Today is the first annual International Day for small and medium sized enterprises.
But here in Kenya, FSD’s James Kashangaki prefers to just call them enterprises. After all, in low and middle-income countries, small, informal businesses make up the majority of all enterprises. In Kenya, the informal sector represents a whopping 82.7% of employment. A mother selling tomatoes on the side of the road, a group of young men running a car wash in an informal settlement, and a recent college graduate supporting himself as a motorcycle taxi are all part of Kenya’s vibrant informal economy.
But a lot of these businesses are stuck because their informality means they don’t have access to finance. When they do, its often not access to finance that serves them. Almost two-thirds of informal enterprises in Kenya cited access to finance as their top obstacle, in a study by The World Bank. Without access to finance a company can’t grow, strangling a majority of Kenya’s economy.
“How can we get them all access to appropriate finance that at least means that you can survive day to day and have a prospect of growing someday,” asks Kashangaki. For now, when it comes to business financing, banks are fighting over a tiny number of Kenya’s many businesses. The informal enterprises, which make up 95% of all businesses and entrepreneurs in Kenya, are usually left out in the cold.
“If you’re not in farming or if you’re not getting a regular wage from employment to stay alive and keep your family alive and going to school you’re going to need some kind of money generate activity,” said Kashangaki. Banks usually don’t operate in the informal space because its opaque, there often aren’t financial records to determine whether a business is credit worthy or an entrepreneur is capable of paying back a loan.
But as transactions become more digitized, particularly with the increasing ubiquity of mobile banking, that is changing, as FSD explores in this publication by Ben Lyon and Ignacio Mas. “Particularly with digital transactions, there could be ways of quantifying the risk. If you could see how much they’re transacting, how much stock do they buy, what are your daily sales, that can change, said Kashangaki, “technology can solve some of the opaqueness.”
One example of the increasing opportunities digital records provide is Kenya’s Movable Property Security Rights (MPSR) Bill, passed last year, which establishes a digital registry for moveable property security rights. Before, the only thing Kenyans could register were assets such as a house, which few informal entrepreneurs can afford. The Moveable Assets Registry means that now Kenyans can register things like crops, a motorbike, and even pots and pans. It also allows a business owner to register receivables, or the invoices you’ve sent to a company for work completed. While still in its early stages, this could pave the way for banks to use these types of assets to determine credit worthiness. Read more in FSD’s 2016 Annual Report.
More Kenyans having access to finance means more growth and, as Kashangaki said, “when you have more inclusive growth, more people benefit from the growth of the country and more people can enjoy the fruits of that growth.”