Reforms in the provision of credit guarantees by the Business Development Fund (BDF) are likely after the Parliament’s Public Accounts Committee (PAC) poked holes in the funding extended to Small and Medium Enterprises (SMEs).
During two virtual public hearings with BDF on the public finance mismanagement cases exposed by the Office of the Auditor General’s report for the 2018/19 financial year, PAC concurred with the AG that the Fund was not doing enough to support the growth of SMEs.
Yet, they said, large enterprises that are not eligible for BDF financing received support they did not deserve.
In the first hearing held on September 17, PAC was not satisfied with the explanations given by BDF officials for the mismanagement cases, prompting the committee to adjourn the session.
The hearing resumed on October 7 and lasted more than eight hours, during which more holes were poked in the way the facility is managed, including guaranteeing loans to companies owned by foreigners.
Management of credit guarantees
When BDF was established in 2011, its mandate was to facilitate start-ups and existing SMEs to access finance and business advice.
Overall, the initiative was designed to boost the government efforts to create jobs, empower the youth and women and as well as eradicate poverty.
According to the national SMEs development policy, SMEs are defined as enterprises not exceeding Rwf75 million of net capital investments; Rwf50 million of annual turnover and employee 100 people.
Hence BDF is mandated to support such SMEs without sufficient collaterals in form of guarantees.
An audit into the operations of BDF revealed that BDF had deviated from its mandate and was supporting large enterprises.
The audit also exposed wide-ranging inefficiencies and management of financing products.
It was disclosed during the public hearings that BDF’s SME policy put the ceiling of net capital investments at Rwf500 million, which is higher than what is contained in the national SMEs development policy.
Members of the parliamentary Public Accounts Committee during a virtual public hearing with BDF officials on mismanagement cases exposed by the Auditor-General’s report for the 2018/19 financial year in Kigali on October 7. / Photo: Courtesy
The AG’s report revealed that BDF gave credit guarantees worth more than Rwf25.1 billion to finance 217 projects of large enterprises contrary to the original policy of SMEs. That security represents 51 per cent of total credit guarantees of more than Rwf49.2 billion provided from 2011 to August 2019.
This, the report said, implies that a high portion of credit guarantee was provided to secure financing for the 217 large enterprise projects, representing only 2 per cent of all 10,191 projects secured in this period.
"This does not facilitate as many deserving beneficiaries to access finance as should have been,” the report warned, adding that providing credit guarantees to large enterprises violates BDF mandate.
Revising the BDF SME policy
BDF CEO Innocent Bulindi said that they thought that it was fine to maintain the ceiling at Rwf500 million because the money set by the national SME policy was within that cap, especially because of the agreement the Fund had with financial institutions.
Moreover, he added, after considering the side of the Auditor General, BDF consulted the National Employment Programme (NEP) Steering Committee, which resolved that the Fund halts providing credit guarantee to large enterprises.
Bulindi said that the AG’s report has indicated that "BDF has reached a point where it needs reform, be it at the policy level, partnership with other institutions and stakeholders.”
"And, we promise you that the changes take place,” he said.
MP Jeanne d’Arc Uwimanimpaye said that caution should be exercised so that BDF support does not end in the hands of the people with means to run big businesses at the expense of the vulnerable people who deserve the funding.
"BDF should target the people who lack the guarantee to be able to secure finance to run small businesses so that they are lifted out of poverty,” she said.
"Otherwise, it will end up working with the same people who have large businesses and are able to employ people – say 100 individuals – but who earn little money that cannot enable them to get rid of poverty.”
MP Beline Uwineza slammed BDF officials for not changing the policy before, yet it was interfering with its SME development and poverty eradication mission.
"It implies that you were not understanding the mission of the Fund. If you understood it, you would have changed it, instead of doing it as a result of a performance audit,” she told BDF officials.
The Permanent Secretary at the Ministry of Public Service and Labour, Gaspard Musonera said that the MPs’ viewpoint that the target should be on people who need the guarantee support more than others has valid grounds, pointing out that the outcomes of the existing BDF policy exposed the weaknesses that they want to work on.
He said the meeting of Permanent Secretaries and heads of institutions that are stakeholders of NEP took a decision that BDF should not support any business in the category of large businesses that should not be given priority.
"Next week, there is a ministerial-level steering committee to approve that so that it starts being implemented,” he said.
However, Musonera said, in case there are exceptions, – when large projects should be supported by BDF – they should be dealt with after a thorough assessment of their potential impact on job creation, and improving people’s lives, and the ministerial-level steering committee will decide on that.