Unlocking the potential of small firms: Overcoming challenges to drive 'bottom-up' growth in Kenya's MSME sector

June 14th, 2023

The Micro, Small and Medium Enterprise (MSME) sector is a significant source of employment, making substantial contribution to economies globally. But in Kenya and elsewhere, the sector remains a source of sustained frustration, failing to achieve its much-touted potential.

According to the FinAccess survey carried out by the Kenya National Bureau of Statistics, the Central Bank of Kenya and FSD Kenya, nearly 30% of Micro and Small Enterprises in Kenya employ between 1-20 employees, making up a significant, though a largely invisible layer of the MSME sector.

The recently published Kenya Small Firm Diaries study posits that small firms (defined in the study as enterprises employing between 1 and 20 employees) should be treated as a unique segment, quite different from micro firms (the typical ‘mama mboga’) and larger firms with specialised managerial capacities.

The Kenya Small Firm Diaries study involved collecting weekly cashflow data from 150 businesses in Kwale, Kisumu and Nairobi counties for a full year, revealing new information on financial flows and financial decisions.

Stability entrepreneurs

Small firms straddle formal and informal which gives them the agility to negotiate a complex and volatile business environment. Survival in this environment demonstrates a degree of resilience and capability that has led the Small Firm Diaries to term owners of these firms ‘stability entrepreneurs’.

Seeking stability as much as growth, these stability entrepreneurs are the middle that has remained ‘invisible’ whilst creating employment, producing goods and services and capturing value for local economies.

Rehema, one such stability entrepreneur, who took part in the study, is one of 40 sardine processors in Vanga, Kwale county. Through her financial and business capabilities, networks and processing skills, Rehema has succeeded where others have failed. The efforts  Rehema and other sardine processors in Vanga demonstrate the potential of small firms to capture value and build local economies. As a result of their business success, more children in Vanga are going to school, stone houses are being built, women are becoming empowered. In Rehema’s words things are different now ‘kuna maendeleo’.

But the study finds that small firms face challenges that impede their ability to grow and reduce their value in the economy. Their employees, for instance, face precarious conditions. Employed mainly on casual and piecemeal terms, many do not get work for the full year and two thirds claimed their families had gone hungry at some point over the past year.

The challenge of working capital

A key unmet need for small firms is liquidity or working capital. Even with Kenya’s sophisticated financial inclusion landscape, small firms continue to operate mostly in cash or through informal channels like chamas.

The Kenya Small Firm Diaries study challenges financial service providers to solve the working capital crunch, for instance through trade credit that eases transactions throughout the small firms’ trade ‘ecosystem’, or by leveraging Kenya’s financial infrastructure (credit information bureaus, moveable collateral registries, digital payments etc) to reduce the cost of lending through better information on revenues, stocks and accounts receivables.

Some progress has been made and is helping small firms to better manage their cash flows. New facilities such as bank pay bill apps have made inroads into the working capital issue, creating information trails from revenue flows that banks can leverage to lend on better terms. But outreach is still low, and even these facilities are not sufficient to support stable growth.

At the end of the day, it is the economic and household pressures which small firms absorb that compromise their capacity to achieve stability and growth.

Small firms continue to support the financial needs of their owners and their employees, including household healthcare needs, trade premises security, and other services that the government should ideally provide. With the financial health of customers deeply under threat and the cost of supplies rising daily, even access to working capital will not help. ‘There are no customers’ said a frustrated furniture maker in Nairobi, describing how his business had sunk in the previous 6 months.

The story of small firms is the story of our failure to build our economy from ‘the bottom up’.

How can we create the ‘demand floors’ (e.g. through social security) to provide a springboard for business growth; reduce the cost of supplies through investing in manufacturing and local economic development; and develop the role of small firms in key value chains (for instance through aggregation and cooperatives)?

How can we streamline the costs of compliance and create more transparency in public spending; and how can we invest in the infrastructure through which small firms can secure their operations and concentrate their investments on growth?

The gauntlet is down for financial service providers, government, and development partners to come together and enable small firms to achieve their potential in driving ‘bottom up’ growth.

This article was first published by Business Daily on 7th June 2023. 



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