Support For SMEs in Kenya During Covid-19

Support for SMEs in Kenya during Covid-19

There is little to no doubt that Small and medium-sized enterprises (SMEs) are the drivers of most developed and developing economies. In Sub Saharan Africa for instance, 90% of all businesses are SMEs (SME Initiatives), implying that more than three-quarters of the working population is employed by this sector. This significant working population under this segment clearly shows that the contribution of SMEs to the national economy is substantial.

In Kenya, SMEs have played a huge role in contributing to the Kenyan economy. Early last year, statistics revealed that SMEs in Kenya contributed to about 30% of Kenya’s GDP. This noteworthy contribution has in fact been growing over the years: in 1993, the contribution to overall GDP stood at around 13%, 2011 (20%) and in 2014 (25%) (Supply Chain Analysis.Pdf, n.d.-a). However, the significance of these SMEs is not only reflected in boosting the economy, but also in the creation of jobs in the country with numbers also rising across time: in 1999, about 2.3 million people were employed by SMEs, 2003 about 4.6 million, 2013 approximately 6.4 million and as of last year (SMEs Driving Kenya’s Economy), 14.9 million Kenyans were employed in the sector that constitutes about 98% of all businesses in the Kenyan economy.


Source: United Nations Development Programme (Supply Chain Analysis.Pdf, n.d.-b)

In Kenya, the classification of SMEs is primarily by the number of employees engaged by the firms and their turnover. According to Kenya’s Micro and Small Enterprises (MSE) Bill 2012, micro, small-and medium enterprises are defined categorically as:

Enterprise Number of Employees Annual Turnover (KES)
Micro Enterprises 1 to 9 Less than 500,000
Small Enterprise 10 to 50 500,000 – 5,000,000
Medium Enterprises 51 to 100 Below 5,000,000
Source: Micro and Small Enterprises act (Micro-and-Small-Enterprises-No-55-of-2012.Pdf, n.d.)

These enterprises can therefore be firms operating in different trade and service industries including small shops, retailers, and market vendors. The importance of these SMEs is quite significant. In addition to creation of employment and contributing to economic growth, they help promote innovation, create new markets and consumers as well as contribute to a higher tax base for government revenue.

Kenya has a fair share of SMEs sprouting across different sectors, especially in the financial, transport and agribusiness space. For instance, one recognizable SME that is scaling high is Twiga Foods, which is a mobile marketplace for retailers and farmers. Another is True Blaq Limited which provides exploratory marketing in the Kenyan economy and in the recent annual top ranking of SMEs done by KPMG and Business Daily Kenya, ranked first amongst other represented SMEs.


Twiga Foods in Kenya provides a mobile marketplace for farmers & vendors

However, in recent years, significant challenges have concerned these SMEs, including: funding deficit, competition from international businesses that have flooded the Kenyan market, stringent regulation and taxation, a lack of information on public programs and policies, negative listing which affects accessibility to capital and relatively high license fees.

The advent of the global Covid-19 pandemic has only made the business atmosphere even more difficult, as both large corporates and SMEs are struggling to earn income and maintain healthy cash flows. However, small- and medium size businesses have become the primary focus for many governments because of their significant contribution to creating employment opportunities and boosting economic growth. Thus, recognizing this importance of SMEs, the Kenyan government has proposed fiscal measures aimed at cushioning the large working population in the SME segment as well as the businesses themselves, which would consequently help prevent the economy from severe poor performance.

 

Solutions geared towards helping SMEs.

 Reduction of turnover tax

Early this year, the government of Kenya through the Kenya Revenue Authority introduced the Turnover Tax which represented a simpler tax regime for Micro and Small Enterprises. This new tax system was meant to capture the revenue from small businesses that in early years went “untaxed”. The turnover tax was payable at a rate of 3% of monthly gross sales by businesses whose annual revenue did not exceed Kshs. 5 million.

Despite the good intentions of improving collection of government revenue, the introduction of turnover tax was met with huge criticism from business owners and members of public. This was largely due to the nature of the businesses that were being taxed: considering that the tax is payable on gross sales and not on the bottom line, small businesses that do not manage to generate monthly profit would still owe the government tax. Simply, most of the SMEs would go out of business because of not being able to honor the tax dues. Another reason for the resentment was the lack of belief that collected revenue would be utilized well since the Kenyan government has had a long history of misappropriation of funds, why pay for hard earned income? Third, the Kenyan business environment for SMEs is highly competitive and thus sales are minimal.

Regardless, the Kenyan government remains unwavering in charging this turnover tax now and in the future and it has offered to help the business during this unprecedented pandemic through reduction of the turnover tax to 1% to assist traders who will be hardest hit (Deloitte_Kenya_Covid19_Government_Measures.Pdf, n.d.).

Loan holidays by financial Institutions

As mentioned, one of the main challenges affecting SMEs is the difficulty in accessing credit and specifically, cheap credit. Before the interest rate cap era, many small and medium sized businesses in Kenya struggled to finance their debts due to the high interest rates. Interest rate capping was thought to be a solution, but financial institutions only became more averse to whom they were lending, especially SMEs with little or no collateral. Late last year,  a repeal of the interest rate cap was enforced to incentivize financial institutions to lend and boost the businesses for SMEs.

While its too early to realize the effects of the repeal on access to credit, financial institutions have ventured into providing financial products that will help businesses as well as reducing their interest rates to economically reasonable levels. In addition, to help their SME clients during this pandemic, many Kenyan financial institutions have indicated revised measures on loan repayments to cushion them from adverse effects caused by Covid-19. Among the measures is a loan holiday that will allow SMEs to defer interest payments till the economy stabilizes. Stanbic Bank Kenya, for instance, offered a 3-month loan holiday for SMEs and personal loans while Absa Kenya restructured Kshs. 8.3 billion of its loans, introducing repayment breaks of up to 3 months to cushion businesses that have been hit by the corona virus crisis(“Absa Kenya Restructures Loans Amounting to Ksh 8.3Bn -,” 2020).

 

Covid-19 Emergency fund

As with many governments mobilizing funds, on April 1, the Kenyan government set up an emergency response fund to mobilize resources for emergency response towards containing the effects of corona virus on the Kenyan citizens. While not directly going towards the small businesses, this emergency fund is supporting persons who were relying on income from the businesses to support their families. As of 22nd April, the fund had raised over Kshs. 1.3 billion: 917,768,950 in cash and 370,300,000 in material resources.

Stawi Loan

Last year, the Central Bank of Kenya endorsed a mobile loan product, known as Stawi, that was meant to improve access to credit for MSMEs. Over the past decade, Kenya has realized a significant growth in money lending applications that have come under serious scrutiny for their high interest loans offered to individuals and small businesses. In an effort to protect small businesses from these high interest repayments, Stawi was created by five commercial banks who will offer unsecured loan products, ranging from Kshs. 30,000 up to Kshs. 250,000 at interest charges of 9% per annum with repayment profiles of 1-12 months. This product will especially come in handy during these tough times to provide much needed cash flow to small businesses.

Micro, small- and medium enterprises are the heartbeat of the Kenyan economy. Not only do they create numerous job opportunities, but they also contribute significantly to the country’s GDP. As the world faces this common unique problem, governments continue to look for ways to cushion and support their citizens. Reduced taxes and loan reliefs are just some of the measures being implemented and our hope is that all businesses, large and small, will continue with their operations post-Covid, even though not at the same magnitude.


Nairobi Central  Business District, Source: Yonko Kilasi.


Written by Frank Muhoho
@naima_frank