The announcement of the prolonged shut-down in Kenya as a measure to contain the virus by President Uhuru Kenyatta as the coronavirus pandemic continues to take its toll, could have dramatic negative effects on the economy. Kenya’s economy is largely driven by Small and Medium Enterprises (SMEs) and the informal sector that accounts for over 80% per cent of the total workforce. SMEs are our economy's driving force and the backbone of the economy. SMEs employ about 85% of Kenyan labour force which is close to 7.5 million aggregate employment (Gure & Karugu, 2018). They utilize locally accessible resources, foster innovation, employ technology, assemble small-dispersed private savings, and foster entrepreneurship development. They are key to not only driving industrialization as envisaged in Vision 2030 but also crucial in achievement of the sustainable development goals (SDGs).
The pandemic has massively impacted SMEs by multiple factors ranging from disruption on supply chains, massive lay-offs by large organizations, decreased air freight services and limited outbound air freights among others. In the services industry, the drop-in customers mean no cash coming in to offset expenses and looming shut down of thousands of businesses. Restaurants have been closed or switched to only providing take-aways in parts of the country, gyms, daycares, hair salon and spas, retailers have also shut down as health officials urge social distancing. The COVID-19 era is an unprecedented crisis that poses very tough times for SMEs who are struggling with survival as demand plunges and now staring at the looming business closures.
While it may be too early to estimate how deeply the pandemic will affect SMEs, mooted Kenya government measures to help these struggling businesses may take some time to kick-in. McKinsey have just released some chilling projections citing sub -3% economic growth having already placed growth expectations for Kenya at 1.9% in a recent report analyzing the impact of the virus on Africa. This points to the need for stakeholders to act with a sense of urgency in protecting our SMEs.
As we contend with these complex issues and uncertainty, supporting SMEs will be vital during this uncertainty. We must start to lay focus and take action through sustainable approaches and measures to that will minimize these negative impacts and salvage the economy. While we don’t know how long this will take, we must be cognizant of the fact that opening up the economy will be more difficult than shutting it down as with the fast changing pace of things, the new normal, whenever it arrives, will be different than the old one.
At a time of crisis, knee jerk and ad – hoc reactions will not be sustainable in helping to bounce back SMEs and keeping jobs as we move to recovery. We need SMEs to survive, grow and continue making their contribution to Kenya’s economy and the world at large.
I will offer suggestions on a few approaches that stakeholders could adopt at a time of crisis like this one:
A strategic approach will provide clarity to direct support actions
SMEs are numerous and heterogenous, in order to formulate effective and impactful solutions our strategies for intervention must be informed by a clear understanding of SMEs, mapped needs by segments and clearly defined objectives targeting sectors affected the most and that will have the most impact on job creation as we move towards recovery. This information will be crucial in painting a clear picture of the desired outcome in view of the unprecedented scale of the crisis and our national goals and development plans as outlined in vision 2030 and the Government of Kenya’s Big 4 Agenda
A cohesive multi-stakeholder approach and coordinated action is needed to effectively deliver solutions
Sustainable SME interventions will require a holistic and coordinated approach with involvement of multiple stakeholders as support actors ranging from both the public and private sector, research institutions, financiers, policy, academia and technical support providers, business membership organizations as well as business development support services. The SME ecosystem has been disjointed and now is the time to step up partnerships and collaborations among stakeholders working with SMEs to capitalize on their strengths and think synergistically. No single player will operate successfully without the other. Active dialogue and information exchange among these players is pertinent now and in the future. An ecosystem approach that is unified by common objectives through one platform that brings support actors together to collaborate, leverage their strengths will create shared value by combining resources. This can leverage technology to support and power the collaboration.
Targeted technical assistance to business support intermediaries on the frontline to offer immediate relief to SMEs
The novel COVID crisis has thrown SMEs into the deep end of the sea in an uncharted territory. There is need to collect data on the ground that will inform practical interventions to direct support and actions. SMEs will need high touch business support, advice and immediate practical solutions to navigate the crisis. Most business owners are turning to their support organizations where they have membership for help and information. At this point, business support networks and member organizations are well-positioned to collect data and provide credible solutions and resources to help SMEs rethink their next steps and navigate the crisis. Support intermediaries and organizations will need to build sufficient capacity in order to effectively support their SME members. They are the network providers such as the chambers of commerce, sector associations, trade promotion organizations, investment promotion agencies and also co-operatives. Networks like Invest in Africa (IIA) have quickly responded with a Covid-19 survival toolkit offering a range of webinars, resources and business clinic hotlines for SMEs and are collecting SME data.
The role of these network organizations with SMEs is critical as they have structured ways of engaging SMEs and being on the frontline, they need extra funding support to immediately offer relief and provide data to inform wider actions. Targeted interventions for COVID-19 can be channeled through them.
Creating a desirable proposition for lenders in the Financing Ecosystem
The fact that SMEs have insufficient assets and collateral, they are riskier and therefore have a less desirable proposition. The lack of access to finance is one of the most pressing challenges that SMEs face as the funding gap continues to widen. At a time of crisis, maintaining the lines of credit open to viable SMEs through readily available negotiated loan packages by banks and other financial institutions is crucial. The current uncertainty will only raise scrutiny standards on the back of risk-averse lending. While bank financing will continue to be paramount for the SME sector, there is a broad concern that credit constraints will simply become “the new normal” for SMEs unless action is taken. The question is how do we create a desirable proposition to banks and other providers to lend to SMEs?
Firstly, engagement with stakeholders to explore new approaches and innovative policies for SME financing will be paramount; Secondly, creation of partnerships to de-risk mechanisms through guarantees and other instruments; Thirdly, broaden the range of financing products available to broaden the options targeting a blend of both mainstream and alternative solutions ranging from bank debt, Private Equity and Mezzanine Financing which is a blend of debt and equity. This the ecosystem approach.
In conclusion, the important role of SMEs in Kenya cannot be overstated. This is a clarion call to all SME support actors to rise to action as key stakeholders to get out of silos and collaborate, share resources, synergize and cohesively develop targeted interventions to salvage our SMEs.
This article first appeared in blog.biasharanow.com and was written by Wangechi Murikuki - Country Director Invest in Africa Kenya.