Small and Medium enterprises popularly known as SMEs are engines of growth, vital to most economies. Research suggests that micro businesses and SMEs account for 95 percent of firms in most countries, create jobs, contribute to GDP, aid industrial development, satisfy local demand for services, innovate and support large firms with inputs and services.
In Africa, SMEs create 80 percent of employment, establishes a new middle class and stimulates the demand for new goods and services. The region is set to have a decline in economic growth with less than 3 percent average growth forecast for 2017. Nevertheless, pockets of countries in Africa, mainly non-resource intensive countries such as Côte d’Ivoire, Ethiopia, Kenya and Senegal, are foreseen to continue to grow at more than 6 percent.
According to the IMF, growth in these countries has been supported by infrastructure investment efforts and strong private consumption. Many African countries are turning to entrepreneurs to support future growth. With entrepreneurship playing a vital role in the development of a vibrant and formal small business-sized sector, there is much scope for SMEs to support African growth.
In Kenya, SMEs play a key role in economic development and job creation. In 2014, 80 percent of jobs created were dominated by these enterprises. The term micro and small enterprises (MSEs) or micro, small and medium enterprises (MSMEs), is used to refer to SMEs in Kenya and under the Micro and Small Enterprise Act of 2012, micro enterprises have a maximum annual turnover of KES 500,000 and employ less than 10 people.
Small enterprises have between KES 500,000 and 5 million annual turnover and employ 10-49 people. However, medium enterprises are not covered under the act, but have been reported as comprising of enterprises with a turnover of between KES 5 million and 800 million and employing 50-99 employees.
Most SMEs fall under the informal sector and by extension, the term informal refers to people in self-employment or small-scale industries. The informal sector is estimated to constitute 98 percent of business in Kenya, contributing 30 percent of jobs and 3 percent of Kenya’s GDP. The government recognizes the role of the informal sector and seeks ways to integrate these businesses into the formal sector.
According to the 2017 Doing Business in Kenya report, the ease with which businesses can be registered has a bearing on the number of entrepreneurs who start businesses in the formal sector, leading to jobs and more government revenue. In Kenya, starting a business involves seven procedures, takes 22 days and costs 21.1 percent income per capita for both men and women. Although the country has generally made progress in making it easier to start a business, there are questions as to how easy starting a business is especially for SMEs.
Kenya stands to significantly benefit through integration and skills development of its large, yet unproductive, informal sector. Fortunately, Vision 2030 acknowledges the need to support the informal sector to raise productivity and distribution, jobs, owners’ incomes and public revenues. Vision 2030, the country’s development blueprint to transform Kenya into a newly industrializing middle-income country, aims to increase annual GDP growth rates to an average of 10 percent.
Under its economic pillar, apart from supporting the informal sector, the country hopes to accelerate economic growth by increasing national savings, implementing governance and institutional reforms and addressing poor infrastructure and high energy costs. The government is currently involved in some infrastructure developments, which have the potential to ease some of the constraints to doing business, such as the lack of electricity and accessible roads.
Despite the fundamental role SME’s play in the Kenyan economy, these enterprises are not able to operate to their optimum level due to the challenges they face.
The following are challenges faced by small and medium enterprises.
- Lack of adequate managerial training.
More often than not small and medium enterprises establish managerial strategies through trial and error mechanism. Their managerial techniques only focus on operational plans rather than strategic plans of their organization. In addition, these managerial techniques are not standard with those of other global managers. Consequently, managers of small and medium enterprises are not able to adequately handle challenges facing enterprises.
- Lack of adequate finance and limited access to credit.
Many small and medium enterprises do not have access to finance and credit especially from financial institutions such as commercial banks. This is because of the lending conditions given to them such as collateral for the loan. These enterprises may not be able to provide collateral such as immovable assets due to their small asset base.
Consequently, most of these enterprises resort to borrowing from friends and relatives. However, this type of finance is inadequate to cater for all the needs of the medium and small enterprises. As a result, lack of credit forces the management to use cheap and local technology which most times are inappropriate.
- Rapid technology changes.
Technology change poses a big challenge to the growth of small and medium enterprises. Most of these enterprises are not able to adopt new technology due to its high initial and installation costs. In addition, this new technology, more often than not, does not suit the needs of these enterprises. For instance, a small enterprise located in a rural area cannot reap the full benefits of internet connection due to lack of rural electrification. Adapting to new technology has also been hampered by the slow rate of economic growth in Kenya.
- New laws and regulations.
Every day, the government and other stakeholders continue to introduce new regulations for industries and enterprises in Kenya. New laws are being enacted in a bid to regulate the operations of enterprises. These laws are also meant to spearhead sustainable economic growth in the country. However, such regulations sometimes pose tremendous threat to the growth of small and medium enterprises in Kenya. This is because some of these laws are too tough.
- Inadequate knowledge and skills.
Every managerial position regardless of whether in a small shop, supermarket chain or an enterprise warrants for adequate education and skill. However, research reveals that most of the managers of these enterprises in Kenya lack adequate education. In addition, they are not well informed in terms of managerial knowledge and skills.
Other challenges facing small and medium enterprises include poor infrastructure, poor management of resources and inadequate support from the government. Small and medium enterprises should not be ignored. They can serve as the backbone of restoring our crippled economy back on its feet. Therefore, the government should intervene and help these enterprises gain momentum.