The contribution of Small and Medium Enterprises (SMEs) to the Kenyan economy cannot be underestimated because apart from generating revenue for the country, they also create jobs for the owners and a few other people.
Increasing number of innovative tech startups have contributed to Kenya’s global reputation as “Silicon Savannah”, attracting a growing number of African and international investors, a report entitled ‘Closing the Gap Kenya’, by a research, consulting and investment firm said.
The report authored by Intellecap further indicated that the boom has been due to the growth and expansion of information technologies (ICT) sector in the country.
“According to Kenya ICT Authority, the sector is set to contribute up to 8% to the GDP in 2017,” part of the report read.
But even as the nation enjoys the growth of SMEs, there are some glaring gaps in the ecosystem which according to Intellecap need to be strategically handled to sustain the SMEs.
Although internet penetration in Kenya remains high, electricity and transport network remain major challenges to many upcoming SMEs as well as developed companies and Kenyans in general.
Primary research reveals that the energy infrastructure is especially poor, with parts of the country having no access to electricity while other regions suffer from unstable supply.
The government is trying to tarmac roads in major urban areas, but the situation in rural areas remain poor. The ports were also reported as part of the transport challenges for the SMEs.
“Kenyan firms lose 2.6% of annual sales to indirect costs such as spoilage during transportation, which is highest among low-income countries,” the report argued.
Access to Capital
Finance remains a major challenge for entrepreneurs. Although lending to SMEs has increased in recent years, the study shows that credit gap per enterprise is the highest in the region.
The high interest rates (18%), high cost of recovery for bad debt (40% of loan amount) and poor contract enforcement, were mentioned as the key reasons why entrepreneurs are not able to access funds from financial institutions.
Lack of or inadequate Skills
While poor access to finance by the SMEs is contributed by high interest rates and other local bureaucratic demands, minimal or lack of knowledge about the investor market affects how businesses are operated.
On the demand side, “Low awareness about products (less than 20% uptake of letter of credit and factoring), inability to offer collateral and lack of investment ready models,” were reported as some of the skills that young business owner lack.
Young entrepreneurs should formalize their businesses as well as maintain good business record keeping systems, and the required legal papers to enable them expand through investors or other partnerships.
Support and Human Capital
Over the last 5 years, the Kenyan business support ecosystem has evolved introducing business incubators and accelerator programs into the country.
“Our mapping has found 24 incubator-like organizations,” the study showed. Unfortunately, most of these incubators and accelerators are majorly in Nairobi, leaving a few outside the capital. Moreover, many of these accelerators host SMEs in the ICT sector.
It is not until a few years back, when universities and colleges started teaching entrepreneurship. As such, there is a negligible number of people with skills concerning this field.
“Kenya ranks 23rd out of 29 in the Global Entrepreneurship Development Index when it comes to tertiary education.”
“Entrepreneurship education is in its infancy in Kenya; however, an increasing number of universities and colleges have included entrepreneurship in the curriculum.” This is hoped to change the means in which SMEs are operated in future.
A majority of the survey enterprises (60%) were from Nairobi, which has a fairly good representation of enterprises across all size and stage segments. Nakuru had the largest number of small (5 to 19 employees) among the three counties, while Mombasa had the most number of mature (set up between 1970 and 1999) enterprises.
The survey sample indicates a dominant presence of low-growth enterprises, particularly in the early and mature stages, where ideally enterprises seek access to capital for growth.
Image Credit: Georgina Goodwin/World Bank