The outcome is supported by the 2016 MSME Survey, which establishes that about 9,000 licensed MSMEs in Kenya and about 121,100 unlicensed MSMEs obtained credit from the public decentralized enterprise funds.
Massive layoffs and shutting down of businesses have been reported since 2022, with the trade sector being the most affected.
According to the Central Bank of Kenya, about 75 percent of MSMEs were at risk of collapse as of April 2020 due to a lack of cash flow.
MSMEs play a pivotal role in Kenya’s economy. They contribute to over 90 percent of the total labor force and play a key role in poverty reduction and economic development. They are also a source of innovation, competitiveness, goods and services, and entrepreneurial skills.
Millions of Kenyans are employed in various sectors of the economy that fall under the MSMEs. In addition, the MSMEs cover a wide range of establishments in all sectors of the economy. It is also worth noting that most MSMEs operate informally.
The significant role of MSMEs in promoting GDP growth and employment is underlined in Kenya’s Vision 2030, the country’s long-term development blueprint.
Despite the critical role they play in the economy, MSMEs are frequently confronted with market imperfections. They have difficulties in accessing adequate, affordable, and timely credit, and face ineffective marketing due to inadequate resources and the non-availability of a skilled workforce. Most of them are unable to integrate into large-scale business relationships due to a lack of international standards and quality controls.
However, one challenge that stands out is that access to affordable and quality credit. The MSME survey conducted in 2016 revealed that about 29 percent of MSMEs closed their establishments because of a shortage of operating funds. The situation was worsened by the COVID-19 pandemic, which exposed the sector to more financial woes.
Massive layoffs and shutting down of businesses have been reported since 2022, with the trade sector being the most affected. According to the Central Bank of Kenya, about 75 percent of MSMEs were at risk of collapse as of April 2020 due to a lack of cash flow.
The main source of capital for about 72 percent of MSMEs in Kenya is family income or personal savings. Such capital is in most cases insufficient and unsustainable, hence limiting the enterprises from expanding to reach economies of scale.
Even though financing from the banking sector is reliable, most banks consider MSMEs to be highly risky. Specifically, the micro and small enterprises often either fail to demonstrate creditworthiness or lack sufficient cash flow to sustain loan repayments.
In addition, the MSMEs fail to meet the required documentation such as bank statements, audited financial statements, and financial projections. The sector, therefore, faces inadequate finances in most cases.
Due to such factors, less than 30 percent of MSMEs rely on bank loans as a source of financing investments and working capital.
In recent years, the Government has introduced policies and initiatives to address these failures in access to finance and markets. However, access to formal financial services and products and the cost of credit are still a challenge for MSMEs.
According to the Financial Sector Deepening 2015, Micro and Small Enterprises access credit at a disproportionately higher cost. The outcome is supported by the 2016 MSME Survey, which establishes that about 9,000 licensed MSMEs in Kenya and about 121,100 unlicensed MSMEs obtained credit from the public decentralized enterprise funds. The survey identified limited access to adequate collateral as a major reason for the low access to credit.
Digital lenders such as Tala came in as a ‘savior’ to Kenya’s SME sector. For the last five years, Kenyans who ‘fell out of favor’ from commercial banks, have turned to digital lenders for financial support.
According to FSD Kenya, 27 percent of Kenyans are digital borrowers, and 37 percent of Kenyan digital borrowers are borrowing for business purposes with virtually all of them being SMEs. Digital lenders are playing a pivotal role in helping SMEs to access credit.
Tala is part of the financial inclusion movement, trying to lift people out of poverty by offering them new ways to gain access to loans and other financial services, and is among the giant micro-lenders in Kenya that have been producing new offerings for both individuals and businesses use.
Towards the end of 2021, Tala launched the piloting Jijenge na Tala Rebuild Fund Business Program to help the hard-hit micro, small and medium-sized enterprises to build back better post-covid 19 as the country enters the recovery stage.
Recently, the digital lender introduced the Jichagulie due date product that gives customers the freedom of choosing when they should pay their loan, a move that gives them an opportunity to plan themselves and concentrate on other productive activities than getting worried about a date they have no control over.
Tala believes that the future belongs to MSMEs and therefore focuses on helping them acquire the success that will promote an upward economic trajectory.
Moreover, Tala believes that finances are what make a business run. An entrepreneur must be financially prudent from the outset as well for the continuous smooth running of the business.
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