SME development drives economic growth of African economies: A Kenyan example

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Kenya is commonly considered to be East Africa’s financial hub. Its economic growth has increased steadily in the last decade due to significant political, structural and economic reforms. The SME sector stands out as the key driver of Kenya Vision 2030 which seeks to transform the country into a newly industrialized middle income country by 2030. SMEs are crucial in encouraging industrialization and helping to eradicate poverty by creating employment and raising income levels.

Social and Economic Benefits

SMEs complement large firms as subsidiary units; because they are more flexible they can effectively meet the needs of the market. They have a facilitative role in entrepreneurial activities across the country in both urban and rural settings, thus contributing immensely towards the socio-economic development and transformation of the country. SMEs are can ensure the achievement of sustainable development goals (SDGs), promotion of inclusive economic growth and sustainable industrialisation and fostering as well as reduction of inequality.

There are about 7.41 million Micro, Small and Medium Enterprises in Kenya which contribute approximately 35-50% of GDP. According to the Kenya National Bureau of Statistics (KNBS) 2019 Economic survey, small mostly informal businesses with an annual turnover of less than 500, 000 Ksh recorded an 18 percent increase in annual turnover between the 2018-2019 financial years. During the same period their contribution to job creation was reported to have been over 83.6 percent of the total 840 600 new jobs created.

The SME sector showed a great deal of resilience in the 2019 financial year as it continued to thrive and contribute to economic growth amidst a harsh business environment. Listed companies in the private sector laid off about 1700 employees after issuing profit warnings. SMEs on the other hand continued to contribute significantly towards job creation and GDP.

Market stall in Kenya

Challenges

A 2016 report produced by the Kenya National Bureau of Statistics indicated that many SMEs ceased their operations after the first year of opening, an estimated 2.2 million businesses closed down in the 5 years preceding the compilation of that report. This was due to the adverse environment inhibiting SMEs from thriving. The SME sector scarcely achieves its full potential because of these challenges. Tackling these challenges will increase the efficiency of SMES and amplify their contribution to the economy.

Some of the challenges include inability to expand globally, lack of technical skills and commercial knowhow, poor business ethics, inadequate infrastructure, limited access to information on markets, corruption and limited access to innovative production processes and technology. The inadequacy of capital is one major barrier to growth for the SMEs, according to the Kenya SME Performance Index 2019, their number one source of financing is retained business profits, followed by mobile money then personal savings.

Many SMEs have also reported that they do not engage in any form of marketing believing that their products will market themselves. The MSME 2016 Kenya survey reported that SMEs have exhibited product innovation in manufacturing, financial, ICT, and health activities, however process and marketing innovations are non-existent in MSMEs. This has amongst other factors led to reduced turnover for the sector. Between 2018-2019 SMEs access to new local markets as well as export markets declined. This may also be attributed to the availability of cheaper imports such as electrical gadgets from China, as well as the low consumer buying buyer power which was a result of the job losses.

Government Support

The Government of Kenya has taken various measures to ease the cost of doing business and to create a conducive business environment, so as to improve the competitiveness of Kenyan goods in both the local and export markets. The World Bank’s Ease of Doing Business Report released in 2019 showed that Kenya had an improvement in the ease of doing business, for the fourth consecutive time – rising in ranking to position 56 in 2018 from position 80 in 2017.

The leading areas in which ease of doing business indicators showed improvement are property registration, getting credit financing, protecting minority investors, paying taxes, enforcing contracts and resolving insolvency. However, a decrease in indicators was recorded in starting a business, dealing with construction permits, getting electricity, and trading across borders.

The government continues to show its support for SMEs by enacting legislation which promotes use of local products and services for public projects. They have established ‘Buy Kenya, Build Kenya’ policies in public procurement, offered research and development support and increased funding to certain projects like the Uwezo Fund. The Competition Authority of Kenya has also been instrumental in promoting SMEs through the Proposed Competition Amendment Bill which seeks to punish big companies for delay or non-payment for goods or services supplied by SMEs. This should boost cash flow for SMEs through higher turnover.

Farming in Kenya

An interest cap in 2016 led to some adverse effects on the economy and the Central Bank of Kenya sought to relieve the situation by enacting the Finance Act 2019 which amongst other provisions, seeks to repeal Section 33b of the Banking Act. This section provides for the capping of bank interest rates. The law also introduces tax on income gained from the digital market place, as a measure of ensuring equity in taxation. This ensures SMEs have wider access to financing and as well increases government revenue through taxation.

An estimated 1.56 million of SMES are licensed whereas about 5.85 million are unlicensed and operate in the informal sector. There is an urgent need to render assistance in formalising the operations of these entities and registering their businesses.  This can be achieved through the simplification of business start-up operations as has already been initiated by the state. Formalizing SMEs gives an identity to a business and helps create better business opportunities.

Market stall in Kenya

Looking Ahead

It is time African states realize that aid is not the major solution to all their economic and developmental woes. It is sectors like the SME sector which should be supported so that they realize their full potential and contribute to poverty eradication and employment creation. The innovative SMEs if allowed to flourish, can transform the social and economic outlook of the continent, however, government support is required to ensure a more conducive business environment.

 

Evelyn is a finance and business content writer with a passion for business news in Africa. Her expertise is in analyzing African equities and telling the truth when it comes to doing business on the continent!

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