Kenya SME COVID 19 Resilience: Support through informal sector social protection framework

SMEs in Kenya are the bedrock of the economy accounting for 33 percent of GDP, employ over 30 percent of the population close to 15 million as well as constitute 98 percent of all businesses in Kenya.

Despite the recognition and systemic support from national government through inclusion into vision 2030 followed by raft of policy and legislative intervention including enactment of MSME Act 2012, SME Policy 2020, establishment of special economic zones, credit guarantee scheme, movable property act among others under medium term plans 1 to 3; Kenyan SMEs have continued to struggle evidenced by a pre covid 19 mortality rate of 75 percent within the first three years.

Underpinning the struggle has been a cocktail of challenges ranging from challenges in ; access to finance, access to market, management skills, technology, regulation and license regime among others.

The advent of covid 19 exposed the vulnerability of SMEs to external shocks with estimates indicating a mortality of over 80 percent. The government of Kenya in response unveiled covid 19 stimulus program in 2020 followed by a comprehensive post covid 19 economic recovery strategy in 2021 enumerated in the budget policy statement for financial year 2021-2022 aimed at helping SMEs build back better.

Unfortunately, the impact of these programs has been sub optimal due to a mismatch between the programs and the realities of SMEs who are largely informal (79 percent of SMEs) and operate in the missing middle that is they exist between the extremely poor and formal economy who were captured by cash transfers and stimuli programs respectively.

Whilst there is a case for evaluating the effectiveness of policy and legislative interventions towards supporting SMEs as espoused in Vision 2030 and MPT 1 to 3 vis a vis the actual growth of the sector, this article will focus on how to build SME resilience from external shocks through a national social protection framework based on best practice from other similar jurisdictions.

Mama Otieno deals in selling fruits and vegetables in Umoja estate Nairobi. Her day starts at 4am buying stock from Marikiti market and selling in Umoja estate. She has three children, and her husband does menial jobs. Their total income was enough to buy food, pay rent and barely any savings left that they could use to expand or diversify their business.

The covid 19 pandemic and subsequent lock downs meant they lost revenue and had barely any savings to support them.

Mama Otieno and her family didn’t qualify for safety net cash transfer as they were not classified as poor but thanks to their chama they were able to get by for at least three months as they looked for other options to survive.

Mama otieno’s experience was the reality of millions of informal sector SMEs who despite being vulnerable due to being in the middle of just being above the poverty line but below formal sector tends to miss out on government interventions.

The article looks at how to structure a safety net for SMEs majority being informal based on their needs as well as lessons from other African countries that have implemented a similar initiative

Kenyan SMEs are largely Micro and Small who account for over 90 percent of the sector with majority being in wholesale-retail. What this means is that they inherently struggle for working capital hence the affinity towards short term financing mostly through chama and mobile credit as well as lack ability to save in the long term.

Based on these needs a social protection framework needs to ensure that SMEs can:

1. Save based on their unique income cycle (mostly daily)
2. Enjoy very low transaction cost cognisant of their low earnings (leverage of mobile technology )
3. Quick access to savings on instances of drop or no income as the case of a pandemic or other unforeseen shock
4. Save in the Long term  with added benefit of government matching amount contributed by SMEs as well as bundling with some form of insurance (loss of income, life, death etc
5. The proposed scheme must have a comprehensive list of SME associations in the county similar to what Zambia through the  National Pension Scheme Authority (NAPSA) which signed a Memorandum of Understanding with Seven Informal Sector Associations to facilitate extension of social security coverage to informal sector workers.

The platform must be interoperable with other government registries to allow for coherent SME interventions across all government ministries as well as act as a channel for rapid relief programs such as covid 19 stimuli among others.