Debt can't nurture: Why Kenya needs grants before loans for entrepreneurs

This story has significance for readers across Kenya and beyond.

Editor's Note: In this compelling piece, Alex Munyua, a policy analyst, challenges the binary 'loans vs. grants' debate in Kenya’s entrepreneurship funding. Drawing on the NYOTA Project’s model, Munyua highlights the inherent risks of premature debt and urges a shift toward 'sequenced financing', prioritising grants for business germination before scaling with debt—to foster truly sustainable local ventures.

Kenya has spent decades arguing about whether young entrepreneurs should get loans or grants. That's the wrong debate. The real question is order — what kind of money a business needs before it exists, and what kind it needs once it does.

What is the NYOTA Project's funding approach?

Debt finances execution. Grants finance discovery. Confuse the two, and you strangle the very businesses you meant to grow.

We are taught that cheap credit is always good news for a young entrepreneur. We are wrong. A loan doesn't ask whether you've found a business yet — only whether you can pay by Friday. Debt is an amplifier: hand it to a business that already works, and it works harder. Debt is not an incubator: hand it to someone who hasn't yet found a model that earns money, and it stops being fuel and becomes a weight, dragging repayments out of a business before the business has anything to give.

Kenya's National Youth Opportunities Towards Advancement (NYOTA) Project is interesting precisely because it sidesteps that trap. It gives young entrepreneurs direct, non-repayable start-up capital — an initial KSh 25,000, rising to KSh 50,000 once they show real progress — bundled with mentorship and automatic enrolment in a savings scheme. It treats young people not as debtors who must already know what they're doing, but as discoverers who need room to find out.

This piece argues that getting that sequence right — patient money first, disciplined money later — builds businesses that last. Getting it backwards, by forcing loan-style discipline onto people who are still figuring out what their business even is, kills good ideas before they can prove themselves.

How do loans impact first-time entrepreneurs?

Picture a first-time entrepreneur — often young, often without a family business to learn from — who takes an interest-bearing loan to start something new. The moment the loan lands, a stopwatch starts, and it doesn't care whether the business is ready. Repayments are usually due within weeks, long before the first paying customer has even shown up, let alone a profit. This isn't a story about poor discipline or bad choices. It's what happens, predictably, when you hand someone a tool built for a business that already exists. Three things tend to happen at once:

- Money leaves the business too early. Cash that should go toward testing an idea, stocking inventory, or finding the first customers instead goes straight to loan repayments.

- Risk-taking disappears. Under constant pressure to make the next payment, borrowers can't afford to experiment. They gravitate toward whatever earns cash fastest — a basic kiosk, a roadside stall — rather than anything more ambitious or differentiated.

- One bad week can end everything. A medical emergency, a late payment from a client, a bad month — any of it can trigger a default. Once that happens, the borrower is blacklisted by credit bureaus, often before their business ever really had a chance.

What the evidence actually shows: Research on this is genuinely mixed, and it's worth being precise about what it says. A widely-cited review of six randomised studies on microcredit (Banerjee, Karlan & Zinman, 2015) found modest, uneven effects overall — credit helped some borrowers and did little for others, but wasn't dramatically harmful on average. That review didn't specifically test whether debt behaves differently for first-time entrepreneurs versus established traders — that distinction is this essay's reasoned inference from how the mechanism works, not a proven result.

Grant-based programmes have their own complication worth naming honestly: a nine-year follow-up on a similar unconditional cash-grant scheme in Uganda (Blattman, Fiala & Martinez, 2020) found that the early income gains faded over time, as people who hadn't received grants eventually caught up through ordinary work.

Grants are not a permanent fix. They're a head start — and what happens after the head start matters as much as the grant itself.

How does NYOTA support entrepreneurs?

No fungus in a forest has ever sent a seedling an invoice. Underground networks of fungal threads route nutrients to struggling young trees for free, on the patient bet that a tree left alone to grow will eventually feed the whole system back. NYOTA runs on the same bet, translated into three practical design choices.

1. Money you don't have to pay back, released in two stages

The first KSh 25,000 removes the survival pressure during the hardest early months — money for raw materials, a workspace, testing whether the idea actually works. The second KSh 25,000 is conditional: it only arrives once the entrepreneur shows real progress.

That milestone acts as a natural quality filter — public money moves toward ideas that are actually working, rather than being spread thin across ventures that aren't.

2. Skills, not just cash

Money without know-how is fragile. NYOTA pairs its grants with structured training delivered through the Micro and Small Enterprises Authority (MSEA) — the practical basics of managing margins, handling suppliers, and reading customer demand.

If the grant is the nutrient, the training is the root system that lets the business actually use it.

3. A savings net, automatically

Beneficiaries are automatically enrolled in the NSSF's Haba Haba savings scheme. Because the grant has already absorbed the early risk, some of what the business earns afterwards gets set aside — building a longer-term cushion instead of all of it being spent immediately.

Clearing the ground: what county governments are doing

NYOTA's design is reinforced by a separate, complementary decision: a two-year waiver on business permit fees for beneficiaries, directed nationally and rolled out county by county — Kakamega among the first movers, alongside Nairobi, Kajiado, and the Western region counties.

For a business still finding its feet, even a modest licensing fee is a real drag. Removing it alongside the financial barrier is a straightforward trade:

The logic is simple: lowering the cost of doing things properly, during the years a business is most likely to fail, increases the odds it survives long enough to formalise — and eventually pay into the system it once needed shelter from.

"If grants work this well, why not just give everyone grants, indefinitely?"

Because the justification for a grant is uncertainty — and uncertainty doesn't last forever. A grant is a pair of training wheels: essential while you're still learning to balance, useless and a little embarrassing once you're not.

When is debt the right tool for business?

Discovery deserves patient, no-strings capital precisely because nobody yet knows if the idea will work. But once a business finds its footing and its income becomes predictable, that justification runs out. At that point, debt becomes the better tool — because the obligation to repay is itself useful information: it tests whether the money is actually being put to good use, in a way a grant never has to.

Debt remains the right instrument for:

- Working capital for traders who already have a known, repeating cash cycle.

- Stock financing for seasonal businesses with predictable demand.

- Equipment upgrades for businesses already running at capacity.

NYOTA isn't trying to replace banks and lenders. It's building a pipeline of entrepreneurs who are actually ready for them. After two years of running a real business, a NYOTA graduate approaches a bank with a track record — not a blank slate. Debt belongs at the execution stage.

Grants belong at the germination stage. Confusing the two is the mistake this essay is trying to name.

Risks to NYOTA programme

NYOTA's success won't be decided by how generous the grants are. It will be decided by whether the systems around it hold up. Three risks are worth naming plainly, because acknowledging them is what lets a programme survive scrutiny rather than collapse under it:

- Who gets selected. If local elites or better-connected applicants capture the process, the money reaches people who least need the head start — and the programme's actual impact on unemployment shrinks.

- Whether progress is real. Weak verification rewards people who are good at reporting activity, not people who are actually building something. Without credible checks, that gap is an open invitation to game the system.

- What happens after the grant. A business that has proven itself but still can't get a loan at commercial rates is stuck in a gap between public support and private finance. Without a clear bridge across that gap, viable businesses can still stall.

The real test of any of this is whether people move from needing support to providing it for others. Under debt-first models, that shift rarely happens — owners squeezed by repayments can't afford to hire or train anyone.

Under a grant-first, sequenced model, the dynamic changes: businesses with breathing room can take on apprentices, reinvest surplus locally, and become a source of stability for the people around them rather than a source of financial strain. Choice on the table

The loans-versus-grants debate isn't really about mechanics. It's about how a country sees its young entrepreneurs. One view treats them as debtors to be policed and squeezed for repayment before they've even proven there's anything worth repaying for.

The other treats them as capable people whose energy, if not extracted too early, can grow into something that feeds the whole economy back.

NYOTA's real innovation isn't swapping loans for grants. It's admitting that a business is a different animal at birth than it is at maturity — and refusing to feed it the wrong diet.

If that sequencing logic holds, NYOTA's lasting legacy may not be the individual businesses it funds, but the financing philosophy it leaves behind — one that could travel well beyond Kenya, into agricultural policy, innovation grants, and venture finance across the region. Feed the roots first. Ask for the harvest later.

The author, Alex Munyua, is a policy analyst and systems architect focused on political economy, resource sovereignty, and digital infrastructure design. His email: estlexmunyua@gmail.com

Source: TUKO.co.ke

Reporting originally appeared via TUKO. Read the full source for additional context.