators.

The current model of funds designed to run as ministry-integrated structures has no capacity to identify and grow hard-nosed entrepreneurs.

The driving vision must be to build strong businesses. Unless this mindset permeates the sponsors and funders of this fund, Kenyans will simply be burdened further by a loan that achieves nothing.