How financial institutions can strengthen MSMEs to grow their role in the economy

January 8, 2024January 8, 2024 Newsroom

Kenya’s economic foundation unquestionably rests upon its Micro, Small, and Medium Enterprises (MSMEs). As indicated in Sessional Paper Number 5 of 2020 on Kenya’s Micro and Small Enterprises Policy, these enterprises contribute to 24 percent of Kenya’s GDP, encompass over 90 percent of private sector enterprises, and engage 93 percent of the total labor force in the economy.

The MSMEs policy identifies access to formal financial services, financial education, and credit sharing as crucial factors for the growth of the country’s MSME sector.

According to the most recent MSME Survey conducted by the Kenya National Bureau of Statistics in 2016, there are over 7.4 million MSMEs in Kenya, employing over 14.4 million Kenyans across all sectors of the economy. Furthermore, the World Bank estimates that SMEs account for approximately 90 percent of all businesses worldwide and generate more than 50 percent of all job opportunities.

Due to their significant contribution to the country’s GDP, their development is crucial for realizing national development goals outlined in Kenya Vision 2030 and the current Bottom-Up Economic Transformation Agenda (BETA), where MSMEs have been identified as one of the five key priorities.

The sector is particularly important in providing job and income opportunities for economically disadvantaged segments of the population, such as youth and women. MSMEs serve as a key entry point for women and youth looking to start their own businesses due to their low capital requirements and less stringent establishment criteria for small family-run businesses.

Women entrepreneurs

For instance, it is estimated that female entrepreneurship rates in Sub-Saharan Africa are among the highest globally, with one in every four adult women engaged in early-stage entrepreneurial activity in the region, according to the Global Entrepreneurship Monitor. Another survey conducted by the Central Bank of Kenya found that women entrepreneurs account for slightly more than a third of all businesses in Kenya.

Despite their significant potential, businesses owned by women and youth continue to face challenges from multiple external shocks in the global economy, such as geopolitical tensions, supply chain disruptions, and the COVID-19 pandemic.

Nevertheless, I am confident that financial institutions, with key strategic partners, can transform these challenges into success stories by providing solutions that address these issues.

Over time, we have witnessed the evolution of the role of commercial banks, shifting from merely providing credit to becoming partners who actively contribute to the growth of businesses.

Banks are increasingly compelled to assist MSMEs in accessing market information, finding markets for their products and services, offering mentorship, facilitating business networks, and providing the capital required to scale their operations. The need for this type of assistance is particularly pronounced among women and young entrepreneurs.

Mentorship and coaching

The Absa SHE Stars program, a collaboration between GIZ, Absa Kenya, and the Yunus Environment Hub (YEH), serves as an excellent example of a four-pronged approach that includes mentorship and coaching, access to information, markets, and finance.

Since 2021, at least 1,300 women business owners have received entrepreneurial skills and knowledge in areas such as social business, circular economy, disruption management, business continuity, human resource management, investor readiness, and transitioning their business online, among other areas. This initiative has significantly increased their productivity and competitiveness.

Similarly, over the last two years, at least 20,000 SMEs from across the country have benefited from business training and networking opportunities organized in partnership with the Kenya National Chamber of Commerce and Industry (KNCCI).

Furthermore, MSMEs and financial institutions must adopt digital capabilities and ecosystems to remain relevant and adaptable. This is especially true as customers and businesses seek simpler, more convenient, and faster ways to conduct business.

The March 2023 MSE Tracker Survey report, co-conducted by CBK, KNBS, and FSD Kenya, found that businesses owned by youth were more digitalized compared to those owned by individuals aged 36 and above.

As a result, Interswitch, Melanin Kapital, and VISA entered into various partnerships with Absa last year to facilitate the adoption of digital payment solutions for SMEs, enabling them to streamline their operations and seize new business opportunities.

Smartphones to accept card purchases

Additionally, earlier this year, Absa collaborated with VISA to launch the Mobi-Tap solution, which uses smartphones to accept card purchases. This innovation has relieved SMEs of the costly burden of acquiring PDQ machines for accepting card payments.

Another example of the power of automation is the Wezesha Stock platform, accessible to both Absa and non-Absa clients. It is a digital platform that offers a convenient and efficient way to manage inventory, automating access to working capital linked to stock financing for small and medium-sized enterprises (SMEs) across various value chains.

These value chains span from those involved in Fast Moving Consumer Goods (FMCGs) and agro-processing to oil marketing and agro-chemicals. Absa Bank has committed KES 100 billion to support SMEs across these value chains over the next three years through this initiative.

In conclusion, fostering the growth and success of MSMEs requires collaboration with various stakeholders, including the public sector, to champion favorable policies, regulations, and infrastructure that encourage the formalization of MSMEs.

This way, they can be assisted in transforming into registered business entities, providing them access to opportunities to scale into larger businesses. As their partner for growth, we are greatly inspired by the resilience, hard work, and creativity of MSMEs amidst the challenging operating landscape.

The writer, Elizabeth Wasunna-Ochwa, is the Business Banking Director, Absa Bank Kenya PLC.