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December 10, 2018

PHYLLIS WAKIAGA: Time is ripe for SMES to flourish, profit

Jua Kali artisans at work.
Jua Kali artisans at work.

Fifty per cent of all new jobs are estimated to come from medium and large companies, despite their constituting only 20 per cent of all firms in the manufacturing and service sectors. This is according to a World Bank report on High Growth Firms released this month. 

Despite the huge role SMEs play in driving growth, it is estimated their contribution to production is minimal, and many of them specialise in low-value addition. Essentially, many small businesses are part of a huge informal economy, which may seem to offer relief for their short-term challenges but in the long run, minimises their potential for growth, access to wider resources and markets — and ultimately limits their socio-economic impact. 

Kenya’s Micro, Small and Medium Enterprises contribute approximately 40 per cent of the GDP, with the majority falling in the informal sector.  While there are about 7.41 million SMEs in Kenya, only 1.56 million are licensed, whereas 5.85 million are not.

The high number of unlicensed SMEs indicates the time is ripe to create a conducive space for SMEs to be productive and profitable at local and regional levels.  President Uhuru Kenyatta’s recent directive for relevant ministries to devise SME-specific strategies is indeed timely and promises to unlock the potential for small businesses if implemented in the short and medium term.  There are several ways to go about this but some overarching things to focus on are;

First, there is an urgent need to formalise the informal segment of the SME sector through the promotion and simplification of business start-up operations. By doing so, many more people, particularly the youth, will gain an identity and open themselves up for more business opportunities.

Second, we need to develop and implement the SMEs subcontracting policy. This should aim at promoting the creation of strong linkages between large enterprises and SMEs, whilst governing the contractual agreements between the two. This will not only boost the growth of the SMEs, but also result in the growth of the value chains, catalysing a more vibrant economy.

Third, it is important that we foster SME innovation and patenting. The SME sector competitiveness and the exploitation of economies of scale are largely determined by the quality of products developed and the right pricing. While the presence of innovation, inventions and modifications signifies growth, very few ( 30 per cent) companies have come up with innovations within three years of their existence, according to a KAM study on Intellectual Property Rights. In this regard, it is critical that all 47 counties establish incubation centres for SMEs to resolve issues on product design, innovation and patenting.

Lastly, we must promote market access of SMEs at local and international levels. Unfair competition from cheap imports continues to hinder the growth of the sector. Our domestic market is shared by a small portion of formal markets that prefers high-quality products and at reasonable prices, yet it is too small to bring down the cost of production through economies of scale. Unfortunately, the low level of product development and innovation has allowed the importation of items that can be locally produced. Additionally, clear guidelines targeting SMEs for the smooth operation of the Buy Kenya Build Kenya Strategy are key. The government, the largest consumer of goods and services, would be of great importance in purchasing SMEs’ products.

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