Financial Sector Deepening (FSD) Kenya and the Financial Access Initiative (FAI) research center of New York University, has presented the results of the Kenya Small Firm Diaries (SFD) study ,a global research project being conducted between 2021 to 2023 in seven countries: Kenya, Nigeria, Uganda, Ethiopia, Indonesia, Fiji and Colombia.
The study which was funded by the Argidius Foundation, the Aspen Network of Development Entrepreneurs (ANDE), the Bill & Melinda Gates Foundation, Financial Sector Deeping Kenya, and the Mastercard Center for Inclusive Growth aims to improve the understanding of how small businesses can overcome the barriers they face in order to prosper in the modern economy, and thus contribute to reducing poverty.
Financial Sector Deepening (FSD) Kenya and the Financial Access Initiative (FAI) research center of New York University anticipate that these results will inform the design of future development policies, financial services and tools to help small businesses and their employees to prosper.
In Kenya, the research was carried out in Kisumu, Kwale and Nairobi counties between October 2021 and October 2022.
The study found that although the Kenya sample has the largest group of firms that have been open for 7 years or more compared to other countries in the study, it is in the middle of the pack in terms of monthly revenue, with 75% of the firms making less than KShs 240,000. This level of revenue affects the quality of life for employees, with approximately two thirds of staff interviewed reporting struggling to have enough money to obtain necessary items for their families.
Key findings from the study are as follows:
Financial inclusion: Approximately 60% of small firm owners in Kenya have bank accounts which they use for business purposes. However, usage of accounts is uneven with the majority of these firms moving less than a quarter of their transactions through bank accounts.
Mobile money: Kenya is a large positive outlier in mobile wallet ownership with nearly 70% of the respondents stating they use a mobile money account for their businesses. However, usage is still low, with the majority of these firms using their accounts for a small percentage of their overall transaction value.
Variety of sectors: The study was focused on three industries – light manufacturing, agri-processing, and services – which all play a vital role in Kenya’s economic development and sustainability. Half the firms in the Kenyan sample are engaged in small-scale manufacturing such as carpentry, metal work, and construction; 20% in services such as printing, car and bike repair and maintenance; and 26% in agri-processing industries such as meat and fish preservation and food preparation. Small firms play a critical role in these sectors, unlocking value for local economies.
Business stability: Like those in the global sample, Kenyan firms experience volatile earnings. Revenue and expenses fluctuate in unpredictable and hard to manage ways from month-to-month. However, despite access to finance being the third-largest barrier to firm owners’ vision for success, many firm owners from the global sample, including those in Kenya, say they “rarely” or “never” need a loan.
Credit life: When requesting loans, the firms analysed say that working capital is a bigger need than investment capital. They frequently look to sources other than banks, such as their own suppliers, for loans, and rarely take any operating risk that could result in negative monthly cash flow. These facts help confirm their need for working capital to cover liquidity needs.
Job security: Kenyan firms seem to offer a bit more stability of employment to key employees compared to firms in other countries in the study. Still, only half of the small firm employees got paid 8 months or more in a 10-month period; a quarter of employees worked at the same firm for fewer than 5 months of that period.
In general, the study concluded that stability and growth is a priority for the entrepreneurs interviewed. According to the research, these companies face high volatility in their income and expenses. They cited “rising costs and supply problems” as the main barrier to achieving their vision of growth and stability.
“We see that these entrepreneurs do have aspirations to grow, and they are dynamic, constantly working toward those goals. But that dynamism often translates into just overcoming the volatility and risk they face, rather than moving them toward achieving their goals. Every time they are able to seize an opportunity, they have to contend with a wave knocking them back–particularly because of a lack of liquidity and working capital. Policies and financial tools that allow them to manage volatility can enable these entrepreneurs to contribute much more to the economy and development of the country,” noted Timothy Ogden, Managing Director of the global study and of the Financial Access Initiative at NYU.
“This study is instrumental in unravelling the intricate dynamics of the financial behaviours, challenges, and aspirations of small businesses across the globe including Kenya. By delving into the daily realities faced by small firms, the Small Firm Diaries study equips us with crucial insights to inform evidence-based interventions and policies that can drive sustainable economic growth. It offers an invaluable opportunity to identify gaps in financial services and develop innovative solutions tailored to the unique needs of small firms. FSD Kenya is committed to leveraging the findings from this study to enhance financial inclusion, foster entrepreneurship, and unlock the full potential of small firms in driving economic prosperity for individuals and communities alike,” says Tamara Cook, Chief Executive Officer at Financial Sector Deepening (FSD) Kenya.
“Mastercard recognises the immense potential of small businesses and the pivotal role they play in driving economic growth and creating opportunities. Understanding the needs and challenges faced by small firms through such studies is critical to fostering the creation of a more supportive ecosystem for small businesses that will drive innovation, job creation, and economic prosperity,” says Shehryar Ali, Country Manager for East Africa at Mastercard.
The reports presented today—The Kenya Country Data Overview and the Financial Access Report–are just the beginning of the analysis and insight the study will deliver. Financial Sector Deepening Kenya and the Financial Access Initiative are working together to glean further insights and collaborate with partners in the public and private sectors to the benefit of small firms in Kenya.
The study aims to guide the policies and practices of a wide variety of actors and stakeholders. The results may be used by others in their own independent research to address the challenges facing MSMEs in low- and middle-income communities in Kenya, and around the world.
Lastly, it allows companies and governments to design or improve products and programmes that increase the capacity and productivity of small businesses. It will also enable organisations to design financial services products, including digital financial services, that better meet the liquidity and investment needs of SMEs so that they can expand their businesses in terms of income, productivity, employment, and wages paid.