Globally, Small and Medium Enterprises (SME’s) make up to over ninety per cent of businesses and account for between fifty to sixty per cent of employment (Hill, 2004). In Europe, the Netherlands SME account for 95% or more of total business establishments. Recent studies from Sub-Saharan Africa confirm the importance of the informal SMEs sector as a contributor to the creation of productive employment and poverty alleviation. In the South African Development Community (SADC) region, the SMEs in the informal sector alone account for an estimated sixty percent of Gross National Product (Kiiru, 2004).
The small and medium enterprises (SMEs) play an important role in the Kenyan Economy. According to Longenecker et’al. (2006), the sector contributed over 50 percent of new jobs created in the year 2005. Despite their significance, past statistics indicate that three out of five businesses fail within the first few months of operation. According to Amyx, L. (2005), one of the most significant challenges is the negative perception towards SMEs. Potential clients perceive small businesses as lacking the ability to provide quality services and are unable to satisfy more than one critical project simultaneously. Often larger companies are selected and given business for their clout in the industry and name recognition alone. As with many developing countries, there is limited research and scholarly studies about the SME sector in Kenya. The 1999 National Baseline Survey conducted by Central Bureau of Statistics, ICEG and K-Rep Holdings provides the most recent comprehensive picture of SMEs in Kenya. Mead, (1998) observes that the health of the economy as a whole has a strong relationship with the health and nature of micro and small enterprise sector. When the state of the macro economy is less favourable, by contrast, the opportunities for profitable employment expansion in SMEs are limited. This is true especially for those SMEs that have linkages to larger enterprises and the economy at large. Given this scenario, an understanding of the dynamics of SMEs is necessary not only for the development of support programmes for SMEs, but also for the growth of the economy as a whole. Given the importance of small businesses to the Kenyan economy and the exposure to risks owing to their location, there was need to conduct an empirical enquiry to investigate the challenges SMEs in Nairobi face and how they manage those challenges. The study targeted those enterprises within the Central Business District in Nairobi City.
Small and Medium Enterprises (SMEs) contribute greatly to the economies of all countries, regardless of their level of development. About 80% of the labour force in Japan and 50% of workers in Germany are employed in the SME sector. With respect to developing countries and according to the ILO/JASPA (1998), the sector made a significant contribution to the gross domestic product of Uganda (20%), Kenya (19.5%) and Nigeria (24.5%). The term SMEs covers a wide range of perceptions and measures, varying from country to country and between the sources reporting SME statistics. Some of the commonly used criterions are the number of employees, total net assets, sales and investment level. However, the most common definitional basis used is employment, 6 but, there is a variation in defining the upper and lower size limit of an SME (Ayyagari, Beck & Demirguc-Kunt, 2003). Many researchers define Small and Medium Enterprises in terms of the numbers of people employed. Storey (1994), for example, defines micro-enterprises as those with 0 to 9 employees, those with 10 to 99 workforces as small business, and medium sized enterprises as having 100 to 499 employees. Gunasekaran & Kobu (2000), however, states that Small and Medium Enterprises have to be defined within the context of the economies in which they operate. In China, annual sales revenue are used to define the size of SMEs so that small enterprises are those with annual sales revenue less than 5 million; medium enterprises are those with annual sales revenue above 5 million but less than 30 million. In Kenya an SME can be a microenterprise, a small enterprise or a medium enterprise. A microenterprise is a business organization having a maximum of 10 employees; a small enterprise has a minimum of 11 employees and a maximum of 50; while a medium enterprise has between 50 and 150 employees (Stevenson & St-Onge, 2005). Waweru (2007) posits that SMEs in Kenya are characterized by: the ease of entry and exit; the small scale nature of activities; self-employment with a high proportion of family workers and apprentices; the little amount of capital and equipment. Further, they have labour intensive technology, low level of skills and low level of organization with little access to organized markets. Other observations by Waweru are their unregulated and competitive markets, their limited access to formal credit, the existent low levels of education and training and the limited access to services and amenities. 7 In Kenya SMEs operate in all sectors of the economy, that is, manufacturing, trade and service subsectors. The SMEs range from those unregistered, known as Jua Kali enterprises, to those formally registered small-scale businesses, such as supermarkets, wholesale shops and transport companies. The capital invested in SMEs varies from as little as ten thousand Kenyan shillings to about 5 million Kenyan shillings. Almost two-thirds of all SMEs in Kenya are located in the rural areas with only one-third found in the urban areas. About 17 per cent are located in Nairobi and Mombasa (Central Bureau of Statistics, 1999). Close to 70 per cent of the SMEs are in the trade sector i.e. in the buying and selling goods and commodities to generate income. SMEs in the manufacturing sub-sector accounted for 13 per cent, SMEs in the services subsector accounted for 15 per cent, the collective group of other service providers, such as bars, hotels and restaurants (Hospitality industry) accounted for 6 per cent. Enterprises in the construction industry accounted for less than two per cent of the total SMEs in the country (Central Bureau of Statistics, 1999).
The Small and Medium Sized Enterprises (SME) sector is one of the primary driving forces for economic growth and job creation. SMEs and micro-enterprises constitute over 95 per cent of all enterprises and account for two thirds to one half of total non-farm employment and gross domestic product (GDP) worldwide. SMEs play pivotal roles in creating dynamic, market oriented economic growth, employing the growing workforce in developing countries, alleviating poverty and promoting democratization (Mira & Ogollah, 2013). SMEs are hailed for their pivotal role in promoting grassroots economic growth and equitable sustainable development (Vera & Onji, 2010). SMEs, just like any other business, need access to finance to be able to implement business plans, develop products and services, and market the products and services to potential customer (Badulescu, 2011).
Historical development of SME policy in Kenya
Governments all over the world have designed a number of support services for SMEs which include the policy initiatives and support programs for the purpose of creating and developing the SME sector. Support programs are designed to assist SMEs in order to link them to the larger developmental vision of the nation with the main focus being poverty reduction and growth of small firms (Charbonneau and Menon, 2013). In the European Union and other countries, such initiatives are covered by the specific acts of SMEs: in India by Micro and SME Development Act, in Kenya by Micro and Small Enterprises Act, in Malaysia by SME Master plan, in Tanzania by the SME Development Policy, and in the USA by the Small Business Act (Charbonneau and Menon, 2013). According to Rambo (2013) the Kenyan government has put mechanisms in place such as the Micro and Small Enterprises Act as initiative aimed at encouraging Kenyans in the SMEs sector to access financing. The SME Act established an enabling environment for small businesses to thrive and enhancing access to funding. Similarly, Kiraithe (2015) notes that other Kenya Government national initiatives including establishment of Youth Entrepreneurship Development Fund (YEDF) aimed at empowering young entrepreneurs by providing an enabling environment. In addition to financing mechanisms and access to business credit. In this light, the Kenyan government seems to be cognizant of the fact that SMEs need access to financial credit for them to grow and flourish. In Kenya, Osano and Languitone (2016) posits that the YEDF provides Ksh. 50, 000 revolving fund to young entrepreneurs as a way of boosting their start-up capital for their SME ventures. In as much as this model has been criticized for high default rates, it is still the most viable alternative to financial institutions that SMEs being run by young entrepreneurs can access funding. Similarly, the government of Kenya has established other like UWEZO Fund that was established in 2013 to finance youth entrepreneurship ventures. The UWEO fund initiative was not exclusively meant to provide access to finance, but also to train SMEs, particularly those owed by the youth on business development services, create market opportunities, facilitate supply chain linkages, in addition to creating infrastructural support for youth SMEs (Wanjohi, 2010). By the end of September 2011, UWEZO fund had disbursed loans to SMEs worth Kshs.5.9 billion to approximately 158, 000 enterprises. Similarly, Kiraithe (2015) notes 18 that through other financial intermediaries, the fund has financed approximately 141, 552 SMEs fundamentally enhancing SMEs access to financial credit.
Policy provisions are fundamental in propelling enterprises towards self – sustenance and realization of full potential in contributing to economic growth and employment. Journey towards SME policy has been long since independence. Intertwined with economic policies development over time.
Milestones that define the path towards SMEs policy
Sessional paper no. 10 (1965) – Africanization
Before independence, Africans had been relegated. After Independence, the Sessional paper no. 10 (1965) was produced. The Thrust was not small enterprises but replacement of white people in business ownership. Financial instructions was also created to support Africans in this effort .KIE 1967 was established to support infrastructure and offer financial support to businesses.
ILO study (1972).
It recognized informal sector contribution in economy and made substantial recommendations on promotion of informal sector. Development plans were subsequently outlined to support this sector;-
Organizations to provide extension services to the services.
Stop official harassment.
KIE AND KIDCs to coordinate services to small scale enterprises.
Development plan 1979-83 proposed comprehensive support programme to SMEs.
Financial and non-financial support advocated.
1984-1988 development plan provided first attempt to define the sector to clear ambiguity in definition;
Size by investment and employment.
SME division in Ministry of Commerce and Industry.
Sessional paper no. 1 (1986).
Recognized SME sector.
Proposed policies to stimulate the sector.
Reduce tariffs on raw materials.
Increase access to information on market opportunities
Skills development through training.
Sessional paper no. 2 (1992 on JK).
The objective of this sessional paper was to improve the enabling environment for informal sector activities; formulate and develop programmes to improve access to credit and finances; technology improvement and innovation; work sites; and bias in public procurement in favour of the small scale and Jua Kali enterprises sector in Kenya amongst others.
Micro & SMEs Act (2012).
Kenya’s Micro and Small Enterprise (MSEs) bill was passed into law in 2012.The main purpose of the law was:
To provide for the promotion, development and regulation of the Micro and Small Enterprises
To establish the Micro and Small Enterprise Authority
The authority’s main role is to formulate policies for the micro and small enterprises and facilitate training in terms of technology, business development, marketing, and innovation in the MSE sector. This will address the challenge that the enterprises face. Another role of the authority is to market products and services of MSEs. Inadequate market is also a common hurdle MSEs encounter. Sometimes competition with established corporates with larger market share has forced some small businesses to close shop. A good example is the case of Kiondo (hand woven basket) in which entrepreneurs lost to a large organization which secured intellectual property rights over the Kiondo yet it is a Kenyan product. Again, the MSEs lacked financial muscle to compete in the market with the larger organization. Micro and small enterprises dealing in the artefacts also face a lot of competition from larger businesses. The authority seeks to address such challenges.
Perhaps the most important thing for small firms to note is that the law also provides for creation of a fund to finance MSEs and give them affordable loans. The authority can enter into agreements with banks to finance eligible enterprises. Financing has been a long standing challenge for MSEs and the establishment of the fund is timely. The sector has been largely unregulated despite the many challenges it faces, especially financial hurdles, lack of proper business management skills such accounting, book keeping and marketing.
According to Rambo (2013) the Kenyan government has put mechanisms in place such as the Micro and Small Enterprises Act as initiative aimed at encouraging Kenyans in the SMEs sector to access financing. The SME Act established an enabling environment for small businesses to thrive and enhancing access to funding. Similarly, Kiraithe (2015) notes that other Kenya Government national initiatives including establishment of Youth Entrepreneurship Development Fund (YEDF) aimed at empowering young entrepreneurs by providing an enabling environment. In addition to financing mechanisms and access to business credit. In this light, the Kenyan government seems to be cognizant of the fact that SMEs need access to financial credit for them to grow and flourish. In Kenya, Osano and Languitone (2016) posits that the YEDF provides Ksh. 50, 000 revolving fund to young entrepreneurs as a way of boosting their start-up capital for their SME ventures. In as much as this model has been criticized for high default rates, it is still the most viable alternative to financial institutions that SMEs being run by young entrepreneurs can access funding. Similarly, the government of Kenya has established other like UWEZO Fund that was established in 2013 to finance youth entrepreneurship ventures. The UWEO fund initiative was not exclusively meant to provide access to finance, but also to train SMEs, particularly those owed by the youth on business development services, create market opportunities, facilitate supply chain linkages, in addition to creating infrastructural support for youth SMEs (Wanjohi, 2010). By the end of September 2011, UWEZO fund had disbursed loans to SMEs worth Kshs.5.9 billion to approximately 158, 000 enterprises. Similarly, Kiraithe (2015) notes 18 that through other financial intermediaries, the fund has financed approximately 141, 552 SMEs fundamentally enhancing SMEs access to financial credit.
Youth Enterprise Fund
Persons with disability fund-Uwezo Fund
Critique/Ease of doing business in kenyaAccording 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.
Yet, even with its immense contribution to the economy, Kenya’s SMEs are faced with numerous challenges.
According to a report Deloitte Kenya Economic Outlook 2016, SMEs are hindered by inadequate capital, limited market access, poor infrastructure, inadequate knowledge and skills and rapid changes in technology. Corruption and other unfavourable regulatory environments present other bottlenecks to this vital cog of the economy.
A survey by the Kenya National Bureau of Statistics released early this year indicates that approximately 400,000 micro, small and medium enterprises do not celebrate their second birthday. Few reach their fifth birthday- leading to concerns of sustainability of this critical sector.
Although the World Bank in its report on Doing Business in Kenya in 2017 lauds the country for making progress in making it easier to start a business, major issues remain in smoothening the process.
In Kenya, starting a business involves seven procedures, takes 22 days and costs 21.1 percent income per capita for both men and women.
The World Bank notes that the ease with which businesses can be registered has a bearing on the number of entrepreneurs who start businesses, leading to jobs and more government revenue.
The government has formulated strategies to quicken the processes of starting a business in favour of small firms. It has addressed SME challenges by enforcing legislation on local content for public projects-establishing ‘Buy Kenya, Build Kenya’ policies in public procurement , research and development support and increased funding to funds such as the Uwezo Fund. The Uwezo Fund is a government fronted financial tool aiming to expand access to finances and promote women, youth and persons with disability.
Experts however say that some of the challenges with SMEs are beyond government bureaucracy.
“Most people prefer replicative businesses. Nobody does a market survey to see whether the business is viable,” observed Dr. Bitange Ndemo, an associate professor at the University of Nairobi’s School of Business and a former government official.
But finance remains the most critical challenge affecting the SMEs in the country.
“The critical factor however remains under financing. Few banks or saccos are eager to finance SMEs especially at the inceptions stage,” added Ms Njuki.
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.
IMPROVEMENTS ON THE ACT