June 20th, 2024

Micro, Small, and Medium-sized Enterprises (MSMEs) are the lifeblood of the economy. Yet, they are a diverse group with unique needs, challenges, and growth potential. To better support them, we can segment MSMEs, like using a magnifying glass to examine a complex ecosystem. 

Segmentation allows us to see MSMEs in more detail, revealing their specific challenges and opportunities. This knowledge is crucial for designing effective support mechanisms. There are several ways to segment MSMEs, including size, industry, location, owner demographics, and business life cycle (startup, growth, mature). The best approach depends on the specific goals and available data. 

Recognising the critical role of MSMEs and digital finance, Safaricom and FSD Kenya partnered to explore these interactions through research that was conducted by Ipsos. The research used a mixed-method approach to segment MSMEs, aiming to gain valuable insights for two purposes: 

1. Product innovation: Safaricom aimed to leverage the study’s findings to develop new financial products and services that better meet the needs of MSMEs. 
2. Market development: FSD Kenya sought to use the insights to support the creation of a more conducive environment for MSMEs to thrive. 

By understanding how MSMEs interact with digital financial tools, the study aimed to identify key opportunities, challenges, and areas where incentives could be beneficial. Some of these key insights would then be shared with the industry to foster a supportive ecosystem that fuels MSME growth and development.

MSME definitions and classifications 

The definition of an MSME varies depending on the country and organization. Common criteria include number of employees, total assets, and annual turnover. In Kenya, both the Central Bank of Kenya (CBK) and the Kenya National Bureau of Statistics (KNBS) have established MSME classifications with specific thresholds for each category (Micro, Small, and Medium). 

See summary below: 

 The World Bank classifies Micro, Small and Medium Enterprises (MSMEs) based on employee size (micro: 1-9 employees; small: 10-49 employees; medium: 50-249 employees). As the table below shows, countries often incorporate additional factors like total assets. This highlights the need for considering local contexts when defining MSMEs.  

To gain deeper insights into the MSME landscape, Safaricom and FSD Kenya conducted a study that segmented businesses into five distinct categories. This segmentation considered both owner demographics (age, gender, education, business skills, and motivations) and firmographics (business age, size, number of employees, access to amenities, technology, finance, record-keeping practices, and past support received). 

The study, which employed a mix of quantitative and qualitative methods, identified five segments representing different stages of development: 

1. Established (Seg 1): These are the most mature businesses in the sample. 
2. Developing (Seg 2): These businesses are growing but may face challenges. 
3. High Potential (Seg 3): These businesses show promise for significant growth. 
4. Maturing (Seg 4): These businesses are transitioning from developing to established. 
5. Emerging (Seg 5): These are the newest businesses in the sample. 

By segmenting MSMEs, the study provides valuable insights for designing targeted support mechanisms that cater to the specific needs of each development stage. Summary table is below:  

Emerging businesses: Building the foundation (30%) 

Emerging businesses form the largest segment (30%) and are often led by young, tech-light founders with a secondary education. These micro-enterprises, typically under four years old, are equally led by men and women, driven by a need to establish themselves. However, limited access to amenities and technology hinders their growth. Only 9% boast an annual turnover exceeding KES 50 million, and just 27% secured a business loan in the past year. 

Maturing businesses: Poised for growth (25%) 

Maturing businesses (25%) represent a significant portion of the market. These small enterprises, typically aged 5-9 years, are led by balanced teams with college degrees, often aged 45-54 and motivated by opportunity. They enjoy better access to resources compared to emerging businesses, with 30% exceeding KES 50 million in annual turnover. Despite their progress, only 30% accessed business loans in the last year, highlighting a potential gap in financial support. 

High-potential businesses: Gearing up for success (14%) 

High-potential businesses, though smaller in number (14%), stand out for their growth potential. Led by experienced, tertiary-educated men focused on financial success, these mid-sized enterprises (5-9 years old) boast the highest access to technology and amenities. They are exceeding expectations, with over half (56%) exceeding KES 50 million in annual turnover and a strong loan uptake (52%). 

Developing businesses: A balancing act (17%) 

Developing businesses (17%) are a unique segment. Predominantly led by college-educated women aged 25-44, they leverage both academic knowledge and work experience. These micro and small enterprises (also 5-9 years old) show promise, with a moderate access to technology and amenities. While not yet surpassing Established businesses, a significant portion (14%) still exceeds KES 50 million in turnover, and over half (56%) have recently secured loans. 

Established businesses: A foundation for growth (14%) 

Established businesses (14%) represent seasoned players. Led by older males (aged 35-54) with bachelor’s degrees and driven by a desire for independence and financial success, these medium enterprises (over 10 years old) possess strong foundations. They enjoy ample resources and high technology adoption, reflected in their solid performance (36% exceeding KES 50 million in turnover) and continued access to financing (49% with recent loans). 

Tailored solutions for diverse needs 

These segments highlight the vast diversity within the MSME landscape. Each group has distinct characteristics, motivations, and needs. The research underscores the importance of developing targeted financial and business solutions, along with specific strategies, to foster the growth and sustainability of all MSMEs.