SME POLICY IN KENYA: ISSUES AND EFFORTS IN
PROGRESS
By Anthony M. Wanjohi
Introduction
SME Policy
Small and Medium Enterprises (SMEs) have been known to contribute
greatly in economic growth of both developed and developing countries.
According to a report published in the journal of Economic Literature in the
year 2000 about the manufacturing firms in developing countries, the share of
SMEs in employment tends to be higher in developing countries, which are
typically more focused on small-scale production. As such, policy provisions
remain fundamental in propelling these enterprises towards self-sustenance and
realization of their full potentials in contributing towards economic
growth.
In Kenya for instance, SME operation cut across almost all sectors
of the economy and sustain majority of households. This was well recognized by
the 2003, National Budget. David Mwriraria, the
then Minister for Finance noted that “SME activities form a breeding ground for
businesses and Employees, and provide one of the most prolific sources of
employment. Their operations are more labourintensive
than the larger manufacturers.” As such, policy provisions would
mean boosting not only the operations of these enterprises but the country’s
economy as well.
The development of the private sector varies greatly throughout
Africa. According to an article which appeared in a UN based booklet ‘handbook
for local investors’: ‘ SMEs are
flourishing variedly well in various countries in Africa. In South
Africa, Mauritius and North Africa, these
enterprises are doing well. This could be attributed to fairly modern financial
systems and clear government policies in favor of private enterprise.’
While this is commendable, in other countries, the rise of a medium sized enterprises with a considerable swing
in the middle class has been hindered by political instability or
overdependence on raw materials as the main engine of economic
advancement. The article observes that in the Democratic Republic of
Congo, most SMEs went bankrupt in the 1990s as a result of the looting in 1993
and 1996 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 Kenya, SMEs have continued to face challenges related to
accessing credit. Commercial banks are still bargaining with the issue of
collateral. Due to limited land ownership status in Kenya (Property Rights in
Kenya), entrepreneurs are unable to provide the necessary collateral needed for
loan requests. According to ILO report published in 2008: ‘Factors affecting
Women Entrepreneurs in Micro and Small Enterprises in Kenya,’ 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. Despite the fact that some provisions have been made towards
gender mainstreaming, there is much more that could be put in place.
The journey towards SME policy formulation by the Kenyan
government has been long. The government’s commitment to foster the
growth of Micro and Small Enterprises (MSEs) emerged as one of the key
strategies in the 1986 report: Economic Management for Renewed Growth. It was
reinforced as a priority in the 1989 report, The Strategy for Small
Enterprise Development in Kenya: Towards the Year 2000. This report set out the
mechanisms for removing constraints to growth of the MSE sector. In 1992, the
government published the MSE policy report, Sessional Paper No. 2 Small
Enterprises and Jua Kali Development in
Kenya. The report was reviewed in 2002, leading to a new policy framework
that provides a balanced focus to SME development in line with the national
goals of fostering growth, employment creation, income generation, poverty
reduction and industrialization.
However, though these efforts are commendable, these are but
perhaps baby steps compared to the task that lies ahead, namely unlocking the
full potential of the SME sector to spur and sustain economic growth. For there
to be long lasting changes, it is imperative for there to be concerted efforts
starting at the policy level especially when it comes to issue identification
and solution architecture. This is because, like in many developing countries,
there have been considerable mountains of policy publications, data and
research yet the problems still remain.
Realizing that the present grinding poverty does not give would be
entrepreneurs the capacity to focus and upscale their enterprises since they
are concerned with meeting their very basic needs - food, shelter and
sustenance, reducing the divergence of policy proposals and the reality on the
ground then, is perhaps the remaining policy challenge that stands in the way
of Kenya reaping the full benefits other countries such as India and Brazil are
currently enjoying as a result of a robust SME sector.
The Policy Challenge
Kenya has had a long history of economic leadership in East Africa
as one of its largest and most advanced economies. However, inconsistent
efforts during the structural reforms era coupled with poor economic
policies and state complicit corruption syndicates
over the past decades have hemorrhaged development and growth significantly
eroding the leadership at a time when other countries in the region have made
significant strides.
The dichotomous policy perception of formal and informal business
entities has also contributed to ineffective policies on the SME economy as
merely-jua kali. It was not until
the beginning of 2003 that there was deliberate Government debate on the need to
integrate the two sectors. At the time, analysis of the SME sector revealed
that development and integration of both the informal and formal sectors has to
a large extend been constrained by regulatory requirements. Most of these
requirements date back to the colonial period and have no relevance in
independent Kenya.
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.’
Efforts in Progress
The Government as the sole regulator and licensor plays a crucial
role in SME development through different ministries, departments and state
corporations. Key organs of government such as cabinet office, Parliament and
Local Authorities concerned with policymaking have to grasp the role of
government in SME advancement, and be aware of the impact new policies and laws
impose on the operations of small enterprises. In doing this, the government
establishes the institutional framework for business - rules of the game and
ensures that promising 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 a well oiled SME sector, the
Kenya Local Government Reform Programme (KLGRP) has been particularly relevant.
This was spurred 1999 with a deliberate policy priority focusing on reducing
poverty and unemployment going hand in hand with accelerating economic
growth.
The KLGRP 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 and on the practical side, removal of
unnecessary regulatory barriers and the reduction in 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 was a response to business licensing problems faced by SMEs in the
start up phase as they had to get multiple licenses before opening
shop draining the initial business inertia
Alongside Government led efforts of change, there has also been
international support towards the SME sub-sector. For instance the
International Finance Corporation (IFC) along with the Central Bank and the
ministry of Finance have been working hand
in hand to establish a credit reference bureau that should benefit SME
entrepreneurs (mostly women). This reform could enable Non-land Assets to be
acceptable as collateral.
According to a 2007 Kenya Women Finance Trust (KWFT) report
‘Improving Access to Finance for SME: International Good Experiences,’ removing
the obstacles to financial access for SMEs requires that commercial banks,
micro-credit institutions, community groups and Business Development Service
(BDS) institutions 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 should also be considered as a
viable option in reducing the extra risk of lending to SMEs. This will address
simultaneously the twin issues of accelerating access to finance and reaching
the unbanked.
An interesting case study in the banking sector has been Equity
Bank. 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 shilling 4 billion loan from
China serves to solidify its commitment revolutionizing the SME sector.
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. Perhaps this is a
wake up call to other financial institutions to develop the courage beyond the
shores and launch out in to the sea too.
Government efforts have also bee unwavering. The proposal by the
government to set up a revolving fund to provide low interest loans to Small and Medium enterprises is another red signal to
commercial banks to lend on easier terms. Looking at the 2010/2011 budget that
hit Ksh 1 trillion markreveals some
of the intended projects. 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. The budget incorporated SME factor as a move towards
revitalizing the sector – having been allotted a Sh3.8 billion credit line. By
all means, this amount is small to cater for the needs of all players in the
massive SME sub-sector.
Conclusion
As if to fill the much-felt SME gaps, the government has also
initiated other programmes to support the sub-sector. For instance,
through Jitihada Business Plan Competition,
the government undertook a training programme for entrepreneurs under the
Micro, Small and Medium Enterprises competitive project in the Ministry of
Industrialization. Implemented by the Kenya Institute of Management, Jomo
Kenyatta University of Agriculture and Technology and TechnoServe,
the plan seeks to identify growth oriented and innovative business ideas that
can be nurtured into vibrant and sustainable business enterprises. It is also
meant to provide participants with innovative ideas, expert coaching and
individual mentorship to help them develop and refine their business
plans.
Therefore, more policy initiatives definitions towards
revitalizing the SME sub-sector should not only be government engineered, but
also enjoy the input of all stakeholders in all sectors of development. The
effort from both private and public sector towards reinforcing the existent SME
policy provisions is highly recommended based on the fact that all appear to
recognize the SMEs’ critical role in spurring not only self sustenance but also
the country’s economic boom.
Citation
Wanjohi,A.M.(2010). Sme Policy
In Kenya: Issues And Efforts In Progress.
KENPRO Publications.
Available online
at http://www.kenpro.org/papers/sme-policy-in-kenya.htm
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