Challenges Facing SMEs in Kenya and the Efforts in Progress

Author: Anthony M. Wanjohi

Category: SMEs Papers

Portal: Kenpro Papers Portal

Year: 2010

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 some of the key issues facing the entrepreneurs in the sub-sector and the effects being made. 

Registration and Certificates

There has been complains regarding tedious registration and certification processes inKenya. 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. 

Lack of Credit

Lack of access to credit is almost universally indicated as a key problem for SME’s. This affects technology choice by limiting the number of alternatives that can be considered. Many SME’s may use an inappropriate technology because it is the only one they can afford. In some cases, even where credit is available, the entrepreneur may lack freedom of choice because the lending conditions may force the purchase of heavy, immovable equipment that can serve as collateral for the loan.

Credit constraints operate in variety of ways in Kenyawhere undeveloped capital market forces entrepreneurs to rely on self-financing or borrowing from friends or relatives. Lack of access to long-term credit for small enterprises forces them to rely on high cost short term finance.

There are various other financial challenges that face small enterprises. They include the high cost of credit, high bank charges and fees. The scenario witnessed inKenya particularly during the climaxing period of the year 2008 testifies the need for credit among the common and low earning entrepreneurs. Numerous money lenders in the name of Pyramid schemes came up, promising hope among the ‘little investors,’ that they can make it to the financial freedom through soft borrowing. The rationale behind turning to these schemes among a good number of entrepreneurs is mainly to seek alternatives and soft credit with low interest rates while making profits. Financial constraint remains a major challenge facing SME’s inKenya (Wanjohi and Mugure, 2008) 

Inadequate Business skills

The juakali informal sector has proved that it can be a factor that can boost economic growth inKenya. 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 inAfrica, andSouth Asiato 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 acrossKenya,South Africa, andMozambique. (Conner, 2000).

There are various other challenges that have continued to have negative impact on the growth of SMEs inKenya. 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).

Ministry of Finance Role

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’sKenya’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. 

Efforts from 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.

Stimulating SME Environment through networking

A networking strategy can improve SMEs’ position. When organized in networks or when they operate through professional organizations, SMEs can reap benefits on multiple levels. Certain 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 inAfrica. 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). 

Policy approach

Policies should aim to encourage and promote the development of local technologies. Emphasis should be on the promotion of the local tool industry to reduce reliance on imports. SMEs are said to face a “liability of smallness.” Because of their size and resource limitations, they are unable to develop new technologies or to make vital changes in existing ones. Still, there is evidence that SMEs have the potential to initiate minor technological innovations to suit their circumstances. However, for SMEs to fully develop and use this potential, they need specific policy measures to ensure that technology services and infrastructure are provided. (Wanjohi, 2009).  Policy initiates in revitalizing the SME sub-sector should not be only government engineered, but all the stakeholders in development arena should take frontline. 

Conclusion

IfKenyawants 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 sectors of development. 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.  RetrievedJuly 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

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