Majority of small businesses in Kenya’s low-income neighbourhoods make less than Sh240,000 per month resulting, in poor quality of life for employees, a study has revealed.

A report by Small Firm Diaries reveals that 75 per cent of small firms in the country’s low-income neighbourhoods make less than Sh240,000 monthly, which is then shared as an emolument among workers.

“This level of revenue affects the quality of life for employees, with approximately two-thirds of staff, interviewed reporting they are struggling to have enough money to obtain necessary items for their families,” the report says.

Potential tax base

It noted that Kenyan firms experience volatile earnings with revenue and expenses fluctuating in unpredictable and hard-to-manage ways from month to month. Only half of the small firm employees got paid eight months or more in a 10-month period. A quarter of the employees worked at the same firm for fewer than five months during that period.

Despite access to finance being the third-largest barrier to firm owners’ vision for success, many firm owners said they rarely or never need a loan. When requesting loans, the firms analysed say that working capital is a bigger need than investment capital.

“They (firms) frequently look to sources other than banks, such as their own suppliers, for loans, and rarely take any operating risk that could result in negative monthly cash flow. These facts help confirm their need for working capital to cover liquidity needs,” says the report.

The study concluded that stability and growth are a priority for the entrepreneurs interviewed.

In the 2023 Draft Budget Policy Statement (BPS) Treasury’s plans for tax base expansion wanted to hit the hard-to-tax informal sector, with a special focus on MSMEs.

“The potential taxable base of the informal sector is Sh2,800 billion as per the MSME survey,” Treasury noted in the report.

Kenya Revenue Authority (KRA) has been given a tax collection budget of Sh2.56 trillion in the Financial Year 2023/24, a target that is set to be raised to Sh4 trillion in the medium.

Rising costs

These companies face high volatility in their income and expenses. The report cited rising costs and supply problems as the main barrier to achieving their vision of growth and stability.

The research was conducted by Financial Sector Deepening (FSD) and Financial Access Initiative (FAI) and focused on three industries; light manufacturing, Agri-processing, and services. It was carried out in Kisumu, Kwale and Nairobi counties between October 2021 and October 2022.

Half of the firms in the Kenyan sample are engaged in small-scale manufacturing such as carpentry, metal work, and construction, while 20 per cent are in services such as printing, car and bike repair and maintenance; and 26 per cent in Agri-processing industries such as meat and fish preservation and food preparation.

Timothy Ogden, the managing girector of the global study and FAI noted that while entrepreneurs have the desire to grow, they are faced with many challenges that hold them back.

He called for policies and access to financial tools that will enable them to overcome these challenges.

“We see that these entrepreneurs do have aspirations to grow, and they are dynamic, constantly working toward those goals. But that dynamism often translates into just overcoming the volatility and risk they face, rather than moving them toward achieving their goals. Every time they are able to seize an opportunity, they have to contend with a wave knocking them back — particularly because of a lack of liquidity and working capital,” he said.