Can Tech Improve Kenya’s Micro-Retail Sector?

TechnoServe’s projects yield a wealth of lessons that can help us – and others – improve our work. In this series, we reflect on the lessons we have learned from our programs in Africa, India, and Latin America, sharing insights from program staff.

“Training specifically on financial management and providing appropriate financial linkages helps small shops improve profitability.” – TechnoServe’s lessons learned database

In Kenya, nearly 90 percent of the businesses in the retail sector are considered informal, with roughly the same percentage of Kenyans employed in the informal sector. Small shops called dukas make up the majority of micro-retail sales in the country. However, duka owners face many challenges to efficiency, often leading to lower earnings.

Since 2015, TechnoServe has partnered with the elea Foundation and Citi Foundation to strengthen the performance of over 1,000 dukas in Nairobi, Kenya, through the Smart Duka program. Through the program, we identified a combination of key factors that were holding back many small shop owners, including lack of knowledge regarding basic financial management and limited access to the capital that could help them expand their businesses.

What was the problem that led to the realization of this lesson?

Entrepreneurship Portfolio Lead Alice Waweru: When we started the Smart Duka program, we saw that only about 30 percent of micro-retailers were keeping records. Moreover, even if records were kept, they were not updated regularly or effectively. Because micro-retailers didn’t have reliable financial data to work from, creditors were unable to carry out a risk assessment and were unlikely to lend.

Furthermore, the majority of the retailers had little or no financial training – only 10 percent had received some form of business training. For example, one consistent challenge the Smart Duka program faced was the practice of not separating personal from business finances. This negatively impacted the long-term growth of shops because the proceeds were used to finance personal needs rather than business needs.

Since small shops are a critical piece of the local economy in many developing countries, improving their profitability would have a ripple effect across communities.”

How did this problem impact program participants?

Alice Waweru: Many small business owners in Nairobi and across East Africa lack access to working capital. Creditors often consider micro-retail to be a very risky market, so many are hesitant to offer financing options. But without a steady flow of cash, it is difficult for them to buy inventory and run their businesses. Most dukas are family-owned, and owners often rely on the shop’s profitability to support their families.

How did you develop the solution to this problem?

For financial management, the training offered by the Smart Duka program made a big difference in helping entrepreneurs learn how to keep records or improve existing records, and how to better save, plan, and separate personal from business finances.

The access to credit issue was harder. It can be challenging to introduce a credit product in micro-retail because most of the sector is informal and lacks regulation. It is also challenging to develop a credit product that is commercially viable to micro-retailers when there is insufficient information about the business.

Recognizing the need for a credit product tailored for micro-retail, TechnoServe partnered with 4G Capital – a financial technology credit provider that supports individuals and businesses across Africa – to pilot a mobile-based credit product called KUZA (the Swahili word for “growth”). KUZA provides short-term working capital for vendors that can be customized to the individual retailer’s business needs. The platform is smartphone-based and uses mobile money for loans and repayment.

Micro-retail is a viable sector for creditors to pursue as long as they can customize products and align them to the needs of retailers.”

Unlike retailers acquired through a more traditional model, 4G Capital leveraged the training Smart Duka participants had already received, offering loans to 111 participants who were actively engaged in business groups with a preferential interest rate. The TechnoServe project team provided 4G Capital with financial data to help them develop credit scores and reduce the potential for loan defaults. In addition, the rollout of KUZA was done in phases, allowing time to evaluate and modify the product as needed to better align with the needs of duka owners.

Shop owners who had access to credit through KUZA and received business training increased their revenues by an average of 82 percent, while those who did not access credit saw only a 12 percent increase. Overall, more than 1,289 loans totaling over $151,000 were disbursed, with a 98 percent repayment rate.

How can this lesson apply to other development initiatives?

The partnership between TechnoServe and 4G Capital has shown that micro-retail is a viable sector for creditors to pursue as long as they can customize products and align them to the needs of retailers. Generic financial products are not as effective.

We would hope that other projects facing similar challenges could seek out partnerships that effectively address micro-retailers’ needs, and believe in their great potential. By starting with small loans, the entrepreneurs gain experience and confidence in using credit, while they gradually develop a history of repayment – opening the way for incrementally larger loans.

Since small shops are a critical piece of the local economy in many developing countries, improving their profitability would have a ripple effect across communities. We just have to get more creative about helping them succeed.

Visit our What We’ve Learned page to read about the insights we’ve gained from our programs.