BRS shines but small businesses are struggling

Twenty years ago, I started a small business with a friend. Soon, several other friends invested. Later still, we got a minute fame when a private equity fund invested in our business. This week, my pals and I took the decision to wind it up.

We love the business but, what to do? The decision was long coming, as the business has been struggling for many months.

After the initial sadness, I begun reflecting. How are other small businesses fairing? How many are closing? So, I opened the Business Registration Service (BRS) website.

It had been a while since I looked at it and I was impressed with the progress. The BRS houses the company registry, the official receiver, the moveable property and hire purchase registries.

The BRS has come a long way from its manual persona of a few years ago. Then, we simply called the companies registry. The BRS is now a state corporation with a board. A good thing too, as lengthy business registration and winding up procedures were long considered a drag on the ease of doing business index.

Most of us are probably familiar with the companies’ registry. It is here that you can register a business name. In this form, the business has no separate legal personality from you, but has a trading name.

A limited liability limits both your liability to the proportion of your share contribution, but also restricts shareholding to those admitted, while a public company can sell shares to the general public. Companies limited by guarantee is a preferred form for non-profits.

Ever the enterprising lot, Kenyans take out about 85,000 business names per year. This peaked in the aftermath of the Covid-19 lockdown, registering 101,674 in 2020/21. Kenyans also register about 50,000 private companies every year.

The number of foreign companies registered was highest 2021/22 at 196, declining slightly to 180 the following year.

The official receiver in insolvency provides services for situations of bankruptcy, liquidation by the court, and when companies are winding up voluntarily, such as our SME.

The BRS also maintains two important registries that enable micro and small business finance. The moveable property security rights (MPSR) Registry a notice-based publicly available, searchable database of security rights in movable property. It is accessible by the public around the clock and replaced the old Chattels Registry.

It records where a borrower grants a security right over assets in favour of a lender as collateral for a loan or debt or other performance obligations to the lender. Last year, 167,271 such transactions were recorded. This is up from about 100,000 in the year after Covid. This registry has great potential to support lending to micro and small business.

The hire purchase registry licenses and supervises hire purchase businesses. Once an owner enters into a hire purchase agreement with the hirer, the owner should ensure that they register the security right in the movable property under the moveable property security rights registry. This protects their interest, should the hirer fail to pay the installment or undergo bankruptcy or liquidation. Generally, the hired goods will not be in the owner’s possession, so this protection is crucial.

Unfortunately, most companies simply stop trading without the formality of winding up. The registry has many dormant entities. A few do through a formal process and the BRS has data on those.

In the first half of this financial year, 62 companies applied winding up through the official receiver. Of these, seven were voluntary liquidations and were all recorded in December 2023. On a full year basis business failure appears to be up, as this compares to 89 applications the previous year, and 88 in the year before that.

What the data doesn’t tell us is why the winding up. For this we have to look elsewhere. I found several and highlight four – cost of credit, high operating costs, taxes and depressed demand.

Cost of credit has been going up dramatically, and with it, non-performing loans have been rising. By some estimates as many as 20 per cent of SME loans could be non-performing. CBK has some concrete data. The 2023 MSME financial access survey found that a total of 6,572 MSME loan facilities, valued at Sh122.5 billion were restructured in 2022. Of the 1.18 million MSMEs loan accounts in the banking industry as at December 2022, 18.4 per cent, valued at Sh90.4 billion were non-performing.

At that time, MSME average rate of interest charged on facilities to MSMEs was 15.5 per cent and 27.0 per cent for commercial banks and microfinance banks (MFBs), respectively. Currently the rates are in the 22-25 per cent range for commercial banks.

Operating costs have been increasing across all businesses. Most notably energy and transport costs. The energy regulator and regime politicians have been quick to blame international conditions, but it is illustrative that companies operating in special economic zones are paying Sh10 per kilowatt hour of electricity, and Sh5, if you are in the Naivasha SEZ.

Taxes have been rising also quite dramatically. The doubling of the VAT on fuel had the immediate effect of slowing down the transport sector. When you look at sources of GDP growth, the sector decelerated from 5.6 per cent growth two years ago to 2.5 per cent in the first three quarters of this year.

All round demand is depressed. The CEO and purchasing manager surveys have all been pointing to a pessimistic outlook. All these conditions are making many small businesses close shop.

@Ndiritu Muriithi is an economist.