Challenges faced by SMEs in Kenya

Small and medium enterprises (SMEs) are an integral part of the Kenyan economy —more than 30% of the annual jobs are created by SMEs. (Wakiaga, 2018).

The majority of Kenyan SMEs are in the informal sector, popularly known as jua kali. According to estimates, the jua kali sector contains 98% of the business in Kenya, contributing 30% of jobs and 3% of Kenya’s GDP (KAAA, 2017). Due to the informal nature that these jua kali SMEs operate under, most of the information about them is often based on estimates. The amount of money they make is also hard to confirm since they seldom use the traditional banking systems.

For a long time, the government has created policies that favour SMEs but implementation of these policies is hindered by massive corruption at the highest levels of government, (Ngunjiri, 2010). This corruption has led to a bad relationship between the government and entrepreneurs.

The impacts of the Covid-19 pandemic adversely affected many businesses, and some closed down. The government of Kenya, as in other parts of the world, put in place measures to help businesses, including a reduction in taxes. Many small companies benefited from the measures and could keep a few employees on the payroll. However, the measures did not benefit SMEs as it did the large corps.  As the pandemic eases across the globe, recovery has started for SMEs in Kenya but entrepreneurs still face the challenges that were in existence before the pandemic. These problems have remained unaddressed for a very long time; if they are addressed, there could be major changes in the way the Kenyan economy develops. These challenges are discussed below.

The Unaddressed Challenges

SMEs in the country face a lot of challenges. Despite the government coming up with favourable policies there still are problems that are yet to be solved. 

Access to credit

Credit is an integral part of any business in Kenya. However, many SMEs cannot get access to cheap loans to scale up their operations. One of the reasons is that most commercial banks ask for tangible collateral before giving out loans. Since most entrepreneurs have no land titles to use, they fail to qualify for the loans.

Most SMEs in the informal sector do not use banks and prefer to do their transactions using cash. This means that they do not build a credit and have no relationships with banks where they can access loans whenever needs arise.

Mobile lending is rising in Kenya. Most young people have used these mobile platforms to borrow sums but have defaulted on payments (Maina, 2021). These defaults are listed with credit reference bureaus and make it hard for the youth that may be interested in setting up a business to access mainstream credit. These youth therefore turn to non-deposit taking microfinance institutions (MFIs) for expensive loans. These MFIs prey on individuals who have bad credit scores but disposable assets, such as cars. Often, the repayment of these loans consumes most of the money that an SME makes and leads to closure of the business.

I talked to Josephat Vaati, a victim of predatory MFI practices. Josephat once had a successful business baking and delivering cakes in Wamunyu town and its environs. He says he had his sights set on expanding his business and was setting up a modern kitchen to improve and expand his service. Due to his lack of good credit, he could not get a loan from a bank. However, he managed to get a loan from a non-deposit taking MFI. Josephat used his delivery van’s logbook as collateral for his loan. After a few months, he was short of cash and the MFI refused to restructure the loan. He lost his van. Now his delivery service is in jeopardy as he has to pay motorcycle riders to do his deliveries. The loan repayment plus the extra delivery costs have eaten into his profits, and he is barely making ends meet.

Josephat is one of the many business owners who have suffered in the hands of unregulated lenders in the country. The Central Bank of Kenya has made efforts to try and curb these institutions, but they face the challenge of the MFIs not following the same regulatory regime as banks. There also seems to be a lack of political will to regulate these institutions.

Inadequate managerial training

Most of the individuals that establish SMEs are not trained in management, (Kasi Insights, 2021). They set up business and try to wing it by learning and unlearning along the way. This method does not result in good operations. It often leads to failure and loss of resources. These SME owners also often cannot employ staff to carry out management responsibilities due to tight budgets. By trying to run the whole operation, without the needed skills, the owners are susceptible to burnout.

Slow adoption of technology

In this era of technology, any business that wants to stay ahead must quickly embrace new products and services in the market. A good example of an innovative technology is mobile payments. However, years after the introduction of mobile payments in Kenya, many SMEs still insist on cash payments. Covid-19 may have pushed some to accept mobile payments but others are yet to embrace the technology. This reluctance is a clear indication that some entrepreneurs are still stuck in the age where cash ruled and they do not want to innovate.

One reason entrepreneurs give for their lack of up-to-date technology is that the costs are high. Another reason for some is they do not want a third party getting a glimpse of their real financial situation. There are also concerns that technology is evolving at a high speed, and that better products are introduced in the market every day. Therefore, some SME owners are left to speculate as to whether to embrace what is available now or to wait for the next big thing.

Either way, there is a need to accelerate the uptake of technology by Kenyan SMEs. 

Regulations and law

In Kenya, I believe we have overregulation by a government that has decided to steer business via laws and regulations and refused to let industries develop freely. Do not get me wrong, I am not saying that all government regulation is bad. However, sometimes the law should follow society’s lead and not try to mould society (Kasi Insights, 2021). For effective development, SMEs should be allowed to operate free of multiple regulations and licensing requirements. For example, to start a food business, there are a number of required licences:  trading licence, a fire clearance certificate, an advertising signage licence, a health certificate, and a food hygiene licence. These multiple licences are not only expensive, but acquiring them is time consuming. If SMEs only needed one permit, that’s cheap and time effective to secure, more SMEs would be set up, leading to more employment opportunities for young Kenyans.  


SMEs are the backbone of the Kenyan economy. However, there are myriad of challenges that must be navigated before one can successfully set up shop and make a profit. Some of these challenges are caused by the government and others by the entrepreneurs themselves.

The government needs to come up with a straightforward licensing regime that does not demand multiple licences for a single business. We also need mentorship programmes for budding entrepreneurs where they learn about management and good financial planning to avoid bad loans that affect their future prospects. Alongside these other changes, financial institutions need to come up with affordable loans for entrepreneurs. These improvements would lead to a win-win situation for all parties.

Kasi Insight. “Challenges of Doing Business in Kenya” Kasi Insights, 30 October 2021,
Kenya Agribusiness and Agroindustry Alliance (KAAA). “Challenges Faced by Small and Medium Enterprises in Kenya”, 12 April 2017,
 Maina, Mwangi. “Kenya: The cycle of mobile app loans is costing the youth its health and finances” The Africa Report”, 26 November 2021,
Ngunjiri, Irene. (2010). Corruption and Entrepreneurship in Kenya. Journal of Language, Technology & Entrepreneurship in Africa. 2. 10.4314/jolte.v2i1.51993.
Wakiaga, Phyliss. “SMEs critical in attaining manufacturing dream”<>


Aksa is a student from Pakistan. She holds a Bachelor’s Degree in Economics, and is passionate about reading, writing, volunteering, creative thinking, teaching and advocacy. She is a strong advocate of quality education, and believes in Allah’s miracles and in the goodness of people. Her aim in life is to work toward education and sustainable development.

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