By Caroline Karanja



Mesofinance refers to a segment of the provision of financing to enterprises which, generally speaking, is barely or not at all developed by microfinance institutions or banks. This segment may be defined as being between the upper limit of loans covered by microfinance institutions and the lower limit for bank loans. There is a ‘missing middle’ between these two limits in which micro, small and medium sized enterprises struggle to find funding and ultimately  develop. Particular focus can be placed on the question of the impact this has in terms of job creation, particularly for young people, within micro, small and medium-sized enterprises. Youth employment is indeed an important issue for the continent since, according to the World Bank, eleven million youth are expected to enter Africa’s labour market every year for the next decade.

In many ways, there will be a need to look beyond conventional microfinance and financial

inclusion in order to focus upon economic inclusion and job creation in Africa.

Both in the North and in the South, the MSME segment represents one of the main drivers of

economic growth and employment creation.  In Africa, the formal sector is

mainly constituted of larger companies that work in the commodities market, without there

being much processing taking place. While there exists a huge potential, only limited

value addition  is  undertaken  on the continent itself. The bulk of the African economy is informal, with agriculture being the main sector. Indeed, the informal sector provides 80 to 90% of the total jobs in Africa. From a quantitative point of view, the major absent player within this sector, is the micro, small and medium-sized enterprise (MSME), which is a key element in the creation of both value addition and employment. In fact, in the majority of the countries in the South and particularly in the least developed countries, MSMEs rarely have access to bank funding, even though this is fundamental for their development. This lack of access is identified as the ‘missing middle’.




Micro, small and medium size enterprises (MSMEs) is often associated with, but extends beyond the informal sector (popularly known as Jua Kali). It   is a group that has generated a lot of interest in relation of  its importance to the economic development of Kenya as witnessed in  various sessional papers through time including:    Sessional Paper No.1 of 1986 on Economic Management for Renewed Growth,  Sessional Paper Number 2 of 1992 on Small Enterprise and Jua Kali Development and  Sessional Paper No 2 of 2005 on the Development of Micro and Small Enterprises for Wealth and Employment Creation for Poverty Reduction.

Recent focus resulted in the Micro and Small Enterprise Act of 2012 and its operationalization through the setting up of relevant institutional mechanisms.  A good example is the Micro and Small Enterprise Authority within the Ministry of Industrialization and Enterprise Development (MSEA 2013). The MSE Act provides for new rules and institutions to support micro and small businesses in Kenya to enable them succeed. It provides legal and institutional frameworks for the promotion, development and regulation of MSEs. These include:  Office of the Registrar of MSE associations (to formalize and register MSEs), MSE tribunal (for conflict resolution) and the MSE fund (to address issues of financing). It also provides for the establishment of the MSE Authority to (GOK 2012b), provide an enabling environment, facilitate formalization and upgrading of informal MSEs, promote a culture of entrepreneurship as well as representative associations.

In Kenya, the classification of enterprises is primarily by the number of employees engaged by firms and their turnover. The Micro and Small Enterprises (MSE) Bill 2012 defines: (a) Micro enterprises as any firm, trade, service, industry or a business activity, formal or informal that has an annual turnover that does not exceed Kshs. 500,000 and employing (or rather engaging) 1- 9 people. The total assets and financial investment or the registered capital of the enterprise does not exceed Kshs. 10 million in the manufacturing sector or Kshs.  5 million in the service and farming sector. (b) Small enterprises are those firms, either trade, service, industry or business activities that post an annual turnover of between Kshs. 500, 000 and Kshs. 5 million and have an employee list of 10 to 50. In the manufacturing sector, investment in plant and machinery should be between Kshs. 10 million and Kshs.  50 million and registered capital of the enterprise between Kshs. 5 million and Kshs. 25 million in the service and farming sector respectively. Given that  the mandate of the Act is limited to micro and small industries,  the focus extends to include medium enterprises. The definition of medium enterprises is guided by the MSE bill, the Sessional Paper No 2 of 2005: Development of Micro and Small Enterprises for Wealth and Employment Creation for Poverty and the Ernst Young 2009 study commissioned by the East African Community (EAC). Medium enterprises are therefore firms with between 51-100 employees and a capital investment of not more than Kshs 30 million.

Challenges in micro, small and medium enterprises (MSMEs)

 Funding the missing middle

This issue of accessing funding stems from the fact that commercial banks, many of which are not well acquainted with this sector, consider these institutions to represent too great a risk. This is because there is a lack of visibility regarding the projects to be funded, the absence of a business plan, insufficient equity and guarantees and limited evidence of the entrepreneur’s experience among other challenges.

Added to this is the argument always used by the conventional banking sector regarding the

management and monitoring of low amounts of credits, which is very expensive for the


At the lower limit, most microfinance institutions (MFIs) are not particularly well equipped to finance this segment of clients. With the exception of just a handful of successful initiatives, it is recognized today that investments in micro-enterprises are generally focused on activities that barely enable the enterprises to survive (small-scale trade and processing activities), which provide very few possibilities for expansion or job creation.


  1. b) Technical assistance for the development of MSMEs


Another major challenge for MSMEs is that of improving their organization, governance and

management so as to gain the trust of financers. Indeed, it is vital  that these

structures demonstrate their capacity to develop and to ensure their long-term future by

presenting tools and monitoring systems which go well beyond the business plan and its

projections. Acquiring know-how in terms of management and marketing techniques,

networking and the capacity to mobilize quality technical support are as important as gaining

access to funding.

In this sense, it may henceforward be acknowledged that credit or funding is not the only

factor that may limit the success of an enterprise, but on  the contrary,  professional and

commercial support  are  important elements of success. Funding and technical assistance

are now combined by the majority of operators with support provisions aimed at the

development of MSMEs.



With the analysis above and the challenges that have been highlighted regarding the MSME sector, financial providers (commercial banks and microfinance institutions) are encouraged to tap into this market. The concept of mesofinance is therefore being emphasized in order to make up for the lack of funding for the said institutions which, nevertheless, still continue to be an important sector of growth and job creation. Mesofinance covers all the initiatives that make it possible to finance the ‘missing middle’ of funding, namely the clients and organizations which find themselves in the gap between being the beneficiaries of MFIs and commercial banks. The clear aim and intention is to develop forms of funding or products and services for these clients who are served neither by banks nor by microfinance institutions. Here, we are talking about downscaling in the case of banks that wish to conquer this market and therefore to accord funding which is lower than the average level they traditionally offer, or up scaling if this is carried out by microfinance institutions that wish to respond to the expectations of MSMEs.

If this ‘missing middle’ gap is addressed the following shall be achieved:

(a) Innovation by  devising new means of achieving business goals that contribute to, for example; reducing the time it takes to carry out a task or a process, reducing wastage or increasing efficiency, saving energy, better customer service, use of ICT, and automation;

(b) Business growth by monitoring registered growth in sales, assets, turnover, expansion into other untapped areas, and expansion of production facilities;

(c) Employment creation especially for the youth i.e. how many jobs has the enterprise created and where is the labour sourced from? Is it skilled or unskilled and what is its gender ratio?

(d) Contribution to the community in which the enterprise operates by ensuring that the relevant products and services are offered;

(e) Financial discipline because there will be financial skills training;

(f) sustainability.

The  writer  is  the  acting  CEO  of  the
Association  of  Microfinance  Institutions
(Kenya). Email: ckaranja@amfikenya.com



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