Need for Support of SMEs in Kenya
As much as one would want to believe in free markets where businesses require no support from governments, in a world where there are governments that are already actively supporting their businesses to give them competitive advantages in local and international markets, those ones that fail to support their own businesses are bound to lag behind in terms of growth, or worse, experience exaggerated economic imbalances. These imbalances are in form of widening deficits or a situation where an economy becomes too reliant on specific exports commodities rather than being diversified. Reliance on specific exports means that when those exports under-perform in international markets, the economy weakens which is usually accompanied by rise in unemployment and unrest.
Low unemployment levels are critical in all economies. Employment not only provides necessary accumulation of skill but goes to an extent of even impacting on the next generation through people’s ability to finance their children’s education (that allows for increase in human capital), health services as well as passing on good values. Small and Medium Sized Enterprises (SMEs) are widely recognized on their role in fast jobs creation. In advanced economies, they account for over 95% of enterprises, 60% of total employment and 50% of value added (BIS study paper).
Developing economies especially in Africa have lagged behind on support for SMEs and have instead focused energies on specifics groups especially the youth. Although this is also important in development, neglecting SMEs in general regardless of age groups prevents these economies from harnessing the power of mass talents in the development of the economies. Innovation is not limited by age but rather by ideas and sometimes skill levels. There is great need to extend as much support as possible to these groups.
Some of the barriers that SMEs face when embarking on production of goods and services especially for those involved in exports are well known and are not exclusive to developing economies. These include lack of foreign markets knowledge and the resources that should be devoted to search for markets, being financially unable to wait for delayed payments by buyers of exported goods and services or those ones sold in local markets and need for developing customer base in foreign markets. Advanced economies have country specific export/import banks that fund both buyers in foreign markets and the SMEs, what about developing economies? Are continent specific Exim banks sufficient?
SMEs which report finance as their greatest constraints receive smaller new loans and high interest rates that further constrain their profitability. Policy initiatives that ease these constraints could play a pivotal role in balanced stable long-term growth characterized by high employment rates.
Some of the following measures implemented by the US in support of SMEs should be replicated or debated on their improvement as opposed to current strategy of giving banks funds without onward lending incentives or rate advantage for SMEs.
- Government establishes a team/department/ministry that specifically focuses on SMEs rather than industry in general to study it and give it special attention separate from other enterprises. This team should ensure that SMEs for instance access efficiency enhancing services for free or at very low costs since it might take time before entrepreneurs address this gap. It should also ensure that they are able to access foreign markets and can group small enterprises such as those involved in farming to access external markets that it has negotiated on their behalf collectively.
- Establishment of a rule that prioritizes SMEs that source their goods and services from domestic markets ahead of other contractors as long as price is within reasonable range. This can be in form of target percentages of say 30% of contracts rather than restricting support to youth and women enterprises. Civil servants also need to be educated on the importance of supporting SMEs and the process be made as transparent as possible with easy to use online tendering/contracting platform.
- Special tax treatment for SMEs that gives them a competitive advantage. These may also include employment incentives such as the one in US that gives tax relief to SMEs that employ those who have been unemployed for more than a year and lower taxes.
- Guarantee of risk on loans issued to SMEs by banks without or with insufficient collateral to reduce spreads on savings and lending rates to a level near rates at which established firms obtain financing. These guarantees can be capped at say sh35Billion. Guarantees mean that the government only gets to pay if the SME defaults. If there are a large enough number of new enterprises in an economy where government is aggressively spending and thereby stimulating demand, it will significantly reduce the risks. Extension of funds being in the hands of private banks will ensure more efficient distribution of funds.
- Special funds from government to micro-lenders in form of interest loans. Rate on funds to be inversely correlated amount of lending to SMEs such that the more the micro-lender lends, the lower the rates they have to pay on the special funds. Micro-lenders can be extended to include deposit taking institutions who ordinarily charge high rates on loans.
- Establishment of county level venture funds that match private investors investments in SMEs in counties. This may restrict funding to second stage small businesses such as farming enterprises or those involved in value addition and should offer other support services.
- Special support for exporters that includes guarantees of close to 100% of export loans so that they are not too adversely affected by delays in payments.
While encouraging innovations vocally, reducing bureaucracies might actually inspire some people to come up with new concepts or develop on already existing ones, I don’t think that is sufficient to support desired levels of growth. It would be more ideal if we not only harnessed the talent pool of huge numbers of people but also provided support that is at par with competitor SMEs in advanced economies in order to achieve greater levels of growth.