Kenya’s manufacturing SMEs are vital, numerous and chronically stunted. Changing that will require more than rhetoric.
By Emily Mwasya
NAIROBI — In the industrial zone of Nairobi’s Embakasi district, a maker of plastic packaging moulds employs eleven people on two second-hand injection machines. Orders arrive inconsistently. Bank credit does not arrive at all. The owner, who has run the business for seven years, has never accessed a formal loan. He relies instead on trade credit from his supplier, which he repays at a punishing premium. His story is, in its essentials, the story of Kenyan manufacturing.
Small and medium enterprises constitute 98% of all registered businesses in Kenya, according to the Kenya Private Sector Alliance, and create roughly 30% of all jobs. In manufacturing specifically, their numbers mask a stubborn failure to scale. The sector contributes just 7.3% of GDP, according to Kenya National Bureau of Statistics data for 2024. The government’s Bottom-up Economic Transformation Agenda sets an ambitious target of raising that share above 20% by 2030 and attracting up to $10 billion in foreign direct investment through value addition, SME empowerment and industrial parks. The gap between aspiration and trajectory is considerable.
The landscape
Manufacturing SMEs cluster in food processing, leather goods, plastics, metal fabrication and garments: sectors with low capital intensity and, correspondingly, low productivity per worker. Kenya Association of Manufacturers (KAM) data show that the sector’s share of GDP has declined steadily over the past decade, from higher levels recorded in 2015. Tobias Alando, KAM’s chief executive, was blunt at the launch of the association’s Manufacturing Priority Agenda 2026 in Nairobi on February 17th. “The sector has shown slower growth, a reduced relative contribution to GDP, and widening competitiveness gaps within the region,” he said. “These trends underscore the need for urgent policy and structural interventions to reverse the decline and reposition manufacturing as a competitive industrial driver.”
The AfCFTA framework offers a structural counterweight. In 2024, Kenya exported goods worth KSh 1.1 trillion, with 38.3% destined for African markets. Hitesh Mediratta, KAM’s board vice-chair, argued at the same launch that the direction of trade confirmed the continent’s centrality to Kenya’s industrial prospects. “Countries that prioritise manufacturing reap tangible economic benefits,” he said. “Kenya must decisively strengthen support for its manufacturing sector by enhancing competitiveness and advancing export-led growth.”
The cost of money
The most persistently cited barrier is credit: its price, its scarcity and its terms. Commercial bank lending rates on SME loans stood at 13% to 18% as of mid-2025, according to Chambers and Partners’ Banking and Finance 2025 country guide, even as the Central Bank of Kenya cut its benchmark rate ten consecutive times, from 13% in mid-2024 to 8.75% by February 2026. Banks have been reluctant to transmit that easing. The Kenya Bankers Association acknowledged as much, noting that average lending rates were still around 16% in early 2025 while its member institutions posted record combined profits of KSh 262 billion in 2024, up 11.6% from the previous year.
The reasons for the gap are not entirely opaque. Gross non-performing loans hit KSh 672.6 billion in December 2024, an 8.3% increase year on year, and representing the highest NPL ratio in nearly two decades at 16.5%, according to CBK data cited by Cytonn Research. Private-sector credit contracted by 1.4% in the twelve months to December 2024 before recovering to 6.3% growth in November 2025. Lenders facing a deteriorating loan book are not inclined to extend it further, least of all to borrowers without collateral. Around 60% of SME loan applications are rejected on precisely those grounds, according to a CBK survey; 75% of SMEs identify access to credit as their top priority, according to the same data cited by Making Finance Work for Africa.
The CBK introduced a new Risk-Based Credit Pricing Model in August 2025, anchoring variable-rate loans to the Kenya Shilling Overnight Interbank Average, a transaction-based benchmark aligned with global standards such as Britain’s SONIA and America’s SOFR. The Kenya Bankers Association welcomed the reform, describing it as an enabler of wider credit access. Whether it reaches small manufacturers in practice is another matter: Cytonn’s Q3 2025 banking sector report noted that most commercial banks have opted to continue using the central bank rate as their reference rate rather than transition to the new benchmark.
The regulatory burden
Finance is not the only constraint. The Finance Act 2025, which took effect in July 2025, deleted VAT exemptions that had previously covered raw materials and inputs used in manufacturing, imposing the standard 16% rate on goods previously exempt. Law firm Bowmans noted that the removal of those exemptions meant input costs would pass directly to consumers, eroding margins throughout the supply chain. The Finance Act also restricted the carrying forward of tax losses to five years, a provision that analysts at Bowmans described as particularly damaging for capital-intensive manufacturers unlikely to exhaust start-up losses within that window.
The government’s own payment practices compound the problem. National government pending bills owed to suppliers reached KSh 524.84 billion by June 2025, up from KSh 516.27 billion the previous year, according to Controller of Budget Margaret Nyakang’o. State corporations account for KSh 404.33 billion, or 77%, of that total. Manufacturers that supply public institutions have effectively been forced to borrow commercially to bridge payment gaps the government created; with VAT refund review periods extended to 120 days under the 2025 Finance Act, the liquidity squeeze is acute. PwC Kenya noted publicly that some businesses continue to be asked to reapply for refunds even after winning favourable court rulings. “The disconnect between legal provisions and actual practice not only frustrates taxpayers but also erodes confidence in Kenya’s tax system,” the firm said.
Alando has catalogued the regulatory friction in detail. “Manufacturers face harassment from regulatory officials such as the Kenya Bureau of Standards, the National Environment Management Authority, and county governments,” he said in KAM’s year-end manufacturing outlook published in December 2025. “The government introduces or raises fees, levies, and taxes without evaluating their cumulative impact on the cost of doing business.” KAM’s MPA 2026 calls for the import declaration fee and railway development levy to be reverted to 1.5% each, as provided under the Finance Act 2019, arguing that the subsequent increases have eroded competitiveness without a corresponding improvement in infrastructure.
Instruments of change
Against this backdrop, a range of support mechanisms has begun to take shape, though most remain embryonic in reach. The CBK’s new KESONIA-based pricing model is designed to reward borrowers with good credit histories through lower risk premiums, a mechanism that could benefit formalised manufacturing SMEs over time. From September to November 2025, banks were required to review and update loan pricing models ahead of full implementation.
The AfCFTA framework itself presents the more immediate commercial opportunity. Principal Secretary for MSMEs Development Susan Mangeni, speaking at KAM’s MPA 2026 launch, committed the government to leveraging both AfCFTA and the East African Community, saying BETA aimed to raise exports to 30% of a broader industrial base. Juma Mukhwana, Principal Secretary for the State Department of Industry, offered a sobering regional comparison at KAM’s Manufacturing Outlook 2025 event. “Intra-Africa trade accounts for only 15%, which means we continue to rely heavily on external markets,” he said. “China is manufacturing ten times more than the entire African continent.”
Credit guarantee schemes offer a more targeted domestic instrument. The National Treasury’s Credit Guarantee Scheme was established to de-risk SME lending, but the draft MSME Policy 2025 concedes that government-backed financing initiatives have reached only a small proportion of their intended beneficiaries. Kenya Industrial Estates and the Industrial Development Corporation face similar limitations of scale and outreach.
The structural problem
What connects these barriers, from credit rationing to regulatory volatility to weak demand linkages, is the informal status of much of the sector. Firms operating outside the formal economy are invisible to commercial lenders, ineligible for public procurement preferences and unable to certify their products for export. The MSE Act of 2012 established the Micro and Small Enterprises Authority to coordinate formalisation, but progress has been slow, partly because formalisation carries costs: tax exposure, compliance obligations and the scrutiny of regulatory bodies that Alando identifies as a source of harassment rather than facilitation.
The Parliament Budget Office’s proposal, floated in early 2026, to raise VAT to 18% and ring-fence part of the proceeds to clear KSh 475 billion in supplier arrears outstanding as of September 2025 illustrates the fiscal bind in which Kenya finds itself. The revenue shortfall is real; so is the risk of raising taxes in ways that further discourage formalisation.
Sustainable Development Goals 8 and 9, which call for decent work, sustained economic growth and resilient industrial infrastructure, are regularly cited in policy documents covering this ground. The more proximate question is whether Kenya can make its policy architecture coherent enough, in credit markets, tax design and regulatory burden, to allow its abundant small manufacturers to grow beyond the precarious first years. The ambition is not lacking. The machinery to realise it needs work.
Sources: Kenya Association of Manufacturers, Manufacturing Priority Agenda 2026 and Manufacturing Outlook 2025 (February and December 2025); Central Bank of Kenya; Cytonn Research, Q3 2025 Banking Sector Report and Private Sector Credit Growth analysis; Chambers and Partners, Banking and Finance 2025, Kenya; Kenya Bankers Association; Making Finance Work for Africa; Controller of Budget Margaret Nyakang’o, Annual Report 2024/25; Bowmans, Finance Act 2025 analysis (July 2025); PwC Kenya; Kenya Private Sector Alliance; Draft MSME Policy 2025, Ministry of Co-operatives and MSMEs Development; Parliament Budget Office; Capital FM; Daily Nation; The Star; Xinhua.
