Building resilience and survival for MSMES post COVID-19

The 2008 global financial crisis, World War II and the Great Depression were some major global crises (or “shifts”) that brought with them changes that have defined the years – and decades – after. The economic harm caused by the COVID-19 pandemic in a few months is likely to rival or exceed that caused by the global financial crisis in 2008 over three years, indicating that the effects will be long-term and likely to outlast the pandemic itself.

Consequently, the far-reaching impact of the COVID-19 pandemic is changing how central banks, government and private sector leaders are implementing solutions to build up resilience and support the most marginalised facets of communities – in particular Micro, Small and Medium Enterprises (MSMES) – to get through the crisis but also as a buffer against the next. After all, the next shift is sure to come whether it is in the form of a pandemic, extreme weather or massive explosions. And we might even still be recovering from COVID-19 when it does. It is commonly accepted that MSMES are the backbone of many economies and play an outsized role in livelihoods, employment and national gross domestic product (GDP), particularly in emerging markets like ours; representing 48.5 percent of Nigeria’s GDP and the most critical component of industrialisation as set out in Nigeria’s Economic Recovery and Growth Plan (ERGP).

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Yet, during times of crisis and “shifts”, MSMES are often more vulnerable and the least resilient to economic shock because of their size. A recent survey of the Korean Federation of MSMES showed that, of the 407 surveyed SMES, 42.1 percent could continue business for no more than three months on a cash flow basis, and 70.1 percent for no longer than six months. In Nigeria, of 1,554 micro-enterprises surveyed, 30 percent reported that their businesses would not survive the economic impact of the COVID-19 pandemic because of cash flow, sales and revenue constraints.

Resilience is as much a tool for surviving during crises (or “shifts”) as it is for thriving. The wealth of nations is determined to a large extent by how well they do in creating an enabling environment for businesses to thrive. Successful businesses drive growth, create jobs and pay the taxes that promote economic growth and development. For MSMES in Nigeria, already having to contend with a sluggish economy that is increasingly less attractive to operate in – much less re- invest in – additional shocks from COVID-19 are putting further pressure on their operations. An enabling environment and policies that have an intentional focus on providing more significant opportunities for MSMES to thrive and participate in the economy would have done well to build their resilience prior to COVID-19.

Imagine the potential of Nigeria’s 41.5 million MSMES if they had a more stable and supportive environment in which to grow their enterprises.

There’s a proverb that goes: “The best time to plant a tree is 20 years ago. The next best time is right now.” Put simply, just because Nigeria, as with so many other developing countries and economies, was not prepared for a pandemic does not mean we cannot build short, medium and long-term resilience during it. Right now is the time to plant the tree to equip MSMES to bounce back from the collapse of markets, leap forward into new markets and address systemic challenges MSMES face as a buffer against future economic downturns.

To borrow from the words of Oumar Seydi, International Finance Corporation (IFC) Director for Africa, “Accessible and inclusive financial products and services will help SMES realise their potential.”

The COVID-19 pandemic reminds us that access to finance is a crucial challenge for many MSMES, and they can only be as productive as the policy environment they operate in allows them to be – especially in developing countries. A World Bank Enterprise Survey found that access to finance is disproportionately difficult for smaller firms in the least developed countries (LDCS). 41 percent of SMES in LDCS report access to finance as a significant constraint to their growth and development, by comparison to 30 percent in middle-income countries and only 15 percent in high-income countries.

To better understand what an enabling environment for MSMES looks like and the opportunities in the sector, let’s consider a few examples.

In America’s Silicon Valley, we see how the dynamism of small firms allows them to create and compete efficiently. For example, companies such as Amazon and Instagram have used new ideas and technologies to transform traditional industries. America’s Silicon Valley is a living example of the process that Joseph Schumpeter termed “creative destruction”. Put simply, a process in which new technologies, new kinds of products, new methods of production and new means of distribution make old ones obsolete, forcing existing companies to adapt to a new environment or fail quickly. It is no surprise that 73 percent of small businesses in America can access and use financing to purchase inventory, expand their businesses, and strengthen their financial foundation.

Closer to home, ‘Jazaduka’ (fill up your store) is an innovative solution in Kenya that addresses the lack of access to capital as a significant barrier to growth for MSMES. Having acknowledged that MSMES cannot produce financial reports to enable financial institutions to assess their repayment capacity and default risk, Unilever in partnership with Mastercard and Kenya Commercial Bank (KCB) launched ‘Jazaduka’. Jazaduka is a digital working capital platform that empowers micro-entrepreneurs with working capital through offering credit in a cashless system that will enable the retailer to buy what they can sell. The platform combines distribution data from Unilever and analysis by Mastercard, on how much inventory a retailer has bought from Unilever over time. The results from the analysis are used to provide a micro-credit eligibility recommendation to KCB.

Interestingly, we see Mastercard, a Fintech solution provider, leveraging data, artificial intelligence, and machine learning to help traditional banks better assess credit risk. They are consequently enabling MSMES in Kenya to move from a cash-based system to a more formalised way of doing business with new opportunities for obtaining credit. The ‘Jazaduka’ platform was launched in 2017 and has already reduced cash-flow challenges of over 20,000 merchants and small distributors by providing working capital, with enrolled businesses experiencing a 20 percent growth in sales on average. Also, about 62 percent of participating merchants have been able to access formal bank credit lines for the first time.

It is clear that sustained investment into a country’s MSME sector not only unlocks the nation’s growth potential but helps them build resilience. Kenya is a typical case point in this matter, illustrating that small business owners who have access to resources and opportunities are better able to confront challenges such as the COVID-19 pandemic. Kenya’s digital platforms have been critical in helping MSME owners find workaround solutions in response to COVID-19, especially given that most already accepted digital payments via M-pesa. This may be because digital platforms like ‘Jazaduka’ and M-pesa were already widely available and used by MSMES in Kenya.

Kenyan digital platforms have not only allowed participating businesses that were already online to ramp up their digital interactions and online presence; they continue to encourage MSMES that were not previously online to utilise digital platforms for survival. For example, Kenya’s Kopokopo enables small business owners to accept digital payments, as well as access to credit through the ‘Grow Cash Advance’ product, which provides cash advances based on prior electronic business performance. By factoring in business owners’ previous electronic transactions, Kopokopo transforms a customer’s operation history into the necessary credit information needed to assess their repayment capacity and default risk.

The business owner then selects the percentage of daily sales to dedicate to repayments via the Kopokopo digital platform, and Kopokopo automatically deducts that percentage each time the customer receives a payment. This arrangement keeps repayments fluid, bite-sized, and in line with cash flow.

COVID-19 has made digital the new normal. Now we see a vast majority of MSMES taking steps to innovate and pivot their businesses in response to the new normal. However, they are going to need broader policy and regulatory support if they are to emerge stronger from the crisis. Government policies and actions determine in no small degree the scale and quality of economic growth and the private sector’s role in it. Therefore, the survival and long-term success of MSMES is dependent on a more holistic and joint public-private sector collaboration to strengthen the underlying ecosystem in which they operate.

Kenya’s ‘Jazaduka’ as a case study illustrates that by working together, public and private institutions can promote and implement the policy solutions needed for the long-term success of the MSME ecosystem postCOVID-19.