A recent critique on collateral-based lending by Kenya’s commercial banks prompted two questions from a colleague. If commercial banks won’t do it, can government enable meaningful financing of innovation? Can state also match policy pronouncements with appropriate action, and at scale?
Our current industrialisation aspirations are contained in Sessional Paper No. 1 of 2022 on National Automotive Policy, which gives expression to Vision 2030 - to become a middle income, industrialising country with a high quality of life by 2030.
On micro, small and medium enterprise (MSME) side, we are on Sessional Paper No. 2 of 2020. It is our 6th, starting in 1965.
Sessional Paper no 10 of 1965 emphasised access to credit for the emergent African entrepreneurs, leading to creation and expansion of development finance institutions (DFIs).
These included the defunct Small Enterprise Finance Company (Sefco), Kenya Industrial Estates (KIE), Industrial Development Bank (IDB), Development Finance Company of Kenya (DFCK, now Development Bank of Kenya). They joined Industrial Commercial and Development Corporation (ICDC, now KDC), which was formed in 1955.
MSMEs should be the focus of our industrialisation efforts. They are the most prevalent form of enterprise. By 2015, there were 1.56 million licensed MSMEs, compared to 38,096 private limited liability, 75 public and 212 foreign companies.
We have never lacked in policy pronouncements in their support. Sessional paper No. 1 of 1986, No. 2 of 1992, No. 2 of 2005, No. 5 of 2020 and the MSME Policy 2025, now in draft form. But policy pronouncements in access to finance, tax incentives, bringing down production costs and improving competitiveness, have not been properly backed by concrete action. And when we act, it is often in contradiction to the intended outcome.
Not the only need, credit poses serious limitations for small business. Without it, all else fails. But credit to the public sector has been growing at three to four times faster per year than credit to the private sector. This decade old trend had crowded out small business.
Seeking improvements, government rolled several small DFIs into the Kenya Development Corporation (KDC), hopefully bigger and better. Their current lending is about Sh1 billion per year, while Kenya Industrial Estates (KIE) is lending Sh1.2 billion per annum.
The Development Bank has about Sh500 million per year, and the State Department of Industry about Sh1 billion. The Hustler Fund is about Sh50 billion, while the Treasury partial guarantee has brought about Sh1.5 billion in MSME lending.
The total resource allocation to all MSME focused lending institutions at the national level is Sh55 billion equivalent to 1.3 percent percent of the 2025/26 budget. That for the sector that employs 93 percent of the total labour force!
In the Laikipia economic stimulus lending programme, most (83 percent) of borrowers were micros, taking loans of Sh500,000 or less. The biggest group (49 percent) took loans of Sh100,000 or less, bringing the average loan size is Sh200,000.
Using this example, the financing need for the 7.4 million MSMEs is Sh1.5 trillion. Since not all businesses borrow at the same time, I place the annual estimate at the Sh150-200 billion range.
Nowhere are our actions more contradictory to the stated outcome than in relation to manufacture of machines and tools. In both the export processing zones act and the special economic zones act, imported machinery and tools are given tax preference. But not so for locally manufactured ones. This has made it cheaper to import such basic items as motors, pumps, cutting, folding and bending machines.
To assist micro and small businesses to mechanise and automate, we should change all the laws that give preferential treatment to imported machinery and tools. Further, we should give incentives to the more sophisticated fabricators to make those machines and tools.
In the single business permit data by counties, you will find large engineering workshops capable of producing the kinds of machines that small engineering workshops in turn use to make, for example, agricultural processing machines such as mixers and fillers.
All these MSMEs pay Sh21 shillings per unit of electricity, approximately three times compared to their competitors in India and China.
To ensure competitiveness, we must bring down that cost. That requires a change of strategy in the energy sector, which should begin in eliminating or reducing the dominance of the distribution monopoly, which carries 23.5 percent distribution loses.
Ndiritu Muriithi is an economist and partner at Ecocapp Capital. He is also the chairman of KRA and former governor of Laikipia County.
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