MSMEs Are Dying: Can We Realize Full Potential Of Digital Revolution?

MSMEs are facing an existential crisis. The economic impact of the COVID-19 has been as bad as we had feared … possibly worse. 

About 17% of businesses surveyed by MSC in India, Indonesia, Kenya, and the Philippines have closed due to local restrictions and low demand for goods and services, while micro and small enterprises (MSEs) in the informal sector fared worse. A recent World Bank report suggests that in Kenya, one-third of household-run MSEs have not been operating for months.

Declining income and rising expenses is a double whammy for enterprises in such trying times. On the demand side, the income of businesses declined due to reduced footfall, lower customer demand, and reduced purchasing power of customers. At the household level, MSME owners have had to pay for increased household expenses for basic goods, electricity, and the education of children. On the supply side, the factors contributing to the decline in income included disruptions in the supply chain and limited operating hours for the businesses impacted by the lockdowns and restrictions on movement. 

Entrepreneurs have experienced severe challenges related to cash flow. This was due to three key issues—limited access to goods on supplier credit, most sales being conducted on credit, which resulted in increasing receivables, and the rising cost of supplies. MSMEs have resorted to running down their life savings, borrowing from their social networks, and even selling off business and household assets to meet their cash flow requirements. 

In Kenya, with other expenses gradually stabilizing, repayment of loans has emerged as the biggest challenge for entrepreneurs. They have been struggling to repay new loans taken during the pandemic or pay penalties on old loans, or both, due to delays in installments. 

MSMEs have struggled to borrow from formal financial institutions as they encounter more stringent terms, such as higher costs of credit and requests for physical collateral. Financial service providers are also reluctant to offer loans, let alone discounted interest rates as the pandemic devastated their cash-flows. But many MSMEs need credit to be able to revive their business, restock, and survive the crisis. In December 2020, 50% of the respondents reported that they applied for the loan compared to 39% of MSMEs in September 2020. 

This situation is not unique for entrepreneurs in Kenya and is replicated worldwide—as seen from studies by MSC and the World Bank. Both the studies note that local enterprises now have limited access to cash and credit for business. In the absence of credit for MSMEs, they will be unable to restart their businesses or reach their previous scale—as their efforts to respond to the pandemic have eaten into much of their working capital.

How has the inclusive finance sector responded to these challenges?

The response from the inclusive finance sector to this crisis has been largely traditional—and, as a consequence, we risk losing an important opportunity to “build back better”. 

Governments and donors remain largely focused on traditional solutions, such as supporting microfinance institutions and credit guarantee initiatives that are managed largely by traditional banks. For example, in December 2020, the Government of Kenya launched the credit guarantee scheme (CGS) by allocating an initial seed capital of KES 3 billion (˜USD 30 million). This approach may be necessary and relatively easy in the short run, but we should think more strategically.

We should not let this crisis go to waste. It provides us the opportunity to accelerate several interrelated transitions to allow MSMEs and the financial institutions that serve them to realize the full potential of the digital revolution.

1. Formalize informal enterprises

Most micro-and many small enterprises remain informal and thus do not qualify for the stimulus packages of governments. The f