This report estimates the credit gap in the MSME sector as it emerges from the long shadow of COVID-19 and presents solutions to bridge this gap. It presents the current state of financing to MSMEs, including the role of initiatives like TReDS and GeM in meeting the short-term financing gap. It also touches upon supply-side challenges that MSMEs face in accessing credit. The report then offers some broad recommendations and some technology-specific ones with a focus on financial architecture and digital public infrastructure plan for faster diffusion of cash-flow-based lending and deeper access to credit.
As part of our continued research, we present the second round of reports on the impact of the COVID-19 pandemic on cash-in cash-out (CICO) agents, farmers, and micro, small, and medium enterprises (MSMEs) in #Kenya. Our reports indicate that these segments of the economy have been struggling to overcome the challenges posed by the pandemic despite the reduced hours under curfew and relaxation of restrictions in inter-county movement by the government.
MSC and Swiss Capacity Building Facility(SCBF) launched the new reports on the impact of the COVID-19 pandemic on cash-in cash-out (CICO) agents, farmers, and micro, small, and medium enterprises (MSMEs) in Kenya through an interactive webinar on 21st January, 2021.
The Government of India (GoI) has done notable work in feeding 115 million children through the Mid-day Meal Scheme (MDMS). It has already made giant strides to reach its first objective of increasing student enrolment and attendance. However, guidelines around the scheme need to improve for the program to reach its second objective of improving the nutrition of the students.
Most decisions regarding MDMS are taken at the national level. However, states play a vital role in the evolution and improvement of the scheme. States have the flexibility to innovate the scheme and the MHRD encourages them to pilot new interventions. States are permitted to use up to 5% of their annual budgets for novel interventions with prior approval from MHRD. Many states have utilized this allotment and further supplemented it with their own funds to achieve a better impact on children’s nutrition and other areas. In the following section, we look at a few examples of such interventions, which we have categorized under infrastructure, nutrition, and monitoring.
Infrastructure
As part of the MDMS, the GoI mandates that all schools have kitchens where meals can be cooked and served fresh to the children.[1] Additionally, the GoI encourages schools to have nutrition gardens[2] as well as toilet and washing facilities.
Some states have gone a step further by providing funds to schools to construct dining halls to improve cleanliness and discipline among students. West Bengal has built 692 dining halls and Tripura has built 250, both with state funding. Madhya Pradesh has also started building dining halls. In Assam, where state funds were not sufficient for such a project, the state provides tarpaulin mats to each school so that students do not have to sit on the bare floor while eating.
The benefit of the intervention: In schools that lack dining halls, students often have to sit in open spaces on bare floors to eat their meals. Eating in dining halls increases hygiene and makes students more eager to participate in the MDMS.
The MHRD advises all schools to have washing facilities but many states cannot afford to construct large enough facilities for school students. Most schools only have one or two taps available as washing facilities. Odisha overcame this problem by installing cost-effective devices made of plastic and rubber with multiple taps running from a tube-well or pipe source, which allows several students to wash their hands at a time.
The benefit of the intervention: This invention saves time, reduces chaos among the children, and increases convenience.
Nutrition
A primary objective of the MDMS is to improve nutrition for children. As India attempts to move from food security to nutrition security, MDMS can emerge as the ideal conduit through which nutritional food can be delivered. Some states have instated policies specifically to utilize the MDMS to improve nutritional outcomes.
In Uttar Pradesh (UP) and Tamil Nadu, governments are piloting fortification[1] of food grains, which are then served as part of the MDM in some districts. The UP government has been fortifying food grains in Varanasi in collaboration with the World Food Program while the Tamil Nadu government is doing it independently.
The benefit of the intervention: The WHO recommends food fortification as a means to reduce malnutrition. By fortifying food grains before serving them to students, the governments of Tamil Nadu and Uttar Pradesh expect to improve the nutritional outcomes of their students.
In Uttarakhand, “apna kitchen, apnabhojan”[2] is organized, under which kitchen helpers teach children to prepare the MDM once a week.
The benefit of the intervention: This teaches students to be responsible for their own food requirements and nutrition while imparting an important life skill for their future.
The Gujarat government has divided the MDM into two meals. As per the guidelines of the MDMS in Gujarat, schools should provide 180 grams of food grains to primary students and 265 grams of food grains to upper primary students. When the requisite food grains are cooked, it expands to a weight that is too much for the primary and upper primary classes to consume at one sitting. Thus, the meal is divided into two meals and served as breakfast and lunch.
The benefit of the intervention: Splitting the meal into two ensures that children eat the complete amount of food grains available. They eat both breakfast and lunch, which ensures that they do not go hungry during the school day.
The governments of Andhra Pradesh, Karnataka, Telangana, and Tamil Nadu have expanded the MDMS to cover children who study in classes 9 and 10. The respective state governments fund this completely.
The benefit of the intervention: Findings of research studies have suggested that MDM has led to increased student retention rates and has played a role in curbing dropouts, especially among girls. By expanding the scheme to Classes 9 and 10, the state governments hope to reap the same benefits.
The Kerala government provides a separate breakfast in addition to the MDM in approximately 3,000 schools in the state, all of which are state-funded.
The benefit of the intervention: The draft of the new education policy of the MHRD states that the morning hours after a nutritious breakfast can be particularly productive. By ensuring that children receive not only a mid-day meal but also an energizing breakfast, the Kerala government makes sure that students are well-fed throughout the school day, which allows them to focus better on their studies.
Monitoring
Monitoring remains an essential component of any scheme. While all states must comply with the National Monitoring Guidelines for MDMS, including monthly and annual report submissions, certain states and union territories have increased the monitoring component on their own.
The Chandigarh government has installed CCTV cameras in all kitchens.
The benefit of the intervention: This allows authorities to monitor the kitchens in real-time. It also serves to ensure that the kitchens follow all the MDM guidelines and allows mitigation of any untoward incidents, such as instances where children have reported illnesses after consuming the meal in school.
Uttar Pradesh has created a “Maa Samuh” for each school, as part of which six mothers visit the schools regularly to supervise the preparation and cooking of the food served to students. The six mothers are selected on a voluntary basis. The central government also encourages states to appoint eligible and interested parents of schoolchildren as kitchen cooks.
The benefit of the intervention: The rationale behind creating the Maa Samuh is that mothers with children studying in the school will have a greater stake in ensuring that the MDM is prepared in a quality manner.
In Madhya Pradesh, a sample of the day’s meal and milk is stored for 24 hours in a container in the kitchen for parents, school figures, or government authorities to check if they wish.
The benefit of the intervention: This aids in addressing any incidents that may arise from poor quality of food or milk served at the MDM.
General Interventions
Many states have also taken smaller steps to improve their MDM schemes.
Kitchen helpers are considered important stakeholders in the scheme as they cook and serve the meals to the students. In Uttar Pradesh, the kitchen helpers receive training through an innovative short film, Poshana, which focuses on hygiene, safety, and nutrition. In Tamil Nadu, the state government recognizes the efforts of kitchen helpers by awarding those that have done great work based on hygiene and nutrition parameters.
Goa and Delhi have assisted overburdened teachers in short-staffed government schools by outsourcing all cooking activities to centralized kitchens operated by self-help groups (SHGs) and non-governmental organizations. Government schools are often short-staffed. As a result, teachers frequently become responsible for not only educating students but also implementing government programs—including the MDMS and the School Health Program. When the MDM is cooked on school grounds, the lead teacher is responsible for buying the raw ingredients for the meal (other than food grains) and confirming that the kitchen helpers are preparing food according to guidelines. The burden of these responsibilities reduces when the cooking process is outsourced to centralized kitchens and delivered to schools.
In Chhattisgarh, the state government mandates that 21 important MDMS-related topics, including the toll-free number to resolve grievances, must be displayed on a visible wall of the school building. This encourages parents to raise grievances if they arise and increases their level of awareness. Other topics include a menu, nutritional and food norms, and details regarding the lead teacher. Additionally, many states paint the weekly MDM menu on walls and bulletin boards in schools. Many MDM interventions initially piloted at the state level became so successful that they were mandated nationally. Existing evidence points to the positive impact of the MDMS on enrolment levels, and the increase in retention and attendance rates of students—one of the scheme’s primary objectives. However, the GoI and state governments should continue to pursue the second, more elusive, goal of improving student nutrition. To do so will require innovative ideas and the ability to test them in real-world situations.
Each of the steps implemented by the state governments serves as pilots for the idea. The GoI should conduct impact assessments and feasibility studies for each of these innovations and then scale the ones that could potentially have a positive impact on students across the nation.
States have demonstrated that they are keen to contribute their funds to improve the MDMS. They must continue to experiment to tackle the problem of undernourishment and malnutrition among students as well.
References
In the Indian context, “schemes” refer to programs of varying scale, usually undertaken by the government or private bodies
This is not a requirement for those schools whose food is served from centralized kitchen.
Nutrition gardens are vegetable gardens in the school premises. The GoI recommends their use to teach children how to grow their own vegetables.
“The biggest impact of COVID-19 on my livelihood is the closure of my primary business. The inter-county travel restrictions and curfews had hurt customer footfall and I was left with no choice but to shut my shop.” Philip, a furniture enterprise owner from Nairobi.
Social and economic disruptions brought about by COVID-19 are projected to contract Kenya’s economy between 1% and 1.5%. As per a World Bank report, since the pandemic struck, two million more people in the country have fallen below the poverty line and around one-third of household-run businesses have not been operating. The Central Bank of Kenya warned that 75% of businesses risk closure due to the lack of emergency funds and crisis in liquidity. Further, a study by BFA on COVID-19 indicates that more than 80% of Kenyan respondents reported a decline in income while 67% reported an increase in expenses. Along with the loss of livelihoods, remittances have fallen while few households have benefitted from direct cash assistance.
In this blog, we present key insights from MSC’s research[1] into the impact of the pandemic on micro, small, and medium enterprises (MSMEs). We conclude with recommendations for the government to formulate policy measures to support the recovery of Kenyan MSMEs and build their resilience.
Entrepreneurs face declining business revenues and increasing expenses, which have jeopardized the survival ofmicro and small enterprises
MSMEs play a vital role in the economic development of Kenya. The sector largely comprises micro-enterprises (98.3%)[2] and contributes approximately 40% to the GDP[3]. MSMEs employ 14.9 million people, of whom 12.1 million are employed in microenterprises. However, the sector remains highly informal as only 20% of the 7.4 million MSMEs operate as licensed entities.
COVID-19 has had a significant impact on the general economy. Many enterprises have closed and people have lost their jobs. As a result, the purchasing power of consumers is constrained. Consumers spent less on discretionary expenses and limited their consumption to focus on essential goods. While the economy is gradually reopening and the restrictions have been relaxed, the consumers are diffident and have been spending cautiously.
In our two dipstick surveys, we found that most entrepreneurs have struggled with falling business revenues as a result of reduced customer footfall and decreased volume of sales per customer. Furthermore, business expenses increased as travel restrictions hurt supplies and increased prices. Some entrepreneurs who borrowed from financial institutions have found it difficult to repay their loans.
Furthermore, the household incomes of micro and small enterprise owners have generally declined, as members of the household have either lost jobs or seen a lower footfall in their enterprises. However, 32% of entrepreneurs in September, 2020 and 82% of entrepreneurs in July 2020 reported an increase in household expenses.
MSMEs operate with limited resources and hence are less able to absorb heightened costs that result from shocks like COVID-19. Most entrepreneurs mentioned that they have exhausted whatever little financial reserves and savings they had. The use and eventual depletion of savings
have increased as many enterprises continue to face a significant decline in income. As a result, only a few entrepreneurs have the resilience to recover after the pandemic, and unless supported, many enterprises will eventually fail to survive the crisis.
Some entrepreneurs turned to credit and sold off assets to meet household needs but these provided only temporary relief. More female than male respondents reported resorting to the sale of productive assets, especially those based in rural areas and involved in agricultural enterprises. Entrepreneurs who resorted to borrowing reported being trapped in a vicious cycle of repeat borrowing to manage repayments.
A squeeze on credit and limited access to capital has further diminished the ability of enterprises to survive the crisis
Two specific external sources of capital fueled enterprise value chains before COVID-19. These were loans from financial institutions and the provision of credit from suppliers. The reduction in access to credit from both sources has posed significant challenges for enterprises to maintain business liquidity.
Most financial institutions have reduced their exposure to the MSME segment given its higher levels of vulnerability and lower resilience. Some lenders asked for additional collateral or priced the loans higher than usual, which reflects the higher perceived risk associated with MSMEs. Such conditions have made loans expensive for MSMEs and thus have limited their ability to use additional loans to reestablish business.
Under normal circumstances, suppliers provide goods to entrepreneurs on credit for short terms, usually 15 to 45 days. Yet suppliers have reduced sales on credit. This is because liquidity is crunched in the value chain due to limited funding from financial institutions, a decrease in sales, and increased expenses. Moreover, some enterprises have defaulted on payments to suppliers, which has reduced the ability of suppliers to offer goods on credit to other entrepreneurs. Thus, most entrepreneurs are now forced to make only cash sales to preserve their liquidity and pay suppliers. Hence, they extend credit sales only to their most important customers. This measure has also reduced sales.
Coping mechanisms by entrepreneurs include diversification of income and businesses
Some entrepreneurs have responded to the risk of business failure by switching their existing products and services to suit the immediate demands of customers. The entrepreneurs who have two or three concurrent businesses have focused on those businesses with stronger cash flows.
The uptake of digital platforms and technologies by enterprises, particularly micro and small enterprises, has been limited
The pandemic has led to a limited increase in the adoption of digital platforms across urban and rural areas. WhatsApp, Facebook, and other e-commerce platforms provide an opportunity to enhance sales. However, the lack of awareness and understanding to use digital platforms among entrepreneurs have limited the uptake. Among enterprises surveyed in September, 2020, 73% have reported using digital transactions, such as mobile money and electronic bank transfers up from 60% in July 2020.
Recent times saw digital transactions in the country rise, buoyed by the Central Bank of Kenya’s directive that waived the fee on mobile money transactions of less than KES 1,000 (~USD 10) and bank to mobile wallet transfers. While digital merchant payments witnessed a net decline of 16%[4], enterprises in sectors, such as agriculture and food and grocery experienced an upward trend in digital payments.
Measures that the public and private sector can take to support this segment to tide over the crisis
To support the entrepreneurs and enhance their income from their enterprises:
The government may mobilize funding from multilateral agencies to provide one-time emergency relief cash support to enterprises, preferably to women-owned enterprises.
The government may review and suitably modify procurement guidelines to encourage and support local enterprises, especially women-owned enterprises.
The government can establish a multi-agency platform and collaborate with the private sector to support enterprises with access to digital technologies, and use e-commerce and social commerce, digital payments, and alternate modes of financing—including those from the private sector.
To support the entrepreneurs and reduce the burden of expenses of their enterprises:
The government may formulate forward-looking policies that combine incentives and tax-reliefs to revive the sectors affected most by the restrictions. Such policies will reduce the overall operating costs and provide the much-needed revenue and liquidity for enterprises.
Donor agencies may support the financial industry by promoting concessionary financing modalities, such as guarantee funds for specific enterprise sectors that have been affected by the pandemic. These will enable and encourage financial institutions to provide loans with generous terms and conditions to help enterprises continue their business.
To support the entrepreneurs and boost access to finance for their enterprises:
Donor agencies may fund technical support to financial service providers, including fintechs, to develop innovative products for enterprise finance, such as business interruption solutions, as well as bundled savings, credit, and insurance products.
The government and the central bank may run an awareness campaign to encourage enterprises to seek refinancing and restructuring options from their lenders so that in case of non-repayment, the suspension of listing the negative information[5] of borrowers would not affect the entrepreneurs’ credit scores.
To benefit enterprises in the informal sector:
The Micro and Small Enterprise Authority as the nodal agency can consider providing support to enterprises for business continuity and recovery by preparing them to adapt the delivery of products and services in line with the prevailing business environment and changing customer demands. The government may allocate a budget to extend this support.
The government should increase the formalization of informal enterprises by encouraging them to register and by supporting them to comply with regulatory requirements.
Donor agencies may assist financial service providers to offer advisory support to help enterprises develop mid- and long-term risk mitigation strategies. This in turn can help financial institutions earn customer loyalty and improve the quality of their loan portfolio by stemming rising defaults.
Enterprises have faced severe disruptions in demand and payment cycles, considering their limited net worth, low backup of savings, and a squeeze on their access to finance. The micro and small enterprises sector needs appropriate responses at all levels to support its recovery in the aftermath of the crisis.
[1] The sample size of the research is, clearly, too small to be representative and therefore the percentages reported throughout should be seen solely as indicative.
[2] KNBS MSME survey 2016
[3] KAM-Focus on SMEs-
[4] FSD Kenya: How COVID-19 has affected digital payments to merchants in Kenya
[5] In April, 2020, the CBK suspended listing of negative information of borrowers on the Credit Reference Bureau by commercial banks. This was to cushion borrowers who were unable to repay their loans due to the effects of the pandemic, such as job loss or disruption in business. The CBK however, lifted the suspension in October, 2020 due to rising loan defaults that affected the financial sector.
This site uses cookies, by continuing your navigation, you agree with our Cookie Policy.Ok
In our two dipstick surveys, we found that most entrepreneurs have struggled with falling business revenues as a result of reduced customer footfall and decreased volume of sales per customer. Furthermore, business expenses increased as travel restrictions hurt supplies and increased prices. Some entrepreneurs who borrowed from financial institutions have found it difficult to repay their loans.
have increased as many enterprises continue to face a significant decline in income. As a result, only a few entrepreneurs have the resilience to recover after the pandemic, and unless supported, many enterprises will eventually fail to survive the crisis.
Under normal circumstances, suppliers provide goods to entrepreneurs on credit for short terms, usually 15 to 45 days. Yet suppliers have reduced sales on credit. This is because liquidity is crunched in the value chain due to limited funding from financial institutions, a decrease in sales, and increased expenses. Moreover, some enterprises have defaulted on payments to suppliers, which has reduced the ability of suppliers to offer goods on credit to other entrepreneurs. Thus, most entrepreneurs are now forced to make only cash sales to preserve their liquidity and pay suppliers. Hence, they extend credit sales only to their most important customers. This measure has also reduced sales.
Some entrepreneurs have responded to the risk of business failure by switching their existing products and services to suit the immediate demands of customers. The entrepreneurs who have two or three concurrent businesses have focused on those businesses with stronger cash flows.
The pandemic has led to a limited increase in the adoption of digital platforms across urban and rural areas. WhatsApp, Facebook, and other e-commerce platforms provide an opportunity to enhance sales. However, the lack of awareness and understanding to use digital platforms among entrepreneurs have limited the uptake. Among enterprises surveyed in September, 2020, 73% have reported using digital transactions, such as mobile money and electronic bank transfers up from 60% in July 2020.