MSEs Buckle Under Weight of Pandemic

The effects of Covid-19 continued to ravage micro and small enterprises (MSEs) in 2021 with 39% of the businesses collapsing post pandemic. 

Reporting of the first case of Covid-19 on March 13, 2020, marked the beginning of trouble for MSEs whose pre-covid existence was already threatened by low access to credit, lack of managerial training and skilled labor, punitive laws and regulations and technological changes.

To track MSE survival rate, the Kenya Bureau of Statistics, the Central Bank of Kenya and Financial Sector Deepening conducted the FinAccess Micro and Small Enterprise Covid-19 Tracker survey. At the beginning of the survey, in Feruary 2020, the study had a sample size of 603 MSEs which shrunk to 347 in July 2021. 

Reduced Demand for Goods and Services

The closures were mostly fueled by reduced customer demands and failure to meet expenses occasioned by lean pockets due to Covid-19. 

“The biggest challenge cited by MSEs was reduced customer demand at 37% followed by inability to meet business expenses (6%),” reads the survey in part.

Although reduced customer demand was still a contributing factor to why MSEs did not expand prior to the pandemic, it was not as bad as post Covid-19. 

Customer demand reduction was worse during the lockdown, plummeting by 68% before stabilizing to 50 % in July 2021.

“In July 2021, the median number of customers reported by business owners was 50% of the customer numbers they reported in February 2020,” says the report.

Increased Supplier Prices

During the time when demand for their goods and services was low, the MSEs sampled complained of increased supplier prices. In July this year, 46% of business owners cited increased prices as their major challenge.

“Despite this, 60% of business owners reported that their prices for customers were the same or lower than the pre-covid prices.”

During the lockdown, which saw a reduction in the hours that businesses could operate as well as cessation of movements which affected the supply chain, the purchase price for goods had skyrocketed to 77 % compared to the pre-coronavirus era. The prices were higher by 58% in March this year and by 60% in July.

Poor Access to Credit Worsens

Poor access to credit continued to dog the business owners but worsened during the Covid-19 era. 

Because many MSEs operate without a license, lack of documentation locks them out of credit which is a key ingredient for growth for any enterprise. 

According to a 2016 KNBS survey, MSEs accounted for 98% of businesses in Kenya employing between one and nine people. However, 65 % of the micro businesses operate without a license.

“Unlike the formal Micro, Small and Medium Enterprises (MSMEs), micro enterprises are not in the government records,” reads the survey in part. 

However, uptake of loans from small mobile banking loans dominated the Covid era at 42% followed by chamas at 26%. Bank confidence in MSEs improved with loans to the sector growing to 14% in July 2021. Saccos also made a comeback, giving MSEs 14% more loans in July 2021 compared to 8% in November 2020.

During the same period, however, mobile money usage dipped to 8% down from 16% pre-covid.

Inability to Save Affected Most Micro Businesses

The micro-businesses also reported reduced resilience with only 32% of the MSEs surveyed reporting to have savings compared to 60% pre-covid.

Reduced resilience, combined with operational challenges affected the families of business owners who were unable to put three meals on the table. 

According to a July 2020 study carried out by MicroSave Consulting (MSC) dubbed Impact of the Covid-19 pandemic on micro, small and medium enterprises, most small businesses do not have financial reserves to meet expenses during emergencies such as the one precipitated by the pandemic. Only 39% of Kenyans have set aside funds for rainy days caused by loss of income.

“The government can fast-track the earlier proposal of setting up a credit guarantee program for MSMEs to unlock more funding from financial institutions to ease challenges around liquidity for businesses,” recommends MSC.

Going to bed hungry

“Forty-seven percent of MSE households missed meals in July 2021 compared to 14% in February 2020.”

According to the survey, however, micro businesses are slowly recovering although the majority are still earning less than they did pre-Covid. In July 2021, revenue had recovered by two thirds of what it was before the first case of Covid-19 was confirmed in Kenya.

Thirty-eight percent of the surveyed businesses had fully recovered by July 2021 but 62% were still earning below what they made pre-Covid.

Gloomy Outlook

But even as businesses slowly recovered, the majority of the MSEs owners are not optimistic about the future. Compared to 11% of pessimistic business owners in November 2020, confidence in enterprise recovery waned by 62% in July this year.

Following President Uhuru Kenyatta’s call to shift from hard cash to digital transactions, the MSEs accepted mobile money payments at 70% in July 2021 compared to 18% in November 2018. 

Digital Payments Shoot

During the April to July 2020 lockdown, 58 % of businesses reported an increase in the number of customers who pay digitally. This, according to the FinAccess survey, was driven by the perception of reduced risk of transmitting coronavirus through handing cash.

Post the lockdown, however, most of the MSE customers reverted back to paying with cash although at a lower rate compared to the pre-covid era. According to the survey 26% of customers paid through mobile money in March this year compared to February 2020 while the percentage increased to 33% in July.

Businesses continued to tap social media for business with the percentage of MSEs taking advantage of the space growing slightly to 13% in July this year compared to 9% in February 2020.

“There is still significant opportunity to increase the usage of digital channels to reach customers,” the FinAccess report recommends.