Small but mighty: The crucial role of SMEs in driving Kenya's economy

Kenya's economy is facing a slowdown, with a 4.6 per cent year-on-year growth recorded in Q2 2024. The concerns are mounting for Micro, Small, and Medium Enterprises (MSMEs), which are considered the backbone of the country's economic growth. Victor Otieno, the Managing Director of Viffa Consult, shared his insights on the challenges faced by SMEs in a recent interview with CNBC Africa. Otieno highlighted the systemic challenges that SMEs have been grappling with, including the credit crunch and pending bills from government contracts, which have left many SMEs cash-strapped and struggling to operate effectively. The high inflation rates and regulatory environment have further exacerbated the situation for these businesses, putting them in dire straits. The drop in inflation in the recent quarter does offer some hope for SMEs, especially those in wholesale and retail sectors that are highly affected by transportation costs. However, the key question remains whether the decrease in costs will be significant enough to drive profits and improve business operations for SMEs. While certain sectors like tourism and agriculture have shown resilience, others such as construction have experienced a slowdown due to government debt payments and aggressive tax collections. The lack of affordable credit accessibility has been a major challenge for SMEs, with formal financial institutions hesitant to extend loans to small businesses. Alternative financing mechanisms like fintech platforms have emerged, but they primarily focus on cash flow financing, limiting SMEs' ability to invest in assets. Government interventions like the Hustler Fund have attempted to address the financial access issue, but with limited success and high non-performing loans. Otieno emphasized the need for a more strategic and well-defined approach to supporting SMEs, as current programs lack a clear theory of change and market access strategy. With limited fiscal headroom for new programs, Otieno suggested that the government focus on reducing the regulatory burden and costs on SMEs to stimulate growth and market exploration. By reviewing licensing fees, electricity costs, and fuel taxes, the government could provide SMEs with the necessary space to thrive and contribute to the overall economic performance. Despite the challenging economic environment and varying sector performances, Otieno believes that a regulatory overhaul could be the key to unlocking growth and sustainability for Kenya's SME sector. A strategic and targeted approach towards reducing regulatory burdens and increasing market access could pave the way for SMEs to navigate these turbulent times and emerge stronger in the long run.