Kenyan startups creatively bring capital to MSMEs

Shop owner Stella Mukuha is a Kopo Kopo client. The small business she runs has been in her family since her father started it in 1997.

Micro, small and medium enterprises (MSMEs) in Kenya face an estimated US$2-5 billion funding gap, representing one of the largest constraints to the country’s economic development. Kenyan MSMEs struggle to get access to affordable working capital and to meet stringent bank requirements – such as a proven track record and collateral – when seeking working capital. Those that do meet traditional banks’ criteria usually face lengthy approval and disbursement time frames, as well as costly terms. Furthermore, a recent government cap on commercial lending rates will likely mean even fewer loans to MSMEs.

This financial hindrance stands in direct contrast to Kenya’s reputation as the Silicon Sahara – a supportive environment for flexible, fast-moving, tech innovators. Kenya is home to a number of tech and innovation hubs and incubators, like iHub and Nailab. As the birthplace of M-Pesa, the biggest name in mobile money, some even say Kenya is paving the way for the future of mobile payments. What if Kenya’s most promising innovators could use digital technology to close the funding gap, or at least make it a little smaller?

Kopo Kopo business model

Accion Venture Lab, Accion’s seed-stage investment initiative, partnered with two early-stage companies, Umati Capital and Kopo Kopo, which are trying to do just that. Venture Lab provides seed capital and strategic and operational support to innovative startups such as these that expand financial access to the underserved. Both Umati Capital and Kopo Kopo are fintech innovators working to serve the so-called missing middle, those MSMEs caught in this massive funding gap. Kopo Kopo enables small business owners to accept mobile money payments, as well as other tech-driven financial services to help small businesses grow, like their merchant cash advance product, which is based on digital transaction data. Umati provides invoice discounting and supply chain financing that serve as an affordable and swift solution for businesses to convert unpaid or outstanding invoices into cash, helping them manage their supply chain and ease pressure on an already tight cash flow. This means that Umati Capital helps businesses bridge payment gaps that arise after they sell goods to buyers, but before they collect payment for the sale. The company does this by enabling businesses to convert unpaid or outstanding invoices into cash via their digital platform.

Whereas Umati works with actors in the agriculture value chain and Kopo Kopo works with a variety of urban merchants, both bring innovation to acquisition and underwriting. The two companies offer capital that takes the business cycle of their customer base into account, which is innovative, compared to other existing credit products. Banks usually have more rigid product offerings that do not cater to the vast variety of small business needs, such as natural ebb and flow of a farmer or restaurateur’s business.

Umati business model

Moreover, both companies have found creative ways to underwrite credit for segments that usually have few low-cost, convenient options. For example, By factoring customers’ electronic receivables, Kopo Kopo can anticipate their repayment capacity and recognize any unusual or suspicious variations. This transforms a customer’s transaction history into a pseudo-credit history. When entrepreneurs aren’t able to access financial services from traditional institutions like banks, they are limited in their ability to grow their business, and many turn to informal sources of credit, such as friends, family, or loan sharks. Companies like Kopo Kopo and Umati provide a much-needed alternative, which is good for the entire economy since in emerging markets, most formal jobs are with MSMEs, which create four out of five new positions.

These two Kenyan startups are using technology to make high-quality financial products available to MSMEs. However, similar to the MSMEs they serve, startups like these are themselves in need of broader support: advice and mentoring, well-targeted research, more conducive regulatory environments, capital investment and debt financing.

This article is part of our global series on MSMEs in seven key countries where we work. Read the paper Bridging the Small Business Credit Gap Through Innovative Lending.

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