The COVID-19 pandemic has been a defining force across the world. With devastating impact on health, jobs, businesses and lives, the pandemic has challenged the way many systems operate and exist and has demanded shifts in how normalcy is perceived. The social and economic aftershocks of this crisis have been profound and will continue to be so.
The impact of COVID-19 on Micro, Small and Medium-sized Enterprises (MSMEs) in Kenya is of great importance and the economic disruption on the sector has significant consequences to the national and global economy. MSMEs play a critical role in Kenya’s economic development and employment creation. The Kenya National Bureau of Statistics (KNBS) indicates that there are over 7.4 million MSMEs in the country, which employ approximately 14.9 million Kenyans in various sectors of the economy and contribute approximately 40% of the Gross Domestic Product (GDP). In addition, the MSMEs cover a wide range of activities in almost all sectors of the economy and are a major engine of inclusive economic growth.
In partnership with the Micro and Small Enterprise Authority in Kenya (MSEA), the UNDP Kenya Accelerator Lab team in September 2020, conducted a survey to establish the impact of COVID-19 on Kenyan MSMEs and their needs for recovery and sustenance. The country-wide survey covered diverse industries within the MSME sector and received more than 500 responses.
A report was generated from this exercise. It is a gender responsive analysis of characteristics of MSMEs, the impact of the COVID-19 pandemic on operations and income, challenges faced by the sector with the mitigation mechanisms and the support and needs expressed by respondents. It goes further to analyse the digital maturity of the enterprises as well as the support needed to facilitate digital transformation as a key strategy to achieve sustained competitiveness of MSMEs. This study was able to yield critical insights into the impact of the pandemic on MSMEs and offer data that could inform engagement with the sector towards resilience and recovery.
Findings from the Micro, Small and Medium size Enterprises show that many MSMEs in Kenya were adversely affected by the pandemic with one out of every ten enterprises surveyed indicating a shutdown of their businesses due to the pandemic. Micro enterprises were most affected in comparison to medium enterprises. Movement restrictions, lockdown and enforcement of social distancing measures all had a significant impact on MSMEs. Disruptions of supply and demand for raw materials both locally and internationally also influenced the ability of MSMEs to continue with business. Remedial measures taken by many enterprises included retrenchment of staff, diversification of business, exploration of alternative marketing strategies, and negotiation for financing among others. The logistical challenges of managing stock suggest an opportunity for innovation and investment in local manufacturing and supply chains by both the private and public sector.
Digital technology was identified as an enabler for business resilience. MSMEs higher digital maturity reflected lower levels of negative impact on income. Digital technology was needed for marketing products and services, development of products and services, procurement, financial management and customer care. The use of tools such as social media, e-commerce platforms and websites can support MSMEs to access wider markets. This is an area to consider capacity building and investment in. While recognising the potential in adoption of digital technology of MSMEs, it was clear that the level of maturity may indicate aptitude, interest, applicability, or utility of digital technology for some MSMEs. It may be worthwhile to consider context and need specific capacity building for digital skills. Digital technology should not be viewed as a one size fits all solution. Certain businesses and sectors may see more benefits from engaging with digital technology than others and as such it is important to weigh in not only on the digital awareness of MSMEs but the role that digital technology may serve for businesses.
43.6% of the MSMEs did not have their businesses registered with reasons offered for this being lack of information on the benefits and process of registration. This contributes to the informality of many MSMEs. While there was no apparent relationship between the registration of businesses and the impact of COVID-19, it is worthwhile to address the information gaps communicated by the MSMEs. The ease of registration processes as well as information on the benefits of registration are factors for the Government to consider in facilitating MSME formalisation. Further, Government, Government agencies and development partners may consider increasing ease of access to information and services relevant to MSMEs such as information on opportunities, information on waivers, subsidies, and business legal requirements and, opportunities for capacity building. Factors such as channels of communication as well as language and content play a great role in enhancing reach to MSMEs with considerations made to factor in MSMEs in hard to reach areas, MSMEs run and led by persons with disability and MSMEs in low-income areas.
Access to financial support was a major challenge for MSMEs. Many of the MSMEs interviewed expressed frustration at not having access to support be it financial or information related. MSMEs remain significantly underserved by financial institutions. As such, there are many MSMEs who could not or did not benefit from moratoriums or credit leniency. As many as 18% of the MSMEs in the survey highlighted that as recourse to the impact of the pandemic on their businesses, they had to negotiate with creditors such as banks and suppliers. Many of them faced barriers to receiving support including high interest rates on credit facilities, lack of collateral, poor comprehension of their business models on the part of creditors. The recent move by the Government instructing the removal of borrowers with less than Kenya Shillings 5,000,000 from the Credit Reference Bureau is seen as a relief particularly to MSMEs who continue struggling to get back to a sound footing following the adverse effects of the pandemic.
While there have been considerable efforts to cater to MSMEs by many financial institutions, financial inclusion and access to credit and financial services remains a challenge and more could be done. According to the World Bank, access to finance is a key constraint to SME growth, it is the second most cited obstacle facing MSMEs to grow their businesses in emerging markets and developing countries. It is important for financial institutions, suppliers, and creditors, to consider providing customised and sector- specific support that considers different and diverse user experiences and competencies of MSMEs. An inclusive approach should be adopted within the sector in the design, marketing and production of financial products and services as well as dissemination of information concerning available opportunities and services.
The study also revealed that while young people were employed in MSMEs in large numbers, there were under represented in leadership of the same. As many as 85.5% of enterprises surveyed had youth between the age of 18-35 in their employment. However, only 3.4% of the enterprises had youth making up 15-25% of the leadership and no enterprise had youth making up 75-100% of its leaders. More support is needed to nurture and foster youth leadership through mentorship, apprenticeship, and leadership development. Further, efforts need to be made to support business creation and continuity among the youth by making it easy to access information, support, and capital.
You can access the report here and the summary version here. We believe the insights, data and recommendations from this report will inform new or existing areas of support for MSMEs and will be a critical knowledge source for programming and strategy across all sectors engaging with and supporting MSMEs in Kenya.