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Impact of fintech on state of MSME finance in Kenya

Micro, small and medium-sized enterprises (MSMEs) in Kenya constitute over 90% of all businesses and employ close to 14.9m people, accounting for ~78% of the total labour force. The Kenya National Bureau of Statistics (KNBS) further estimates that the sector contributes about 33% of Kenya’s GDP.

Kenyan MSMEs, as with other developing markets, have historically faced limited access and uptake of formal financial services. Their reliance on cash and informal forms of finance in part constrains their potential to spur sustained and inclusive economic growth.

Since 2005, Kenya’s financial sector has exhibited significant developments characterised by the proliferation of digital financial services; increasing network and channel distribution; and the roll out of new products and services tailored to non-traditional market segments. The Financial Sector Deepening Trust (FSD) Kenya sought to add reliable research on how and to what extent MSMEs had been impacted by these developments, primarily from the banking sector. FSD Kenya commissioned Genesis to carry out an in-depth analysis of relevant and available secondary research, and draft the findings into a report.

We first provided a contextual overview of the macroeconomic and banking-sector trends over the last decade. This involved reviewing the performance of the banking sector in detail and against the Central Bank of Kenya’s (CBK’s) size classification of banks. Next, Genesis interrogated the main drivers of change that had impacted the market. This included demand side factors; the effect of technological changes; the changing regulatory landscape; and the specific winning business-model strategies of individual banks. Together these insights were used to highlight the implications for MSME finance. This focused on the impact of managing day-to-day operations and access to longer-term finance.

Beyond the research findings, Genesis provided a list of recommendations for FSD Kenya to consider in its operations. These included key areas requiring once-off or periodic research; regulatory amendments that would help address gaps in the lending market; and identifying business models and industry infrastructure developments that would benefit MSME finance, but required further innovation and support.

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