How wrong classification of businesses hurts State planning

Wrong categorisation of businesses and the lack of a standard definition of micro, small, and medium enterprises (SMEs) have stood out as major challenges to the government’s ability to get precise data from the private sector.

Investments, Trade, and Industry Cabinet Secretary Lee Kinyanjui has pointed out the existing gaps when it comes to data collection in the industry.

This is as the Kenya Association of Manufacturing (KAM) notes a lack of up-to-date data in the MSME sector, which makes it a challenge for the necessary policies to be formulated.

The manufacturers’ lobby has called for the alignment of the various sector policies under the Ministry of Co-operative and MSME Development.

KAM notes in the 2025 Manufacturing Priority Agenda (MPA) that access to complete, reliable, and quality data and information is key to the development of the SME ecosystem.

“SME data is not only valuable to the ecosystem players but also across many other sectors of the economy. The lack of up-to-date information on the MSME ecosystem poses a significant challenge that affects policy formulation, planning, credit allocation, and support mechanisms,” says the lobby.

“The following action can support and improve SMEs’ governance if adopted by the government: implementation of the reviewed MSMEs policy to align with the current governance structure under the Ministry of Cooperatives and MSME Development.”

An analysis by Enterprise shows that the major cause of this challenge stems from the wrong categorisation of enterprises and the lack of a definite definition of businesses.

This is even as CS Kinyanjui pointed out existing challenges in the method of data collection on businesses during a recent roundtable with manufacturers.

He said some of the issues the industry is dealing with could be streamlined only if the government were fed with the correct information.

However, the private sector seems to be feeding conflicting information to different entities depending on the agenda on the table, a situation that is exacerbated by the unclear classification of businesses by both the lobby and financial institutions.

National Treasury Cabinet Secretary John Mbadi noted this in his analysis on the annual performance of the MSMEs Credit Guarantee Scheme for the 2023-2024 financial year, where he called for policy direction in the classification of businesses.

He noted in the report that even financial institutions seem to miscategorise business, which pokes holes in the accuracy of data on the sector’s performance.

While addressing players in the manufacturing sector during the launch of the Manufacturing Priority Agenda 2025 by the Kenya Association of Manufacturers (KAM) last week, CS Kinyanjui said the mode data collected from the private sector is not accurate.

“When we say, for example, manufacturing is going down, how is this data gotten? We get it by asking someone, ‘How many iron sheets did you produce?’ yet we know many of us have several books. For the bank, we present this set of books, a different one for the Kenya Revenue Authority (KRA), and when KAM wants to discuss tax policy, another set is presented,” said the CS.

His remarks opened a can of worms on where the private sector and, by extension, the government might have gotten it wrong when it comes to data collection from businesses.

Credible data

This is because most businesses in the country are wrongly categorised, according to CS Mbadi’s report.

Once a business has been categorised wrongly, any data collected from the entity might not be accurate for planning.

“As a government, we want to make decisions based on credible data. No country can make progress without data. As policymakers, let us get credible data. With credible data, it is very easy to deal with these issues,” said CS Kinyanjui during the meeting with manufacturers.

This explains why the National Treasury has initiated a policy direction towards a standard categorisation of enterprises.

In the annual performance for the MSMEs Credit Guarantee Scheme for the 2023-2024 financial year prepared by CS Mbadi, the National Treasury seeks to engage relevant government institutions to address the classification issue.

“The National Treasury is ready to engage with relevant government institutions to address the challenge of MSMEs classification as per the law. In the meantime, the National Treasury is in consultation with the relevant government entities to consider issuing policy guidance on the classification of enterprises to improve the consistency of reports,” CS Mbadi says in the report.

He said the ministry will also work with the Central Bank of Kenya (CBK) on sector classification to expand the scope of options, including value chains and the nature of businesses, to enhance accuracy in sector reporting.

The lack of a standard definition of enterprises has been cited among the challenges affecting the uptake of state-guaranteed loans (CGS).

The report states that most of the enterprises do not fully fulfil the definition set out in the Public Finance Management Act, 2012, and the Micro and Small Enterprises Authority (MSEA) Act, 2012.

“Consequently, an enterprise could be micro by number of employees while, according to turnover, it could be classified as a small or medium enterprise,” the report says, pointing to the fact that some businesses might have been registered in the wrong category or have not changed their categorisation following growth.

It adds that the definition of economic sectors in the banking industry may be contributing to misclassification of some MSMEs and the difficulty of the CGS to track impact in certain sectors of interest, such as creative arts and ICT.

“For instance, some enterprises involved in health care services, education, and agricultural value chains are being classified as trade,” the report says.

According to the Micro and Small Enterprise (MSEA) Act, 2012, a micro enterprise is a business whose annual turnover does not exceed Sh500,000 with less than 10 employees.

Annual turnover

A small enterprise, on the other hand, has an annual turnover of between Sh500,000 and Sh5 million with 10 to 50 employees.

But according to the Kenya Bankers Association (KBA) MSME Survey 2021, a micro enterprise has an annual turnover of less than Sh1 million and up to five permanent employees, having operated for at least a year.

A small enterprise has an annual turnover between Sh1 million and Sh50 million with between six and 30 employees, while a medium enterprise has a turnover of between Sh50 million and Sh250 million with 10 to 50 permanent employees.

According to the Kenya Revenue Authority (KRA), an MSME encompasses a trader whose transactions are valued at or equal to or under Sh260,000.

Data from the Kenya National Bureau of Statistics (KNBS) shows that the number of MSMEs in the country stands at 7.4 million.

The State Department projects the actual figure to be close to 20 million since a majority of these enterprises are informal and not registered.

The Kenya Institute for Public Policy Research and Analysis (Kippra), a state think tank, notes that there is no acceptable standard definition of an MSME.

“Globally, there is no standard definition for micro, small, and medium-sized enterprises. However, key attributes that are considered when defining them include the number of employees, turnover, and capital,” says Kippra.

“In Kenya, MSMEs are variously defined in different contexts. They are defined as enterprises that have 1-99 employees. Micro enterprises have fewer than 10 employees; small enterprises have 10-49 employees, while medium-sized enterprises have 50-99 employees.”