Course:GEOG352/2020/Financial Literacy in Nairobi’s Microeconomy

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Simulation of the population growth in Nairobi projected to 2030

Financial literacy refers to the “ability to understand and effectively apply various financial skills, including personal financial management, budgeting, and investing.”[1] It helps people become more self-sufficient and aware of their role in financial services, allowing them to reach financial stability. As novel types of transactions are created in growing urban centres, financial management and access become an integral part of an urban dweller’s ability to navigate daily life. Financial literacy is especially important in securing the success of small informal businesses in the Global South and will become an integral factor in lifting those engaged in informality, who are attempting to penetrate urban economies, out of poverty.  In addition, these ‘microeconomies’ have ‘macro’ level impacts on national and global economies, so they are important to consider when planning a nation’s trajectory. It is estimated that nearly a quarter of the world’s economy is owed to informal markets[2]. In the context of GEOG 352, financial literacy will be examined as a big indicator of the challenges in economic development within Nairobi’s informal sector, implicating the social exclusion of gender, and its influence on the imbalance at the macroeconomic level within the region. Nairobi, Kenya is a prominent urban centre in the Eastern Africa and the Global South. The city has a big tourism industry and is home to multiple educational institutions, including the University of Nairobi.[3] It is a fast growing city, whose projected population in 2025 is six million[4] with a lagging formal sector. Nairobi’s residents are turning to micro, small, and medium enterprises, “MSMEs”, as last-resort mechanisms to create value in a ‘microeconomy’ under educational and vocational constraints[5]. Along with examining the MSMEs in the informal sector, the significance of financial literacy in Nairobi will be studied by assessing the financial history of the city and its current position, examining entrepreneurship and its implications on the economy and employment, financial access, and the gender experience in the informal sector.


Women working as street vendors under the informal sector[6]

Significance of Financial Literacy

Financial literacy within the microeconomies is based on various factors, such as income volatility, unforeseen health expenditures, education, access to digital technology, and the use of social networks. These factors ultimately cause a lack of access to education and training to the detriment of the performance (sales, growth, job creation) of MSMEs that provide sustenance for urbanites living on the fringes of the informal market. Income volatility makes low income households make uninformed trade-offs between pressing personal expenses (school payments, medical care, housing, etc.) and “good” financial management strategies such as diversified savings, business investments, and insurance[7]. A lack of financial literacy also affects financial access to much-needed start-up and operation capital for MSMEs. Microfinancing is impacted by a lack of transparency in the formal financial services – ie. Banks, insurance companies – that incentivizes lower income entrepreneurs to rely on the mixed use of informal financial services such as risk sharing amongst local social networks. Gender plays an important role in financial literacy as in most countries in the Global South women hold a majority or significant placeholder in the informal business space[8].  However, the burden of gendered labour emphasizes the higher frequency of loan borrowing, the need for remittances, risk sharing, bursaries, subsidies, and child support that add to the barriers in social mobility related to illiteracy.

The Growth of the Informal Microeconomy

The growing urban centre, Nairobi was born out of the construction of the Kenya-Uganda railway under British colonial rule, and all of its processes were created to benefit European and Asian settlers, similar to many cities formed during the colonial period. Subsequently, Kenya’s independence in 1963 saw a large swathe of unemployment amongst its African population. In the coming years, the World Bank and IMF’s structural adjustment programs and the emergence of neoliberal policies resulted in massive job losses and impoverishment[9]. By the 1980s and 1990s, the informal economy, known as the ‘jua kali’, flourished as those shut out by the formal economy sought out livelihoods (Macharia (2003)). ‘Jua kali’ - meaning hot-sun - is an ode to the Nairobi shop owners that line its streets with the sun gleaming on their backs[10]. The majority of licensed and unlicensed MSEs now reside in Nairobi City County as it possesses the perfect mixture of high demand for goods and services along with growing investment opportunities. This is a phenomenon seen in many African and Asian countries as recently liberated nations begin the slow renewal of their processes to fit the mold of indigenous populations. When this process is too slow, people turn to informality to survive.

Railway construction from Kenya to Uganda[11]

In stark contrast to De Soto’s legalist view that decrees informality as a way for entrepreneurs to break down legal barriers to thrive, many informal businesses are not built on the basis of legality, but rather on that of survival. Casting a requirement of "ingenuity" and "entrepreneurial spirit" on the informal workers is a method of marginalization in itself. Successful entrepreneurship often requires business and financial literacy, which is not accessible to many people in the informal economy. This is clearly evidenced by a hawker desperately trying to create a livelihood while conforming to city law:

“Dear Sir, I kindly beg you to allow me to install the above kiosk in the area of the hospital. Major building construction work is being carried on by about 300 men to build hospital wards. I have seen how these workers find it hard to get their simple food for lunch. Many of them cannot afford feeding in the present hospital canteen because it is expensive for them. If you allow me, I shall cook for them simple food with less cost [Kenyan Shilling] (KSh) 2 each meal. I shall also abide with the rules and conditions of health. Please help me." - James Karuri, 14/10/1975 [12]

As a city rich with informal MSMEs, Nairobi can be a model for the changes necessary to improve financial literacy and MSME performance all around the world. Advances in financial education and accessibility to quality financial services have made it possible for many Kenyans to enhance their entrepreneurial performance and stimulate financial growth, and these lessons can be applied with contextual improvements in the Global South.

Case Study: The Role of Financial Literacy in Nairobi’s Microeconomy

Nairobi’s Microeconomy and its Challenges

According to the Kenya Bureau of Statistics’ most recent report on MSMEs, over 80% of Nairobi’s MSMEs fall under the ‘micro’ category, thus giving precedence to Nairobi’s ‘microeconomy’, generally referred to as ‘informal’ due to its small size[13]. Although MSMEs contribute to almost a third of Kenya’s total economy, over 90% of them have revenues of less than 50000 Ksh (approximately 660CAD) per month. Micro-businesses in Nairobi are struggling to stay alive, much like their owners, as nearly half of expenditure of business income goes towards supporting family and household needs. The growth of a business is largely dependent on reinvestment, and the lack of this is evidenced by the shortage of operating funds being one of the main reasons for MSME closure in Kenya. Almost half of MSMEs close within the first year of operation, and over half a million die annually[13].

Nairobi’s unemployed are seeking jobs in the ‘informal’ world, and in order to drive the economic growth required to sustain an influx of urban dwellers in Nairobi (50% by 2050[14]), the success of MSMEs becomes more crucial than ever. On a macro level, MSME success is imperative to Kenya’s rise to middle income status as envisioned by the Kenya Vision 2030 plan[15].

Nairobi and MSMEs [16]

Financial Literacy

The majority of MSME owners in Kenya have no education, primary school at the highest level, or high school at the highest level[13]. This jarring lack of education is even more prevalent in women, highlighting the importance of the gender experience with regards to financial literacy and informality. A lack of education barricades many business owners’ success and contribution to the national economy.

Business Performance and Financial Access

Financial literacy has a strong connection to business performance. A study conducted in Nairobi showed that management, debt, savings, investment, and insurance literacy had a strong correlation to business performance in terms of sales growth, profit, income, and employment (refer to infographic).  Kenyan entrepreneurs themselves see the value in these skills and over 50% of them pursue self-sponsored training when it isn’t available from NGOs, individuals, government agencies, cooperative societies, or self-help groups.

A World Bank pilot study[17] implemented a training program in Nairobi and Machakos (63 km southeast of Nairobi) where micro and small enterprises (MSE) could buy vouchers for heavily subsidized business development and technical training programs. MSEs that underwent the training saw their sales double on average; a bleak contrast to the control group that saw a 2% decline in sales due to worsening economic conditions. The trained businesses also performed better overall in terms of asset holdings, diversification of products, liabilities, expenditures, business creation, employment creation.

Financial access - defined as the ability of households and firms to access and utilize a range of financial services if they choose to do so [18] - is also a “key determinant for business start-up, development, and growth of microenterprises”[19]. A lack of financial literacy has been identified as a limiting factor of financial access. The study mentioned above also shows that financial access is strongly correlated with elements of financial literacy in Nairobi.

Improvements in the financial literacy of MSME owners has the potential to decrease business closures in Nairobi, increase economic output, and increase employment in Nairobi’s growing urban scope.

The Gender Experience

When viewing informality in Nairobi with a gendered lens, it is clear that the education rates and average income levels are generally lower for women who own MSMEs. The need for financial literacy amongst women is especially important as women make up 54.5% of individuals without any formal education in Kenya and they are more likely to derive their income from the informal economy than men[6]. There are double the number of unlicensed women-owned MSMEs in comparison to unlicensed men-owned MSMEs, while more men own licensed MSMEs than women [13]. There is a clear disproportionate bias in favour of men in Kenya’s licensing process that is significant as licensed businesses statistically perform better, have more access to capital, and are more likely to occupy space harassment-free [6].

Further, due to a woman's household responsibilities and childcare responsibilities, and her lower likelihood of operating personal transport, she has limited mobility. Thus training sessions must be “modular, provided regularly, in hours that do not conflict with business hours, and provided in a number of convenient locations”, which is often untrue in Kenya[20]. When a study conducted in Kenya provided women-owned dairy businesses technical and business training that fit within their constraints, 60% of the businesses saw an increase in sales and 90% saw a decrease in losses [20].

Women have lost out on decades of opportunities to advance and fortify their businesses, and as they exert their presence in Nairobi’s informal markets, improved financial literacy can prove to be game-changing.

Existing Educational Programs

Implementing financial educational programs can enhance individuals’ financial literacy, facilitating informed financial decisions and advancing their personal financial goals[21]. Here are some examples of the diverse set of programs available in Kenya:

  • Mind My Money Programme[22]: A free financial literacy program aimed at growing financial literacy that offers self-paced digital classes and classroom-based workshops to guide participants on savings and investments, managing credit and debt, insurance and budgeting[23].
  • Kenya Financial Education Centre (KFEC) [24]: A Nairobi-based centre that offers financial education to experienced financiers with target-tailored short sessions (3-6 hours long) taught by certified instructors.
  • The Uwezo Fund [25]: This fund offers loans to women, youths, and people with disabilities. Participants undergo a 30-hour financial literacy program on business development, banking, risk management, and access to obtain the funds.

Successful literacy programs offer both accessibility and the development of relevant skills. Although online resources improve accessibility, they remove the essential part of ‘learning by doing’ element of education. Online resources are inherently unregulated, with limited testing[17], and it can be inaccessible to those without connectivity. On the other hand, in-person workshops and internship programs introduce operational costs and space demands.

Sessions offered by KFEC are directed at those with existing experience in finance and do not support budding entrepreneurs, like those penetrating the microeconomy for the first time. In contrast, the Mind My Money program provides educational content on basic individual finances, directed at those with limited financial knowledge, proving to be problematic for a business in the growth phase. The Uwezo fund offers a unique, intensive program for disenfranchised groups possessing minimal experience. However, the loans and training are granted through a strict selective process and thus are not universally accessible. A unification of programs or the introduction of more transitional programs is required to close existing gaps in literacy.

Lessons Learned

Financial literacy, financial access, and business performance go hand-in-hand for enterprises around the world. Over 50% of Kenyan entrepreneurs rely on self-sponsored training when it isn’t available from any educational programs, NGOs, or the government. Many MSME employees lack proper financial education and access, resulting in limited reinvestments into the business and difficulties with supporting their families. Providing MSME owners in the Global South with education on financial literacy is imperative for the growth and development of all individuals, nations, and global economies as a whole.

In order for financial literacy programs to be successful, they must be both accessible to all individuals and help the participants develop relevant skills. A diverse number of educational programs are in place throughout Kenya, targeting various demographics, but there are notable accessibility barriers existing in most programs. It is important for urban financial literacy programs to provide flexible hours, multiple locations, arranged transport, and inclusivity to ensure access for historically marginalized groups such as women, as these are often the same groups who are reliant on the microeconomy. In addition, entrepreneurs would benefit from government subsidized training, as MSMEs generally run low on operating capital[13], and a subsidized training voucher system was proven to be highly successful in Nairobi[17]. Training must also be accompanied by breaking down legality barriers. Improving Nairobi's gender biased licensing system, an effort can be made to improve representation of women on urban planning councils, such as those equivalent to the Nairobi Central Business District Association[26] to promote fair licensing of MSMEs.

Along with Nairobi, financial literacy initiatives are being implemented across the world. Programs in Wuhan, China have also shown significant financial improvement amongst low-income residents, especially along gender lines, when they are encouraged to participate in financial education projects or programs[27]. Improving the outcomes of the informal microeconomy brings shared benefits for the Global South and presents the opportunity for authentic partnerships and knowledge sharing.


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