Kenya’s 2.2mn SMEs closed shop in the last five years

October 24, 2016
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The main reason cited for business closure was shortage of operating funds as reported by 30 per cent of the businesses
The main reason cited for business closure was shortage of operating funds as reported by 30 per cent of the businesses /FILE

,  NAIROBI, Kenya, Oct 24 – Kenya’s 2.2 million Micro Small and Medium Enterprises (MSMEs) shut down in the last five years including 2016 according to a new survey by the Kenya National Bureau of Statistics (KNBS).

The report, Micro, Small and Medium Establishments, says most of the closed businesses were in wholesale and retail trade as well as repair of motor vehicles and motor cycles sector which accounted to 73 per cent of the total closure.

The report says businesses closed at the age of 3.8 years.

“Establishments that were started or acquired within the last two years were more vulnerable to closures and they accounted for 61.3 per cent of the total businesses closed,” the report states.

The highest number of establishments closed was in 2015 accounting for 35.4 per cent of the total number of closed enterprises in the last five years.

About 1.2 million were closed in rural areas compared to one million establishments that closed in urban areas.

The main reason cited for business closure was shortage of operating funds as reported by 30 per cent of the businesses owing to increased operating expenses, declining income and losses incurred from businesses.

Diversion of returns and operating capital from the business to other uses also led to business closures.

According to the report about 80.6 per cent of establishments reported to have gotten startup capital from their own savings while about 4.2 per cent got loans from family and friends, only 5.6 per cent of MSMEs got financing from banks.

Chamas only financed 1.4 per cent and cooperatives about 0.4 per cent.

Cost of credit, the report states and lack of adequate collateral are hindrances to uptake of loans for majority of businesses that need credit.

However about 70.6 per cent of licensed and 85.8 per cent of unlicensed businesses have reported to have not applied for loans in the last three years.

“In Kenya, the common approach of extending credit of MSMEs is based on collateral provided, this approach has its limitation and not feasible for most of the MSMEs as some start with no tangible assets. Collateral oriented lending should be de–emphasized and new creative and innovative strategies adopted. The new strategies should pay attention to the uniqueness and peculiarity of various businesses,” the report recommends.

Apart from credit, other challenges faced by these MSMEs include lack of markets and local competition.

Employees educational qualifications was also a major point of concern as only three per cent of employees in this segment had a degree as the highest educational qualifications of MSME employees in both unlicensed and licensed businesses had primary level of education.

The MSME has so far employed about 14.9 million people with the unlicensed enterprises contributing about 57.3 per cent.

The segment has about 7.4 million establishments out of which 1.56 million MSMEs we licensed with a majority of them in the service sector with most operating in wholesale and Retail trade repair of motor vehicles and motor cycles followed by accommodation and food service activities and other service activities.

The enterprises contribute about Sh1.6 trillion to the economy in 2015 which is about 28.5 per cent compared to Sh5.6 trillion of the whole economy.

This is the second report of MSME in Kenya, with the first report released 17 years ago (in 1999).

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