The Small and medium enterprises (SMEs) form a large part of the private sector enterprises in Kenya – they have evolved into a highly vibrant and dynamic sector of the Kenyan economy over the last few decades. With over 7.5 million MSMEs, Kenya has been rising in terms of its entrepreneurial culture and orientation.
Data by the Kenya National Bureau of Statistics (KNBS) shows that 49.2 percent of licensed SMEs had a monthly turnover of less than KES50,000, while 35.7 percent recorded a monthly turnover of between KES50,000-1,000,000, by end of 2017. According to the Kenya Institute of Public Policy Research and Analysis (KIPPRA 2007), the SME sector accounted for 75 percent of total employment in Kenya and contributed only 18 percent of GDP (Government of Kenya, 2007)
Small and medium enterprises (SMEs) are complementary to large firms as ancillary units; they are often flexible thus effectively meet the market’s needs.
Role of SMEs to the Economy
Small and medium enterprises (SMEs), according to research carried out by the Organisation for Economic Co-operation and Development (OECD 2017), play a crucial role in the achievement of sustainable development goals (SDGs), promotion of inclusive and sustainable economic growth, creation of employment and decent jobs, promotion of sustainable industrialization and fostering innovation and the reduction of inequality.
The sector has played a catalytic role in entrepreneurial activities across the country cutting across urban and rural settings thereby contributing enormously towards the socio-economic development and transformation of the country.
Measures Taken to Protect SMEs
The Government of Kenya has taken various measures to ease the cost of doing business as this can lead to the competitiveness of Kenyan goods in both the local and export markets.
The World Bank’s Ease of Doing Business Report (2019) showed that Kenya, for the fourth consecutive time, had an improvement in the ease of doing business rising in the ranking by 19 places to position 61 in 2018 compared to position 80 in 2017.
The main ease of doing business indicators where improvement was recorded was in registering property, getting credit, protecting minority investors, paying taxes, enforcing contracts, and resolving insolvency.
However, according to the Kenya Association of Manufacturers (KAM,2019), a decline in indicators was recorded in starting a business, dealing with construction permits, and trading across borders among others.
Challenges facing Small and Medium Enterprises (SMEs)
Despite its success, the Kenyan SME sector is faced with numerous challenges especially relating to the regulatory regime.
The entrepreneurial culture is hampered by an unfavorable environment curtailing SMEs from thriving. This has resulted in a high mortality rate of MSMEs. According to a survey carried out by the Kenya National Bureau of Statistics (KNBS), 2.2 million Micro Small and Medium Enterprises (MSMEs) did shut down in a period of five years up to 2016.
Manufacturing SMEs in particular face some challenges which include low innovation and product development, inability to access affordable credit, inability to access both domestic and international markets, tedious and lengthy process in quality standards, and certification.
Also, they face limited access to markets which is a severe constraint to its growth and competitiveness.
Further, as a result of their small sizes, SMEs usually find it difficult to compete in the domestic economy with established enterprises, face competition from imported goods, and lack requisite productive capacity and technologies to meet demand in the international markets.
According to data released by KAM Priority Agenda 2019, and OECD, 2017, SMEs still find it difficult to access public procurement opportunities compared to large firms.
It is argued that some affirmative action and selective interventions and preference schemes by the government can enhance their market penetration.
In the Constitution of Kenya, the county governments are assigned trade development and regulation functions, including markets, trade licenses, fair trading practices, local tourism, and cooperative societies.
Together with other devolved functions such as agriculture, county public works, and planning, county governments have critical roles to play to ensure the growth of the SMEs. Therefore, the sector growth will depend on whether these counties will develop an enabling environment and make the licensing process seamless and cost of licenses reasonable.
In the 2020/2021 financial budget, to boost efficiency and eliminate overlaps, the government also consolidated the Uwezo Fund, Youth Enterprise Development Fund, and Women Enterprise Development Fund into one major fund known as Biashara Kenya Fund. The Fund will give special priority to businesses owned by youths, women, and people living with disabilities.
Take Away: Growth Strategies
There is a need for Kenyan small and medium enterprises (SMEs) in particular to focus concern on the orientation of business strategy toward global market strategy, market research geared at obtaining foreign market intelligence, innovation and technology, product adaptation, service orientation, collaborative ventures, and long-range vision as critical factors in making them successful in the international market.
There is also a need to enhance the contribution of SMEs to GDP and to improve their global competitiveness. For Kenyan firms to be competitive and to be able to successfully expand globally, it is necessary to pursue opportunities for collaboration between industry and government in addressing some of the impediments facing SMEs.
In addition, SMEs should focus on the production of goods and services of superior quality, understanding customer needs, and meeting them better than their competitors.
Lastly, the government needs to address the constraints that hamper the SMEs from succeeding in global expansion including red tape and administrative compliance, product liability, high customs duties, tariffs, import quota imposed on the company products, complicated and costly licensing requirements, and lack of adequate protection of intellectual property rights.