Implemented through Financial Sector Deepening Kenya (FSD Kenya), this sub-component works to deepen and expand the reach of financial services available to MSMEs in the country. FSD Kenya takes a market based approach to financial sector development. Evidence from a diverse range of institutions in Kenya and internationally shows clearly that financial services can be provided to smaller scale enterprise on a profitable basis.

FSD Kenya’s primary focus is developing the capacity of the financial services industry, working directly with a diverse range of financial institutions, business service providers and support institutions. It also funds research, such as the recent FinAccess study of financial access in Kenya, aiming to bridge information gaps relating to financial markets. FSD also provides support for Government initiatives to improve the legal and regulatory environment for financial markets - such as the new Microfinance Act and the proposed SACCO Bill.

This subcomponent is helping catalyze new risk capital instruments tailored for SMEs by adapting methods that have successfully reached a large number of SMEs in other countries. This is in recognition of the fact that SMEs find it difficult to access commercial bank financing because Banks normally require well secured collateral from applicants in order to offer them loans. On the other hand, Risk Capital Funds specialize in financing start-ups and provide close support and supervision. By solving problems related to information irregularities, risk capital funds can therefore help bridge the gap between emerging entrepreneurs and the banking system.

The subcomponent is being implemented at two levels. In the first one, Business Partners International (BPI) Kenya SME Fund, a local Investment Fund modelled around BPI South Africa, South Africa’s leading investment Company for SMEs, has set up shop in Kenya offering risk capital of between Ksh.4 million and Ksh.40 million to SMEs. Qualifying applicants are also, through the support of a USD 2.5 million Technical Assistance Fund, able to access Technical Assistance (mentorship) funding in the form of interest free loans which can be used to cover the cost of value added services to the entrepreneur – ranging from accounting support, problem solving, marketing plans and turnarounds.

At the second level, financial institutions have been invited to provide funding to SMEs and tap into another USD 4 million Technical Assistance Fund that will operate under the same guidelines.