Over 1250 SMEs close business daily due to vulnerability
Thursday March 16,
By Esther Mwangi/ Dennis Rasto
About 1250 Small and Medium Enterprises (SMEs) close down daily in the country due to being vulnerable to a broad array of risks such as theft, fraud, accidents and weather-related disasters, insufficient capital, limited market access and poor infrastructure.
According to the latest statistics from the Kenya National Bureau of Statistics (KNBS), at least 450,000 SMEs close shop annually, translating to 37,500 monthly due to unforeseen risks.
Players in the insurance sector however say that although the SME sector employs about 86 per cent of the population and contributes about 45 per cent to the country’s gross domestic product, they struggle to survive large losses caused by business interruptions or closures, loss of income, and supply-chain delays as happened to many of them at the height of the Covid-19 pandemic, however, they contend that sufficient insurance cover could avert the losses.
Pacis Insurance Company head of Governance Wancy Lumosi said majority of small and medium enterprises (SMEs) in Kenya lack sufficient insurance coverage necessary to keep their enterprises afloat when mishaps that disrupt businesses happen, adding that having insurance increases the credibility of the businesses and enables the SMEs to obtain loans with less difficulty.
Lumosi observed that SMEs face many challenges including supply chain risks resulting from the failure of a key supplier or customer and delayed payments by debtors and said that minimizing or even eliminating the catastrophic financial consequences of such risks requires a well-thought-out mitigation strategy.
Speaking after a golf tournament sponsored by the underwriter at Njoro Golf Course, the head of Governance said Pacis was working on a product that will help SMEs to mitigate risks when starting new ventures, absorb losses, protect assets and operations of the company, help the entrepreneur in managing exposure, offer protection to the employee and protect the employer.
The tournament was held to mark the 26th anniversary of Catholic Priest Brother Larry Timmons’ death. Brother Timmons who was an Irish missionary at Njoro, near Nakuru town was shot in mysterious circumstances after robbers broke into his home at St Francis Secondary School in Lare on the night of January 29, 1997.
Lumosi observed that big businesses, including blue-chip companies, need insurance for sustainability, adding that SMEs, which are often founded on shakier financial ground, need the cover even more as insurance would add financial stability to SMEs, thus building sustainability.
“One cannot predict the future, and one must always be prepared for any uncertainty that may occur,” advised Lumosi.
The “State of SME Insurance in Kenya 2021” report revealed that most SMEs rely on a variety of coping mechanisms in lieu of insurance.
These include the owner’s personal savings as a fallback during crises and others on the financial goodwill of the owner’s relatives and friends. Some even resort to selling assets.
Lumosi indicated that such approaches may be unreliable or inadequate compared to insurance, especially when confronted with sudden, disruptive events.
He said there was a need for underwriters to come up with products that resonate with the distinctive needs of this underserved market adding that they could consider policies that cover multiple risks such as fire, explosions, water, theft, weather, riots and business loss arising from sudden disruptions as opposed to selling many products to one customer.
SMEs are defined by the government of Kenya (GOK, 2005) as business that engage between 1-99 employees, cover a range of establishments in almost all sectors of the economy; they operate formally or informally, seasonally or year round and are located in a number of areas including markets, streets, households or mobile.
Data from Kenya National Bureau of Statistics (KNBS) shows 49.2 per cent of licensed SMEs had a monthly turnover of less than Sh50,000, while 35.7 per cent recorded a monthly turnover of between Sh50,000-1,000,000.
Only 0.2 per cent of these businesses had a monthly turnover greater than Sh1 million.
And even though this turnover is like a drop in the ocean of what the big businesses record, SMEs have become an attractive employer to many fresh graduates.