MSME partial credit guarantees in Kenya: What 28.000 loans reveal about risk and pricing

Partial Credit Guarantees (PCGs) are central to MSME finance, yet their pricing impact is uneven. Using loan-level evidence from 28,356 guaranteed MSME loans issued in Kenya between 2013 and 2024, this paper examines whether PCGs reduce defaults and borrowing costs, and separately benchmarks Kenya's treasury-run Credit Guarantee Scheme (CGS) against international standards. The results show that higher coverage reduces default rates, especially in high-risk sectors such as agriculture and community services, and modestly lowers interest rates. However, when loans are already collateralized, the marginal benefit of guarantees is limited, and sectoral pricing disparities persist, suggesting that banks do not fully transmit risk-sharing gains to MSMEs. The comparative review highlights several design gaps in Kenya's treasury CGS: coverage is fixed rather than risk-based, allocation of guarantees is largely bank-driven, fees do not reflect borrower risk. These features contrast with leading international models such as the U.S. SBA 7(a) program, Korea's KODIT, and Chile's FOGAPE, which use tiered coverage, risk-based pricing, and stronger governance mechanisms. Overall, while PCGs in Kenya expand credit and reduce lender risk, they have not consistently lowered borrowing costs. Reforms that introduce flexible, risktiered coverage, risk-based fees and transparent allocation would align Kenya's system with global best practice and enhance its role in supporting MSME finance under Vision 2030.