Will Budget transform Kenya’s MSMEs?

While the MSME sector is set to benefit from a total of KES12bn in the new Budget, in the allocations to BETA’s five pillars (see boxout), transforming the MSME economy has been allocated only KES2.46bn, much of which is expected to be funnelled into pre-existing facilities:

• Financial Inclusion Fund (‘Hustler Fund’) – KES300m
• Youth Enterprise Development Fund – KES308m
• Centre for Entrepreneurship Project – KES550m
• Rural Kenya Financial Inclusion Facility – KES1.3bn

Uptake from these facilities has undeniably been strong. As of May 2025, KES71bn had been disbursed by the Hustler Fund to 26 million customers. However, this is not necessarily a signifier of success. The Hustler Fund is open to anyone, not just low-income earners, and only small amounts can be borrowed, potentially leading to loans being used to maintain day-to-day operations rather than for investment. Not only that, high interest rates of 8% often outstrip profits, leading to a high default rate.

According to Hadijah Nannyomo FCCA, tax and trade partner at EY Africa, there is currently a lack of due diligence and process around how funds are administered, as well as a lack of monitoring and evaluation to help businesses best implement loans. ‘Funds are provided without the necessary tools, financial discipline and literacy to best utilise them,’ she says, adding that applicant vetting should be introduced in order to support those ‘at the bottom of the pyramid; once loans are released, there should be support to grow and be successful, including monitoring and evaluation’.

Optimism and scepticism

Aligned with BETA is Kenya’s National Tax Policy, launched in 2023, which proposes to review major tax changes every five years. The Medium-Term Revenue Strategy, meanwhile, which runs until 2026/27, proposes to reduce pay-as-you-earn (PAYE) rates and gradually reduce VAT from 16% to 14%. And public-private partnerships (PPPs) are also being emphasised as a potential growth path for SMEs.

‘If implemented, these could be game changers, especially lowering VAT and rationalising PAYE,’ says Nannyomo. ‘While PPP could open up more opportunities, the challenge will be getting SMEs into those conversations.’

This sets the tone, with tax specialists in one breath voicing optimism and in the next a realism teetering on scepticism. A clear, targeted government SME strategy is missing, says Nannyomo: ‘It’s scattered and doesn’t reflect a targeted approach.’

Sandeep Main FCCA, head of private enterprise at KPMG Africa, agrees: ‘Education gets the biggest allocation, then healthcare, while agriculture and manufacturing, which might have been more enabling for MSMEs, will receive far less.’

Meanwhile, a proposal to move items from zero-rated to exempt status for VAT will raise costs for SMEs in critical sectors, continues Main, who notes that they are ‘unlikely to absorb that extra cost; it will trickle down to consumers and make products less affordable’.

Compliance  costs

There is little scope to expand revenues via the current tax regime, so there’s a push to broaden the tax base, which is expected to impact the largely informal MSME sector. For this to have a positive outcome, businesses will need education and support.

‘Bringing them under the tax net will increase their cost of compliance – something they may not feel able to sustain, especially with reduced demand in the economy,’ says Jilna Shah FCCA, tax director at RSM Eastern Africa. ‘The success of SMEs surviving under this budget remains to be seen.’

There’s also a push to digitise the informal sector, but formalisation means visibility. ‘There’s a catch-22: the government is moving everything online, but many SMEs don’t have the capacity or knowledge to comply,’ says Shah.

Options for change

Main says that focusing on tax reforms to widen the tax base, as well as rebuilding trust, is vital. ‘People will pay taxes if they know they’re being used effectively,’ he says. ‘Faster VAT refunds, better infrastructure – these things build confidence.’

Nannyomo suggests a tax holiday for start-ups. ‘Uganda has introduced a three-year holiday for start-ups meeting certain thresholds. Kenya could do the same – even extend it to five years,’ she says. ‘Additionally, to encourage formalisation, the government could offer an amnesty programme specifically for SMEs.’

Shah believes that SMEs could contribute more tax if properly supported. ‘Under the current turnover tax regime, businesses under KES25m revenue pay only 1.5% without worrying about expenses, but the VAT threshold is only KES5m,’ she says. ‘This mismatch forces a small vendor to file VAT returns even if they can barely manage turnover tax. The VAT threshold should be increased to align with turnover tax, so compliance is simplified.’

She would also overhaul expenditure, believing there to be too much wastage that could be redirected to SMEs. ‘Zero-based budgeting is being discussed, but we don’t have the capacity to do it properly; we can’t even get a normal budget right without multiple supplementary budgets every year,’ she says.

‘There’s no transparency or accountability, and we don’t know where money is going. If we streamlined expenses and tackled corruption, we’d have far more resources to support SMEs.’