The Kenya Small Firm Diaries: A new perspective on small firms in Kenya

May 27th, 2024

In May 2023, FSD Kenya together with the Financial Access Initiative (FAI) at New York University (NYU) launched the The Kenya Small Firm Diaries. The Kenya Small Firm Diaries was part of a global study across seven countries – Kenya, Ethiopia, Nigeria, Uganda, Colombia, Fiji and Indonesia.

The study was conducted to understand the role of small firms -defined firms with between 1-20 employees-  in poverty reduction, and the barriers and challenges they face. Fieldwork for the study took place between October 2021 and November 2022, involving weekly visits to 155 small firms, across three counties- Nairobi, Kwale and Kisumu.

According to FinAccess, small firms make up nearly a third of MSEs, and are thus a significant segment. The diaries highlighted four key insights for policy and innovation:

Small Firms are a distinct segment

Small firms represent an ‘invisible middle’, different from microenterprises and larger more professional firms. They straddle the line between formal and informal. They are banked, and use digital services, but the majority of their transactions are still in cash. They face a great deal of volatility across the year and are neither on a strong upward or downward growth trajectory.

Small Firms value stability as much as growth

Literature on small firms focuses on a distinction between ‘growth’ and ‘survivalist’ firms. But the Small Firm Diaries reveals that these profiles miss a large and important group of firms- those that aspire to grow, but with stability. The study dubs these firms ‘Stability Entrepreneurs’. They cannot take on the level of risk that is necessary to achieve rapid growth, given the volatile conditions in which they operate. Instead, ‘stability entrepreneurs’ want step by step growth that helps to reduce volatility and risk.

Small Firms need working capital more than investment capital

Finance for MSEs has often focused on providing loans to finance investment. But the study found that small firms need working capital even more than investment capital to survive and grow. In the absence of appropriate working capital, small firms try to closely match revenue and expenditure, forgoing opportunities for growth. They rely on (largely informal) supply-chain finance. The study suggests that better solutions for working capital would strengthen the possibilities for small firms to meet their aspirations to ‘grow with stability’.

Small Firms are a key source of employment but the jobs they create are precarious

Workers are often not consistently employed, and the income they get varies substantially. Two thirds of workers in small firms said they lacked money to meet their basic food needs at some point in the past twelve months. The precarity of workers reflects the precarity of the firms themselves.

At the inception of the study in 2021, FSD Kenya set up an advisory group of policy and industry representatives to advise on implementation, help to shape the key findings from the study and enhance the relevance of the study for policy and business development. At the time of the launch in May 2023, the recent government transition created some challenges in leveraging the findings for policy. However, the ambition going forward is to consolidate findings from the Small Firm Diaries and other MSE research that FSD Kenya has been leading (FinAccess MSE Tracker surveys and qualitative research) and develop a communications strategy to maximise impacts of the research on policy and the development of improved solutions for MSE finance.

This blog is one of the articles in FSD Kenya’s 2023 annual report. To read the full report, click here. 

Click here to access the Kenya Small Firm Diaries blog containing publications from the Kenya Small Firm Diaries study and other resources. 



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