Kitty Collier

Kitty Collier

SMEs Sub-sector in Kenya: Issues and Efforts

Introduction

It is generally recognized that SMEs (Small and Medium Enterprises) face unique issues, which affect their growth and profitability and hence, diminish their ability to contribute effectively to sustainable development. Based on this platform, this article briefly explores in Kenya's context the policy related issues among others and the efforts in progress.

Policy related Issues

Kenya has had a long history of economic leadership in East Africa as one of its largest and most advanced economies. However, inconsistent efforts at structural reforms and poor policies over the past couple of decades have generated a prolonged period of decline in development indicators and significantly eroded the leadership position at a time when other countries in the region have made significant strides.

The dichotomous policy perception of formal and informal has contributed to ineffective policies on the informal economy. It was not until the beginning of 2003 that government debate on the need to integrate the two sectors began. The debate and examination of the sector revealed that the development of both the informal and formal sector and their integration as one vibrant economy has been constrained by regulatory requirements. Most of these requirements date back to the colonial period and have no relevance in independent Kenya. While this has been an obvious fact, the government did not address the issue until the dawn of Structural Adjustment Programmes, and related reform programmes.

The development of the private sector varies greatly throughout Africa. SMEs are flourishing in South Africa, Mauritius and North Africa, thanks to fairly modern financial systems and clear government policies in favor of private enterprise. Elsewhere the rise of a small-business class has been hindered by political instability or strong dependence on a few raw materials. In the Democratic Republic of Congo, for example, most SMEs went bankrupt in the 1990s as a result of looting in 1993 and 1996 or during the civil war. In Congo, Equatorial Guinea, Gabon and Chad, the dominance of oil has slowed the emergence of non-oil businesses. Between these two extremes, Senegal and Kenya have created conditions for private-sector growth but are still held back by an inadequate financial system and lack of sound policy provisions. In Nigeria, SMEs (about 95 per cent of formal manufacturing activity) are key to the economy but insecurity, corruption and poor infrastructure prevent them being motors of growth.

SMEs in Kenya face numerous constraints in accessing affordable finance for small business primarily in: issues of access to loans without collateral and access to the formal sector. Due to limited land ownership status in Kenya (Property Rights in Kenya), they are unable to provide collateral needed for loan requests. According to The World Bank report on SMEs entrepreneurs, women make up nearly half of all Small and Medium Enterprises owners and 40 percent of smallholder farm managers, yet they have less than 10 percent of the available credit and less than 1 percent of agricultural credit. This issue has been identified by the Kenyan government as a major constraint inhibiting the growth of the SME sector and more so for women entrepreneurs. There is not doubt that Small and medium-sized firms are the drivers of the Kenyan economy. They employ about 7.5 million Kenyans or 80 per cent of the country's total employment outside the small-scale agriculture. But little has been understood about their operations, ownership, source of capital and the key challenges that they face as they propel growth of the Kenyan economy. This could be the reason why they should be supported to graduate from their current state. Perhaps we should ask: are there certain efforts in progress? For one, lack of insight on the sector has left policy makers, key support players such as financial institutions and others groping in the dark on how best to implement SME policies. However, all is not gone, there is still light at the end of the ‘SME policy tunnel.'

Other Issues

Registration and Certification Issues

There has been complains regarding tedious registration and certification processes in Kenya. Various bodies have their requirements and require money and time. One option left to an entrepreneur is to evade the process but this proves more expensive at the end because of penalty given. For instance, for an entrepreneur running chemical related business, a certificate is needed from the Ministry of Health or similar authority to show that the products or services offered have been analyzed and found to be safe. The authorities may also require the product to conform to legal standards regarding composition.

Inadequate Business Skills

The juakali informal sector has proved that it can be a factor that can boost economic growth in Kenya. In this sector, practical skills are being developed at low cost and with financial support, various types of small scale technology could be developed for labour-intensive enterprises that could absorb hundreds of young job seekers. However, those who run the businesses in this sector lack adequate business skills mainly attributed to low levels of education. It is not sufficient to know how to produce a high quality product. The producer must also know how to sell it effectively and how to control the financial side of the business and in doing that the entrepreneur must be skilled in business.

HIV/AIDS Pandemic

AIDS also threatens the survival of small and medium enterprises (SME's). Recognizing that HIV/AIDS is as much a business issue as a development and humanitarian concern, the International Finance Corporation (IFC), the private sector arm of the World Bank group, aims to promote the involvement of the private sector in the fight against the disease through its IFC Against AIDS program. Since 2000, the program has worked with more than 30 client companies in Africa, and South Asia to develop, implement, and manage effective HIV/AIDS programs within their workplaces and surrounding communities. In Africa, where SME's account for the majority of the private sector, IFC against AIDS has developed a training program to build the capacity of these businesses to mitigate the impact of HIV/AIDS on their operations. The program is working currently with 30 SME's across Kenya, South Africa, and Mozambique. (Conner, 2000).

There are various other challenges that have continued to have negative impact on the growth of SMEs in Kenya. These challenges include but may not be limited to poor infrastructure, insecurity and high cost of energy. There has also been unfavourable investment climate occasioned by poor governance, institutional failures, macroeconomic policy imperfections and inadequate infrastructure, as well as rampant corruption, bureaucratic red tape, weak legal systems and a lack of transparency in government departments. (APRM 2007)

Efforts towards Enhancing SMEs Growth in Kenya

For SME sector to grow there is need for the sector to adequately strengthen itself and come up with solid solutions that can be implemented. Despite the fact that there are certain self-advanced strategies that can be adopted by the sector itself, there are also external efforts that can still be made (and are being made).

The Government's Role

The Government plays a crucial role in SME development, as displayed by activities performed by different arms of government. The key organs of government such as Parliament and related policymaking institutions such as Local Authorities have to grasp the role of government in SME development, and be more aware of the impact of new policies and laws on the operations of small enterprises. In this process, the government has to set the institutional framework for business, the rules of the game, and to ensure that enterprises receive appropriate incentives to facilitate efficient performance. Such interventions have potential for mainstreaming the informal economy alongside larger formal enterprises.

In the journey towards revitalizing SME sub-sector, the Kenya Local Government Reform Programme (KLGRP) has been particularly relevant. The reforms in Kenya began in 1999 with a key policy and programme priority of focusing on reduction of poverty and unemployment coupled with spurring the economy into higher rates of growth. The reforms had three components: improving local service delivery; enhancing economic governance; and alleviating poverty. These objectives were to be achieved through increasing efficiency, accountability, transparency and citizen ownership. The KLGRP, was specifically structured as a policy instrument designed to achieve the above goals. Its immediate policy focus had been the removal of unnecessary regulatory barriers and the reduction of costs of doing business. In particular, the government initiated two nation-wide reform efforts, namely: the Single Business Permit (SBP) and The Local Authority Transfer Fund (LATF). The SBP in relation to small businesses was a response to business licensing problems faced by SME s. Business licensing was aimed at protecting consumers from exploitation, health and safety hazards and control of business activities.

Through the Ministry of Finance

The proposal to set up a revolving fund to provide low interest loans to Small and Medium enterprises should be a wake-up call to banks to lend on easier terms. This year's Kenya's budget hit Ksh 1 trillion mark. This budget incorporated SMEs factor as a move towards revitalizing the sector. However this is still a small amount by all means. With an estimated population of 40 million, were a trillion to be divided equally, each Kenyan should get about Sh.25,000. This is well above what an average worker gets in wages per month or profits from the Small and Micro Enterprises (SMEs) for which the Ministry extended a Sh3.8 billion credit line. Under the theme ‘‘towards inclusive and Sustainability Rapid Economic Development'' the 2010 Budget set an ambitious target of spurring growth in every part of the country. The move by the government to support growth in SMEs sector is a new re-awaking based on what can be viewed as a gradual realization of the inherent potentials in the sector in spurring economic growth.

Through CDF Kitty

Established in 2003 through the CDF Act in The Kenya Gazette Supplement No. 107, the fund was aimed at supporting constituency-level, grass-root development projects. The aim of CDF is to achieve equitable distribution of development resources across regions, a thorny issue that often threatens to stretch the Kenyan socio-ethnic fabric to its limits. Despite the controversy surrounding the misappropriation of the kitty, there are certain milestones that have been covered in rural development. Improvement of infrastructure and the undertaking of various other projects that have been under the CDF support has contributed to some extent to the growth of Small and Medium Enterprises in rural areas.

The Role of International and Local Development Partners

There has been both local and international support to bring about change in SME sub-sector. Certain international organizations have been in the fore line in facilitating networks and partnerships in SME sector. For instance, UNIDO has played a key role in assisting business networks from various SMEs sectors and provided direct assistance to professional organizations in Africa. In order to facilitate access to finance by these networking of SMEs, UNIDO partnered with local banks and credit associations and a new scheme providing mutual guarantee funds for the SME sector was developed. This scheme will provide loans at suitable conditions for projects in the manufacturing sector. SME networking, technical assistance and financial services need a conducive local environment to reap maximum benefits for SMEs. This is why the project has mobilized multi-stakeholder working groups (including local government, private sector representatives and civil society organizations), reinforced their managerial and technical competence, and entrusted them to coordinate the development of future joint initiatives. (UNIDO 2002).

According to an article on Improving Access to Finance for SME: International Good Experiences by Kenya Women Trust Funds, removing the obstacles to financial access for SMEs requires that commercial banks, micro-credit institutions, community groups and Business Development Services (BDS) to work closely together. Pushing for agreements between financial bodies and BDS suppliers can help make up for lack of capacity and reduce costs by more efficient division of labor. The BDS supplier makes the initial choice of projects on a purely technical basis and the credit institution looks at financial viability. Making loans to intermediaries (NGOs and federations of SMEs) with the job of allotting funds to members can also help cut administration costs. Solidarity between banks, especially setting up inter-bank financing to pool money to be invested in SMEs reduces the extra risk of lending to SMEs, as well. Working with banks boosts the financial viability of micro-credit institutions and can also help informal financial bodies to move towards the formal sector.

Equity Bank has also been championing the SME cause. There is no doubt that the bank is one that has stood the test of time in aiding the sub-sector. The recent announcement by the bank to support SMEs in the country following a 4 billion shillings loan from China comes as a means towards solidifying its commitment in bringing revolution in the sub-sector. Equity can be termed as a pace setter in the journey towards SME financial sustainability and policy definition. This loan facility will be available to SME clients at interest rates of between 7 and 9 percent for periods of 3 to 7 years, making it the cheapest source of funding for the sector in the country. This is re-awakening call to other financial institutions to follow suit.

Conclusion

If Kenya wants a strong economy and a great future, the following key points require appropriate attention. Financial Rescue package to address SME funding issues, equipping entrepreneurs with technical and business skills, friendly investment climate, fighting the HIV/AIDS epidemic and above all, implementation of sound SMEs policies. This is not all that there is to change the SME sector. It is a process that require critical measures being undertaken by all the development partners. This is a must for realization of an integral growth in the sub-sector.

References

APRM (2006). Rwanda‘s APRM Programme of Action Implementation: Progress Report of June -December 2006. Midrand, South Africa: Collier P & A.

Conner, G. (2000). Building the capacities of businesses to mitigate the impact of HIV/AIDS. Retrieved July 2, 2010 from www.doingbusiness.org.

United Nation Industrial Development organization (UNIDO) (2002). Stimulating SME environment. Retrieved July 5th 2010 from www.unido.org.

Wanjohi, A. and Mugure, A. (2008). Factors affecting the growth of MSEs in rural areas of Kenya: A case of ICT firms in Kiserian Township, Kajiado District of Kenya. Unpublished.

Wanjohi, A. (2009). Challenges Facing SMEs in Kenya. Retrieved July 10, 2010 from http://www.buzzle.com/articles/challenges-facing-smes-in-kenya.html

About the Author

Wanjohi, Anthony M. is a Research Scientist in the fields of education and social sciences, an educationist and an author. He holds a Bachelor of Science degree (Madras University, INDIA), and postgraduate diplomas in Software Engineering (INDIA), Philosophy and Religion (Tanzania), Education and Projects Management (Kenya). He is currently the Director of Research with Kenya Projects Organization (KENPRO); an author with Jomo Kenyatta Foundation (Kenya) and Lambert Academic Publishers (Germany). His experience in education, research, and projects planning and management spans over a decade.

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