Why special SME funds have yet to make big impact

Christine Muthusi quit her job as a bank teller in 2011 to join the business world. She got into second-hand clothes wholesale business. To get the enterprise off the ground, she used savings from her former job. But a few years down the road she felt she needed to take on a new, bigger challenge.

“I wanted to delve into the supplies and procurement business. I was targeting government agencies, and at this point I needed a huge amount of capital to give my attempt a boost,” she says

She was still in her early thirties and thought that qualified her for the Youth Enterprise Development Fund.

“I applied, only for me to go through all the hurdles but for my application to eventually get rejected on account that I did not have any asset against which to get the loan.

Of course, she was disappointed.

“I wondered who these youths were that the government was targeting that were doing so well that they already had collateral.”

Ms Muthusi asked around and got a relative to lend her the money she needed then.

However, she still wonders how to benefit from the many government initiatives set up to help struggling start-ups like hers.

On her part, Esther Nyambura, an embroiderer, who says she was fired from several jobs because her attention was more focused on taking care of a special needs child, and now wishes to start her own tailoring business, told Enterprise she does not have adequate information about the funds to be able to take advantage of their existence.

“I’ve heard that you have to be in a Chama to access the Women Enterprise Fund. Well I’m not in one because I can’t afford to join,” she says.

Ms Nyambura says she lacks formal education and therefore does not have the knowhow to navigate the hurdles standing in the way of getting the loan. Hers is a story shared by many other entrepreneurs who find it difficult to navigate the complex array of red tape and regulations in accessing the funds.

Small businesses like those of Muthusi and Nyambura a vital cog that keeps the Kenyan economy buoyant, yet they are often fraught with the risk of failure.

A survey by the Kenya National Bureau of Statistics (KNBS) in 2017 found that approximately 400,000 small firms do not celebrate their second birthday. And even fewer reach their fifth birthday, ultimately limiting their overall socio-economic impact.

A study by research firm Viffa Consult found that access to finance is the number one stumbling block for starting and running a business.

Over the years, as it became apparent that entrepreneurship has the potential to create much needed jobs for the large number of unemployed graduates and youth in general, the government set up special funds to offer loans to financially marginalised groups faced with challenges accessing formal financing by commercial banks and other sources of capital.

The Women Enterprise Fund (WEF), Youth Enterprise Development Fund (YEDF) and Uwezo Fund, are all affirmative funds meant to provide an alternative, easily accessible and affordable finance to these special groups including people living with disabilities.

The loans by these funds are interest-free and require no securities. Nevertheless, they remain sleeping giants with great but unrealised potential.

According to the KNBS data, Kenya has about 7.41 million micro, small and medium enterprises (MSMEs). Of those, only 1.56 million are licensed, while at least 5.85 million remain unlicensed, meaning majority fall in the informal sector.

All the same, MSMEs contribute approximately 40 percent to the GDP, according to the KNBS.

Since inception, in 2006, 1.2 million youths have benefited from about Sh13 billion at YEDF. In the last three years, YEDF has disbursed Sh352.7 million to the youth in 2016/2017, Sh549.2 million was given out in 2017/2018 and Sh323.3 million in 2018/2019. It benefited 50,291 youths in 2016/2017, 78,465 in 2017/2018 and 46,176 in 2018/2019.

YEDF acting CEO, Benson Muthendi told Enterprise that the institution is constrained by resources and is unable to reach majority of Kenyans.

“We’ve tried reaching the public through public barazas and churches,” he said. “Other people just aren’t business-minded. You don’t get money and then decide what to do with it.”

Since its inception, WEF has disbursed some Sh18.35 billion to 1,748,202 beneficiaries, half of whom have been return borrowers.

The WEF chief executive Charles Mwirigi, said there is the lack of knowledge about the funds’ accessibility, making them obscure to many needy businesses.

“There’s low business literacy among women and because of this many actually fear the whole idea of putting in an application,” he said.

The Uwezo Fund, operationalised in 2014 to expand access to finances for youth, women and people living with disability, has so far disbursed some Sh6.5 billion to 71,622 groups. Currently (2019/2020) 26.3 percent of all the beneficiaries are repeat borrowers.

“Poor preparedness into business, compliance issues e.g. requisite licences, registration etc., and the fact that most lenders have shunned funding start-ups due to evidence that most of them are not able to grow, continually plague start-ups,” Uwezo Fund CEO, Peter Lengapiani, told Enterprise.

“Uwezo Fund has been addressing this by developing a well-detailed curriculum for entrepreneurs where beginners are trained how to prepare business plan as well as basic entrepreneurship skills. The Fund has incorporated business registration in the training curriculum,” he said.

The government funds basically bridge the gap by providing gradual financing to the new businesses with amounts from Sh50,000 to Sh100,000.

While the heads of the funds say the major setback they face is insufficient monies, MSMEs confront myriads of other problems, according to MSE Authority CEO, Henry Rithaa. These include limited market access, poor infrastructure, inadequate knowledge and skills and rapid changes in technology. He also cited unfavourable regulatory environments and corruption as bottlenecks for businesses.

“Many Kenyan SMEs start too small and are unable to attract or access sufficient funding to run at economically viable levels. Many go into business without clear business models. Some lack sustainable competitive advantage. What was an opportunity today may change tomorrow. Most SMEs fail to plan for tomorrow's realities,” Mr Rithaa said.

Other reasons, he said, are intrinsic to the business owners many of whom come into entrepreneurship for lack of alternatives and hence lack motivation, discipline and do not separate business from family.

“... support system by our government is limited, duplicitous and uncoordinated,” he noted., adding that many start-ups have not been tested and their future is unknown.

“Many start-ups are unable to package a good pitch and demonstrate that they will make it in the market. Many also are not approaching professionals to develop their business models, and business plans!”he said.

“I also think it’s more of a demand and supply thing. The demand for funds simply outstrips supply at government and private sector realms. And so selection favours established businesses.”

He adds: “Requirements such as presenting a viable business plan, and maybe security may limit applicants from accessing funds. While financial institutions are rigid, products inflexibility, pricing and terms box MSEs out.”

There’s an urgent need to formalise SMEs through the promotion and simplification of business start-up operations, notes Kenya Association of Manufacturers (KAM) CEO, Phyllis Wakiaga a report.

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“By formalising these entities, many more people, particularly the youth would gain an identity and in the process, open themselves up for more business opportunities along their value chains,” she said, noting that KAM is creating an hub to provide strategic leadership and support to MSMEs towards inclusivity and global competitiveness. All 47 counties, she said, ought to establish incubation centres for SMEs to resolve and foster issues on product design, innovation and patenting.

“Kenya also needs to promote market access of SMEs at both local and international levels while eliminating unfair competition from cheap imports, to keep local start-ups alive,” she added.

Women in Business Kenya (WIB-Kenya) CEO Mary Muthoni, agrees that information with regard to access to credit is a scarce resource to both the rural and urban poor womenfolk, as well as to MSMEs in general.

In Kenya women-owned MSMEs makeup 48 percent. But for these businesses to access financing continues to be a stumbling block for many.

“Women lack capital, business assets that can be used to create products or services and which can be turned into cash to make payments on business loans. A new business, especially a service business, has few business assets,” noted Ms Muthoni.

“But beyond the lack of collateral, they lack capacity especially track record to show that the business has the capacity to generate enough money to pay back the loan,” she said adding that , “my experience is that in professional businesses, it's common for banks to deny a start-up loan to someone who doesn't have at least a year of experience working in the profession.”

Yet, because most woman-run businesses are informal, they miss out on opportunities like the 30 percent procurement contracts and the available funds.

“To help women rise further the government ought to simplify and reduce documentation requirements and formalities, lower the levels of fees and charges, and educate and build the capacity of women’s business associations, including associations and cooperatives representing female informal traders, to articulate their interests and needs,” said Ms Muthoni.

Editor's note: The previous version of this post put the figure of the money WEF has disbursed to 1,748,202 beneficiaries at Sh18.35 million. The story has been updated to indicate the figure is in billions.