The Public Finance Management (Credit Guarantee Scheme) Regulations

Legal Notice 197 of 2020

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Legal Notice 197 of 2020
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Public Finance Management Act
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LAWS OF KENYA

PUBLIC FINANCE MANAGEMENT ACT

THE PUBLIC FINANCE MANAGEMENT (CREDIT GUARANTEE SCHEME) REGULATIONS

LEGAL NOTICE 197 OF 2020

  • Commenced on 13 October 2020
  1. [Revised by 24th Annual Supplement (Legal Notice 221 of 2023) on 31 December 2022]

Part I – PRELIMINARY

1. Citation

These Regulations may be cited as the Public Finance Management (Credit Guarantee Scheme) Regulations.

2. Interpretation

In these Regulations, unless the context otherwise requires —"Administrator" means the Administrator of the Scheme who shall be the Principal Secretary in the Ministry responsible for matters relating to finance;"borrower" means a person in whose favour a credit facility has been granted by a financial intermediary, part of which has been guaranteed under these Regulations;"enterprise" means an undertaking or a business concern engaged in the production of goods, provision of services or trade in goods;"financial intermediary" means a bank, a microfinance bank and any other institution designated as a financial intermediary by the Cabinet Secretary in accordance with regulation 12 (1) (a); and"Scheme" means the Credit Guarantee Scheme established under regulation 4.

3. Objects of the Regulations

The objects of these Regulations shall be to—
(a)improve and stimulate the national economy by encouraging additional lending to micro, small and medium enterprises, increasing investment opportunities for micro, small and medium enterprises and strengthening skills and capacities of proprietors of micro, small and medium enterprises;
(b)facilitate the financing of micro, small and medium enterprises by partially guaranteeing credit advanced to the enterprises; and
(c)create a conducive business environment and promote partnerships between the government and financial intermediaries with respect to credit guarantees for micro, small and medium enterprises and other related activities.

Part II – CREDIT GUARANTEE SCHEME

4. Establishment of the Scheme

There is established a Scheme to be known as the Credit Guarantee Scheme.

5. Funds of the Scheme.

The funds of the Scheme shall consist of-
(a)monies appropriated by Parliament for the purposes of the Scheme;
(b)income generated from the proceeds of the Scheme;
(c)income from investments made by the Administrator for the purposes of the Scheme;
(d)grants, donations, bequests or other gifts made to the Administrator for the purposes of the Scheme; and
(e)monies from any other source as may be approved by the Cabinet Secretary.

Part III – ADMINISTRATION OF THE SCHEME

6. Steering Committee

(1)The Scheme shall be overseen by a committee to be known as the Steering Committee which shall consist of—
(a)the Principal Secretary in the Ministry responsible for matters relating to finance, who shall be the chairperson, or the Principal Secretary's representative;
(b)the Principal Secretary in the Ministry responsible for matters relating to micro, small and medium enterprises or the Principal Secretary's representative;
(c)the Attorney-General or the Attorney-General's representative;
(d)the Governor of the Central Bank of Kenya or the Governor's representative; and
(e)three independent members, not being public officers, appointed by the Cabinet Secretary for a period not exceeding three years, renewable once, who shall comprise of—
(i)one person with experience in banking or finance;
(ii)one person with experience in insurance; and
(iii)one person with experience as an entrepreneur in a micro, small or medium enterprise.
(2)A person shall be eligible for appointment as a member of the Steering Committee under paragraph (1) (e) if that person—
(a)possesses a degree in a relevant field from a university recognised in Kenya; and
(b)meets the requirements of Chapter Six of the Constitution.

7. Functions of the Steering Committee

The Steering Committee shall—
(a)oversee the administration of the Scheme;
(b)advise the Cabinet Secretary generally on the administration of the Scheme;
(c)develop policy guidelines relating to guarantees by the Scheme;
(d)monitor the uptake of guarantees for credit facilities extended to micro, small and medium enterprises and make recommendations for improvement thereof;
(e)review applications for participation in the Scheme from institutions and advise the Cabinet Secretary on the suitability of the applicants to participate in the Scheme;
(f)advise the Cabinet Secretary on the designation of other entities as participating financial intermediaries;
(g)receive reports on the performance of the Scheme;
(h)review the criteria for the issuance of credit guarantees under the Scheme including guarantee fees, maximum loan sizes, guarantee coverage rates and credit standards defining eligible borrowers to be included in the scheme;
(i)monitor and evaluate the activities of the Scheme; and
(j)perform such other functions that, in the opinion of the Cabinet Secretary, shall promote the objects of the Scheme.

8. Administrator of the Scheme

(1)The Administrator of the Scheme shall be the Principal Secretary in the Ministry responsible for matters relating to finance or a person designated by the Principal Secretary in writing for that purpose.
(2)The Administrator shall —
(a)open and operate bank accounts for the purposes of the Scheme;
(b)supervise and control the administration of the Scheme;
(c)consult with the Steering Committee on matters relating to the administration of the Scheme;
(d)determine the maximum amounts of guarantees that the Scheme may extend to a participating financial intermediary;
(e)cause to be kept books of accounts and other books and records in relation to the Scheme of all activities and undertakings financed and guaranteed by the Scheme;
(f)enter into and sign agreements with financial intermediaries for the purpose of offering guarantees for part of the credit advanced to viable micro, small and medium enterprises; and
(g)open an electronic ledger which shall contain the following details—
(i)the names of participating financial intermediaries; and
(ii)the names of micro, small and medium enterprises that participating financial intermediaries have extended credit facilities indicating enterprises whose owners or proprietors are women, persons with disability and the youth;

9. Scheme Manager and staff

(1)The day to day operations of the Scheme shall be undertaken by a Scheme Manager and staff.
(2)The Scheme Manager and staff of the Scheme shall be appointed by the Cabinet Secretary from among the officers of the Ministry responsible for matters relating to finance.
(3)Notwithstanding paragraph 2, the Cabinet Secretary may appoint any other person as a member of staff of the Scheme if that person's knowledge and skills are found to be necessary for the performance of the functions of the Scheme.

10. Eligible borrowers

(1)An enterprise to which a credit facility has been extended shall be eligible for a partial guarantee of the credit facility under the Scheme if that enterprise —
(a)is a micro, small or medium enterprise;
(b)is registered as a business or company under the relevant laws;
(c)is a registered taxpayer and is in compliance with the relevant tax laws;
(d)is registered by a county government and holds a valid business permit or trade licence;
(e)is not part of any group or enterprise which would otherwise not be eligible for a credit guarantee under these Regulations;
(f)intends to use the credit advanced for business purposes, including —
(i)working capital requirements of the enterprises;
(ii)acquisition of assets; or
(iii)rebuilding businesses affected by natural disasters or other financial crises;
(g)is credit-worthy;
(h)does business in Kenya; and
(i)satisfies any other condition that may be imposed by the Steering Committee before the credit guarantee is granted.
(2)A guarantee for a credit facility under paragraph (1) shall be for a portion of the credit facility.

11. Ineligible borrowers

An enterprise shall not be eligible for a credit guarantee under the Scheme if —
(a)the credit facility relates to risks which are already covered by the Government, any other credit guarantee, insurer or indemnity, to the extent so covered;
(b)the credit facility is inconsistent with any prudential guidelines issued by the Central Bank of Kenya or under any other written law;
(c)the enterprise already enjoys a credit guarantee for another credit facility under these Regulations and the lending institution has invoked the guarantee;
(d)the enterprise has been sanctioned by a financial intermediary against collateral security or third-party guarantee;
(e)the enterprise is a financial intermediary or a state corporation;
(f)the enterprise is not a micro, small or medium enterprise; or
(g)the credit facility is intended for an unlawful purpose.

12. Eligible financial intermediaries

(1)A financial intermediary shall be eligible to participate in the Scheme if the financial intermediary —
(a)is an institution licensed by Central Bank of Kenya or any other institution as may be designated by the Cabinet Secretary on the advice of the Steering Committee;
(b)has experience in extending and managing credit facilities to micro, small and medium enterprises;
(c)commits to extend credit facilities to micro, small and medium enterprises which shall be at least four times the amount that the Scheme will guarantee;
(d)has a wide geographical branch network or outreach;
(e)has a wide sectoral coverage in its portfolio of credit facilities that have been extended to micro, small and medium enterprises; and
(f)has maintained a portfolio quality that is above a minimum level as may be determined by the Steering Committee on credit facilities that have been extended to micro, small and medium enterprises.
(2)The Scheme shall enter into a written agreement with each eligible financial intermediary before the financial intermediary is allowed to participate in the Scheme which shall specify how the financial intermediaries shall participate in the Scheme.

13. Applications by financial intermediaries

(1)An eligible financial intermediary which wishes to participate in the Scheme shall apply in writing to the Administrator.
(2)The application under paragraph (1) shall indicate the —
(a)minimum number of times of the guarantee value that the financial intermediary expects to extend as credit to micro, small and medium enterprises;
(b)size of credit extended by the financial intermediary to micro, small and medium enterprises both in total amount and as a proportion of total lending;
(c)performance of the credit facilities the financial intermediary has extended to micro, small and medium enterprises, including the ratio of non-performing credit facilities;
(d)sectors covered in the financial intermediary's micro, small and medium enterprise borrowers;
(e)geographical distribution of the financial intermediary's branch network or outreach; and
(f)any other relevant information that may be required by the Administrator.
(3)Before an eligible financial intermediary is allowed to participate in the Scheme, the financial intermediary shall undertake in writing to submit to the Administrator reports on the value of credit extended to micro, small and medium enterprises under these Regulations in accordance with regulation 19.

14. Conditions for guarantee by the Scheme

(1)A participating financial intermediary shall—
(a)evaluate applications for credit facilities by using prudent lending criteria;
(b)exercise business discretion and use due diligence in approving commercially viable applications for credit facilities;
(c)conduct the account of the borrowers with normal banking prudence; and
(d)provide access to affordable credit facilities to micro, small and medium enterprises on the basis of the partial guarantees committed under the Scheme.
(2)The participating financial intermediary shall not use more than one per cent of the allocated portfolio on any single individual micro, small or medium enterprise.
(3)The participating financial intermediary shall use at least thirty per cent of guarantee funds available on credit advanced to enterprises owned by women, youth and persons living with disabilities.
(4)The participating financial intermediary shall —
(a)monitor the borrower account;
(b)provide basic business support to the borrower that the participating financial intermediary provides its regular clients;
(c)safeguard the primary securities taken from the borrower in respect of the credit facility in good and enforceable condition; and
(d)ensure that the guarantee claim in respect of the credit facility and borrower is lodged with the Scheme in the form and manner specified by the Scheme.
(5)The participating financial intermediary shall —
(a)exercise all the necessary precautions and maintain its recourse to the borrower for the entire amount of the credit facility owed to it and initiate such necessary action for recovery of the outstanding amount, including such action as may be recommended by the Steering Committee;
(b)comply with the directions of the Cabinet Secretary in facilitating recoveries of the defaulted credit facility or safeguarding its interest as a guarantor;
(c)in respect of any defaulted account, exercise the same diligence in recovering the amount in default, and safeguarding the interest of the Scheme in all the ways open to it as it might have exercised in the normal course if no guarantee had been furnished by the Scheme;
(d)refrain from any act or omission, either before or subsequent to invocation of the guarantee, which may adversely affect the interest of the Scheme;
(e)ensure, through a stipulation in an agreement with the borrower, that it shall not create any charge on the security held in the account covered by the guarantee for the benefit of any account not covered by the guarantee, with itself or in favour of any other creditor without advance written permission from the Cabinet Secretary; and
(f)secure for the Scheme through a stipulation in an agreement with the micro, small and medium enterprise the right to share the enterprise's details and any other information provided by the borrower under these Regulations.
(6)Where a participating financial institution considers that the debt is more likely to be recovered if the borrower is allowed to pay the debt over a period of time, it may enter into an agreement with the borrower to pay the debt over that period and at such intervals, and subject to such terms and conditions, as provided for by relevant laws relating to the extension of credit facilities.
(7)A participating financial intermediary shall hold lien on assets created out of the credit facility extended to the borrower, on its own behalf and on behalf of the Scheme.

15. Invoking a guarantee

(1)A participating financial intermediary may invoke the guarantee in respect of a credit facility if the following conditions are satisfied—
(a)the amount in default in respect of the credit facility has not been paid;
(b)the credit facility has been classified as non-performing in accordance with the Central Bank of Kenya prudential guidelines;
(c)the guarantee in respect of the credit facility was in force at the time the facility was classified as non-performing;
(d)the participating financial intermediary has not invoked any credit life insurance with respect to the credit facility;
(e)a period of three months has elapsed from the date of the last disbursement of the credit facility to the borrower without payment by the borrower or the date of payment of the guarantee fee in respect of the credit facility by the borrower, whichever is the later; and
(f)the credit facility has been recalled and recovery proceedings have been initiated.
(2)The claim for the guarantee shall be preferred by the financial intermediary in such manner and within such time as may be specified by the Administrator.
(3)In this regulation, "amount in default" means the principal amount outstanding in the borrower's account in respect of a credit facility as at —
(a)the date of the credit facility becoming non-performing;
(b)the date the claim is lodged; or
(c)such other reasonable date as may be specified by the Scheme for preferring any claim against the guarantee which shall be subject to the maximum level guaranteed, whichever is earlier.
(4)A claim under paragraph (1) shall be accompanied by the following details—
(a)the name of the micro, small or medium enterprise to which a credit facility was extended;
(b)a certified copy of the certificate of registration or incorporation of the micro, small or medium enterprise;
(c)demand letters by the participating financial intermediary to the micro, small or medium enterprise;
(d)evidence that the credit facility was used for the intended purpose;
(e)the balance of the credit facility that is outstanding at the time of the default;
(f)a statement by the participating financial intermediary that all reasonable collection efforts, excluding conclusion of litigation or other judicial processes for the recovery of the credit facility, have been exhausted;
(g)a statement that the participating financial intermediary has classified the outstanding credit amount as non-performing in accordance with the Central Bank of Kenya prudential guidelines; and
(h)any other information or documents that the Administrator may require in order to validate the claim.
(5)Once the Administrator has received all the documentation or information required to validate a claim, the Administrator shall, within thirty days of receiving the documentation or information—
(a)validate the authenticity of the claim; and
(b)notify the participating financial intermediary in writing of the approval or denial of the claim.

16. Payment of claims

(1)Where the Administrator approves the payment of a claim, the Scheme Manager shall pay the participating financial intermediary—
(a)fifty per cent of the guaranteed amount within sixty days from the date the claim was received by the Administrator; and
(b)fifty per cent of the guaranteed amount within fourteen days of receipt by the Administrator of a notice of exhaustion of available remedies to recover the principal amount outstanding from the borrower or within six months after the claim was first lodged, whichever comes first.
(2)The payment of claims by the Scheme Manager to participating financial intermediaries shall not take away the responsibility of the financial intermediaries to recover the outstanding amounts of the credit facilities that are due from defaulting micro, small and medium enterprises.
(3)Any money paid by the Scheme Manager on a guarantee shall be a debt due to the national government from the micro, small or medium enterprise whose credit facility was guaranteed and be recoverable as a debt due to the national government.
(4)Where the Scheme Manager has paid a claim, and thereafter the participating financial intermediary recovers any funds owed by the micro, small or medium enterprise, the participating financial intermediary shall, within ninety days from the date of the recovery, reimburse the Scheme according to the risk-sharing ratio, after deducting any reasonable expenses incurred in the recovery of the funds, but shall not deduct interest charged by the participating financial intermediary on the outstanding amount that is higher than the interest charged on the credit facility before the default.

17. Record of recovery costs

The participating financial intermediary shall keep a record of all expenses incurred in the recovery process.

18. Claim to be paid in sixty days

The Scheme Manager shall pay each guarantee claim within sixty days from the date the claim was lodged.

19. Reports by participating financial intermediaries.

(1)A participating financial intermediary shall submit to the Administrator at least once in each month a report on the credit facilities for which guarantees have been issued under these Regulations.
(2)The participating financial intermediary shall submit the report under paragraph (1) within ten days after the end of the previous month.
(3)The report under paragraph (1) shall include information on —
(a)all credit facilities extended by the financial intermediary under the Scheme during that period;
(b)the total value of the credit committed by the participating financial intermediary under the Scheme during that period;
(c)all credit guarantees given to the participating financial intermediary which shall be disaggregated into enterprises owned by women, youth and persons living with disability whose credit facilities have been guaranteed;
(d)credit guarantees given to the participating financial intermediary disaggregated into the number of micro, small and medium enterprises whose credit facilities have been guaranteed and by county of operation; and
(e)any other relevant information required by the Scheme Administrator.
(4)Each participating financial intermediary shall submit at least once in each month a list of all credit facilities issued under these Regulations during the previous month.
(5)The participating financial intermediary shall list each credit facility by the account number and provide the—
(a)name of the micro, small or medium enterprise;
(b)micro, small or medium enterprise's county of business operations;
(c)value of the credit facility that has been guaranteed;
(d)interest rate charged on the credit facility;
(e)outstanding balance on the credit facility;
(f)date of approval of the credit facility;
(g)date of the first payment by the micro, small or medium enterprise;
(h)number of instalments to be paid by the micro, small or medium enterprise in the repayment of the credit facility; and
(i)such other details as the Administrator may require.
(6)At least once in each month, each participating financial intermediary shall submit a report to the Administrator of all credit facilities which are in default for thirty days or more specifying the —
(a)name of the micro, small or medium enterprise;
(b)sector of the economy that the micro, small or medium enterprise is engaged in;
(c)value of the credit facility that was guaranteed;
(d)outstanding balance on the credit facility;
(e)value of the unpaid instalment of the credit facility;
(f)date of first unpaid instalment on the credit facility;
(g)number of days in delay in the repayment of the credit facility; and
(h)reasons for the non-repayment of the credit facility.
(7)The report under paragraph (6) shall describe the measures taken by the bank to carry out collections and may reference the letters sent, follow-up notices, and warnings through legal channels.
(8)The participating financial intermediary shall report on the status of any defaulted credit facility for which the Scheme Manager has paid either partial or full coverage amounts.
(9)The participating financial intermediary shall report on each defaulted credit facility until —
(a)the guarantee payment has been recovered by the financial intermediary from the micro, small or medium enterprise; or
(b)the financial intermediary has fully provisioned for the credit facility in accordance with the Central Bank of Kenya prudential guidelines.
(10)Notwithstanding any other provisions of this regulation, the participating financial intermediary shall also report on the following matters in a manner and at intervals specified by the Administrator —
(a)the number and values of rejected credit facilities, repaid credit facilities and a projection of the credit facilities to be extended in the forthcoming period of three months; and
(b)the impact of the credit facilities on micro, small and medium enterprises in the manner specified by the Administrator.

20. Reports by the Scheme Manager

The Scheme Manager shall prepare and submit to the Administrator regular reports on the credit guarantees given under the Scheme including —
(a)financial and technical reports on guarantees made during the period including information on —
(i)the products and sectors for which guarantees have been issued;
(ii)the number of beneficiary micro, small and medium enterprises;
(iii)the value of credit guaranteed;
(iv)the repayment periods; and
(v)the guarantees which have been liquidated;
(b)reports on repayments made on outstanding credit facilities and details of any outstanding payments;
(c)reports on delinquent guarantees and the stage of recovery;
(d)reports on the size and quality of the guaranteed portfolio;
(e)reports on the liquidity position of the Scheme; and
(f)the risk assessment of the credit guarantees or classes of guarantees.

21. Cabinet Secretary may prescribe additional conditions.

(1)The Cabinet Secretary may impose additional conditions with respect to the issuance of guarantees for credit facilities advanced to borrowers under these Regulations.
(2)Without prejudice to the generality of subsection (I), such additional conditions may include the —
(a)maximum size of the credit facilities that may be guaranteed under these Regulations with respect to a credit facility or class of credit facilities;
(b)contributions by the financial intermediaries for purposes of expanding the Scheme and contributing to job creation;
(c)extent of the liability of the Scheme to a participating financial intermediary if the participating financial intermediary fails to comply with these Regulations;
(d)variation of the terms and conditions of an agreement if a participating financial intermediary fails or refuses to comply with these Regulations;
(e)the documents, information and reports that the participating financial intermediaries may be required to submit to the Scheme;
(f)manner of giving of information to the Scheme for the purposes of the making of an agreement;
(g)requirements in relation to the transfer of any rights and liabilities under a credit facility agreement; and
(h)such other matters as the Cabinet Secretary may consider necessary for the purposes of the Scheme.

Part IV – MISCELLANEOUS PROVISIONS

22. Offences and penalties

(1)A person who —
(a)wilfully applies any proceeds of a guaranteed credit facility to any purpose other than the purpose for which the credit was approved;
(b)having obtained a guaranteed credit facility, wilfully destroys or misappropriates any security given in relation to the guaranteed facility;
(c)knowingly gives false information; or
(d)wilfully destroys any asset used as a collateral by a participating financial intermediary,
commits an offence and shall be liable on conviction to the penalties specified in section 199 of the Act.
(2)Where an offence under this section is committed by a body corporate, every person who at the time of the commission of the offence was-
(a)a director, general manager, secretary of the company or other similar officer of the body corporate; or
(b)purporting to act in any such capacity as provided in paragraph (a),
also commits that offence and shall be liable on conviction to the penalties specified in section 199 of the Act.
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