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November 18, 2018

Budget proposals for SMEs timely

Treasury CS Henry Rotich talking to the press after presenting the budget at the National Assembly on Thursday 11-06-15. Photo/Monicah Mwangi
Treasury CS Henry Rotich talking to the press after presenting the budget at the National Assembly on Thursday 11-06-15. Photo/Monicah Mwangi

The recently released national budget for the fiscal year 2015/16 contains timely proposals for small and micro enterprises. Often comprising the informal sector and going by the name Jua Kali and more recently hustlers, SME are a growing source of employment and livelihood in the country. These are enterprises which produce and distribute basic goods and services often in unregulated markets that lie outside the regulatory framework. 

Although their individual contribution to the exchequer by way of taxation is minimal, their collective contribution to the economy is significant. It is estimated that over 60 per cent of the labour force in non-agricultural employment is involved in SMEs. Without this sector, there would be no alternative livelihood for the almost 8.5 million people involved, especially at a time that formal employment is on the decline. 

Besides, as acknowledged in the budget statement, every big company today started small, making small businesses a natural part of any economy, especially a developing economy. The main challenge is how to transition the SMEs to self sustaining middle level enterprises that can have the opportunity to expand further into bigger companies. Without appreciation for their role, SMEs daily contend with lack of a facilitating policy framework as well as unfavourable laws and regulations. Challenges of market access and poor infrastructure for instance have lend many hawkers to the streets to sell their wares in major towns, increasing human congestion and sparking confrontation with the councils.  Access to organised markets in save neighbourhoods, with affordable levies, would be a better and viable alternative for both the SMEs and the target buyers. 

Other areas of challenge include inadequate knowledge and skills as well as lack of credit with most of the SMEs considered by banks to be high risk investments. The entry of microfinance institutions into the economy was initially targeted at this sector, providing basic training on customer care, marketing and management of finances. Operating more on the social than economic space, with the focus being provision of credit and training to mainly a clientele that was un-bankable, the early players such as Equity Bank, Family, Faulu Kenya and K-rep made a significant difference.

The measures outlined in the budget statement are a timely intervention and will go beyond enhancing women and youth empowerment to becoming drivers of the economy.

One, supporting the SMEs to acquire or lease small industrial plants will ensure quality products that can substitute imports. Quality conscience enterprises and even government owned institutions continue for instance to import furniture because they find the locally produced items to be of low quality. Even when the local furniture is solid hardwood, the finishing is often poorly done and many people opt for imported products made from low quality material but with better finishing. Basic industrial tools and training on quality standards would make the local furniture the preferred alternative.   This will create further employment and also save the country the foreign currency that is used in importation. 

Secondly, developing a framework that can nurture and commercialise inventions, innovations and end-products at the national and county levels will ensure market penetration for SMEs. Such a framework when implemented within incubation centres can facilitate SMEs to engage with end buyers, ensuring inventions and innovations are commercialised. SMEs often need to be nurtured and championed to meet the needs of a market that is fast moving and highly demanding. 

Thirdly, boosting science, technology and innovation by increasing investment in research and development will enable the SMEs to respond to the changing needs of the market. Globally, STEM - science, technology, engineering and mathematics - is a subject of focus, recognising the importance of the four disciplines in an interdisciplinary and applied approach as the backbone of innovation. 

In fact, STEM is considered so critical to development that in 2009, the Obama Administration announced the “Educate to Innovate” campaign in the US to motivate and inspire students to excel in STEM subjects. Resources will require to be deployed to ensure the school curriculum adequately addresses the acquisition of STEM skills and the laptop project is one step forward. Promoting research in institutions of higher learning that is targeted at solving the problems for SMEs would be another step forward. 

Fourthly, the increased allocation to Uwezo Fund and Youth and Women Enterprise Fund will ensure access to affordable credit to start, grow and build businesses. SMEs generally rely on friends and family for start up capital, a source that is both limited and fraught with challenges. Availability of soft risk capital provided by these government schemes is one way of addressing this issue. Also notable in the budget is the review of retirement benefits investment guidelines to allow schemes to invest up to 10 per cent of their assets in private equity funds and venture capital funds. While government-lend schemes have a lower risk threshold to accommodate more enterprises, they can also suffer from negative politics that makes them less effective and threatens sustainability. This makes the promotion of private equity and venture capital a more sustainable solution going forward. 

Finally and most importantly, the entrenchment of Buy-Kenya-Build-Kenya policy in public procurement and the legislation to require at least 40 per cent local content in all public projects is critical for the local economy. The culture of importation as a status symbol is counterproductive to our own development as a country. In fact, the level of importation would be a good proxy for the level of unemployment. You want to know the level of unemployment? No need for a census, find out how much of our consumption is imported and that is a good approximation of the level of unemployment. From imported toothpicks to door mats, even in government corridors. We need to take pride in locally manufactured goods in order to address the employment crisis.

 In a recent conference on the creative economy, economist, Dr David Ndii challenged the participants to consider the impact of acquiring at least three locally made garments for every Kenyan in a year would have on the economy. The cotton and garment industry would be revived, no doubt and the resultant employment created would by more than that is currently created by the Kenya Association of Manufacturers.  And in this aspect, the First Lady has lead by example. Good food for thought.

 

Karen Kandie is a financial & risk consultant with First Trident Capital and a PhD candidate in finance at Catholic University of Eastern Africa.  [email protected]

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