The government plans to buy stakes in small and medium sized start-ups that have no access to credit from banks to accelerate enterprise and jobs growth

This will be done through a State-backed venture capital fund, which will provide funding and technical support for businesses that have difficulty accessing loans from banks or capital markets.

The fund that will invest in manufacturing and service sectors is expected to be operational from June 2013.

Mr Julius Korir, the managing director of Kenya Investment Authority, a government agency, said: “The Treasury and the Authority are working on establishing the venture capital fund that will address the problem of limited access to bank loans.”

The fund targets entrepreneurs with good business ideas and in need of funds to roll out projects, Mr Korir said.

He said the government will provide the seed capital for the fund and other development finance institutions (DFIs) may be invited to contribute and run the fund.

The government makes big-ticket equity investments through the state-owned Industrial and Commercial Development Corporation (ICDC) but is now looking at venturing into the SME segment that accounts for over 60 per cent of all jobs.

Venture capital funds face a high risk of loss but earn significantly higher returns on successful ventures. Entrepreneurs accepting venture capital may sometimes have to cede decision-making on critical matters to the investors.

Grofin, for instance, invests between $50,000 to $1.5 million in SMEs, acquiring an equity stake and sharing profits and risk with the business for a period of up to seven years before exiting.

Analysts say that the proposed venture could see more SMEs take-off, more jobs created for the youth who face an unemployment rate of above 40 per cent.

“Retraction of financing on the continent has increased the cost of lending. This has meant that African companies pay more due to the associated risks,” said a panel of investment managers at a forum hosted by the Africa Trade Insurance Agency (ATI).