1. The supply and demand for SME finance in Kenya EDOARDO TOTOLO, RESEARCH ECONOMIST, FSD KENYA

2. Agenda The data 1 Key findings 2 What next 3

3. 1- The data

4. Introducing FinAccess Business  Two sides of the project:  Supply-side: two surveys with banks (2012 and 2014)  Demand-side: survey with 1047 businesses in Nairobi

5. Takeaway one WHAT ARE SMES?

6. 1- What are SMEs? There is large disagreement about how to define SMEs. The Government has adopted a definition, but banks very different ones based on their interests and target markets.

7. Definitions used by banks Loan sizeMedian1st quartile3rd quartile Micro 1 mil 2 mil Small 6.5 mil5 mil10 mil Medium 50 mil20 mil100 mil Turn- over Median1st quartile3rd quartile Micro 10 mil3.25 mil11.5 mil Small 50 mil16.25 mil250 mil Medium 150 mil100 mil1,000 mil EmployeesMedian1st quartile3rd quartile Micro 108 Small 221144 Medium 5043100 Loan size is the most common variable used to classify businesses The heterogeneity of definitions is high (see difference between 1 st and 3 rd quartile) In qualitative interviews conducted prior to the second survey round, it was noticed that banks are unable to provide data if we used a standardized definition

8. Definitions used by the banks Loan sizeMedian1st quartile3rd quartile Micro 1 mil 2 mil Small 6.5 mil5 mil10 mil Medium 50 mil20 mil100 mil Turn- over Median1st quartile3rd quartile Micro 10 mil3.25 mil11.5 mil Small 50 mil16.25 mil250 mil Medium 150 mil100 mil1,000 mil EmployeesMedian1st quartile3rd quartile Micro 108 Small 221144 Medium 5043100 Loan size is the most common variable used to classify businesses The heterogeneity of definitions is high (see difference between 1 st and 3 rd quartile) In qualitative interviews conducted prior to the second survey round, it was noticed that banks are unable to provide data if we used a standardized definition

9. Definitions in demand-side research  We decided to take the Micro and Small Enterprise Act (2013) as the starting point, and then segment further to develop a more nuanced understanding SizeGovernment (employees) Micro Less than 10 Small 10 to 49 Medium 50 to 250

10. Definitions in demand-side research  We decided to take the Micro and Small Enterprise Act (2013) as the starting point, and then segment further to develop a more nuanced understanding SizeGovernment (employees)FinAccess Business Micro Less than 10 Less than 5 5 to 9 Small 10 to 49 10 to 29 30 to 49 Medium 50 to 250

11. Takeaway two MARKET SIZE

12. 2- Market size: SME finance is one of the fastest growing segments in Kenya, but there must be realistic expectations about the size of the demand-side market

13. Market sizing: supply-side 332 225 133

14. Market sizing: demand-side  According to County Government figures, in 2014 there were about 156,000 licensed business establishments in Nairobi

15. OVERVIEW OF SECTORS

16. Distribution of Businesses in Nairobi 5% 9% 17% 8% 13% 32% STAREHE 32% KAMUKUNJI 13% MAKADARA 8% LANGATA 5% DAGORETI 5% WESTLANDS 9% KASARANI 9% EMBAKASI 17%

17. Access to credit

18. Takeaway three PRODUCT PORTFOLIO (WHAT DO SMES WANT FROM BANKS, AND WHAT DO THEY GET)

19. 3- Product portfolio The SME lending portfolio is still largely unsophisticated. SMEs tend to use credit instruments that are expensive, unsuited for their needs and expose them to various types of risks. There are huge opportunities for innovation.

20. Composition of SME finance portfolio (number of loans)

21. Market awareness is low

22. Key takeaway four THE NATURE OF INFORMAL CREDIT AMONG SMES

23. 4- If few businesses use formal credit, how do they actually finance themselves?  There is a conceptual gap when we think about informal finance in the SME segment

24. 4- If few businesses use formal credit, how do they actually finance themselves?  There is a conceptual gap when we think about informal finance in the SME segment Although these instruments are very common in Kenya, informal credit in the SME segment can take different forms

25. How do SMEs grow? Kamau’s Tailoring (2013) We often think that SME growth is linear

26. How do SMEs grow? Kamau’s Tailoring (2013) We often think that SME growth is linear Kamau’s Tailoring (2015)

27. How do SMEs grow? Kamau’s Tailoring (2013) We often think that SME growth is linear Kamau’s Fabrics (2014) Kamau’s Mpesa agent (2015) Kamau’s transports (2016) Kamau is a «portfolio entrepreneur»

28. How do SMEs grow? Kamau’s Tailoring (2013) Kamau’s Fabrics (2014) Kamau’s Mpesa agent (2015) Kamau’s transports (2016) Two implications 1- «Cross financing» 2- Entrepreneur as unit of analysis

29. Key takeaway five OBSTACLES TO THE DEVELOPMENT OF SME FINANCE

30. Main obstacles faced by the banks

31. Main obstacles for businesses

32. What next?

33. Expanding the research  The intention is to continue with both demand-side and supply-side research  On the supply-side, the intention is to expand the scope beyond banks and include SACCO, microfinance institutions and insurance  On the demand-side, the intention is to understand other crucial market hubs (e.g. Mombasa) with high potential for expansion  Research on innovation in SME finance

34. Thank you Edoardo Totolo FSD Kenya edoardo.totolo@fsdkenya.org www.fsdkenya.org