Kenya’s SME Sector Being Choked to Death By Tough Political and Economic Environment

Statistics show that 400,000 SMEs die annually in Kenya with almost 90 percent of them not being able to see their second birthday. These statistics mean that more than 30,000 small medium enterprises are dying monthly with more than 1000 of them facing their demise daily.

The small medium enterprise sector in Kenya has been through a tough economic turmoil and if nothing is done soon, the sector will be choked to death, putting the country’s economy on the brink of collapsing. News that close to 2 million MSMEs were closed down in five years to 2016 is worrying and with the prevailing political situation in the country, the sector is already hard hit.

Kenya’s gross domestic product (GDP) for 2017 was projected at 6.4 percent. The projection, though based on numerous assumptions, it based majorly on the performance of micro and small medium enterprises. In Kenya, more than 80 percent of businesses are SME and in 2014, 80 percent of the 800,000 jobs that were created that year were from the informal sector which is dominated by SMEs. With an employment rate standing at 39.1 percent, the highest in the East African region, SMEs play a key role in both the economic development and job creation.

Many Kenyans, relevant authorities involved seem not to be aware of the concept of SME.  The Micro and Small Enterprise Act of 2012, micro enterprises in Kenya has to have a maximum annual turnover of 500,000 shillings and have less than 10 people as employees. Small enterprises, on the other hand, have between 500,000 shillings and 5 million shillings of annual turnover and employ between 10 and 49 people. Under the act, the medium enterprises are not covered under this act but have been reported as having a turnover of between 5 million and 800 million shillings and employing 50 to 99 employees.

The informal sector in Kenya, with 90 percent of it being SME, constitute 97 percent of all the businesses in Kenya. All the other remaining business sectors account for less than 3 percent. In a report released by World Bank on the ease of doing business in Kenya for the year 2017, the country ranked 92 in overall with starting a business, dealing with construction permits and getting electricity for business being ranked at 116, 152 and 106 respectively as shown in the image below:

The SME sector in Kenya is facing numerous challenges. In the Kenya Economic Outlook 2017 report released by Deloitte, corruption is a major impediment to doing business in Kenya with allegations of misappropriation of public funds on the rise. The 2016 Corruption Perception Index released by Transparency International (TI) ranked Kenya among the most corrupt countries at 145 out of 176 countries. The EIU expects a boost in accountability especially at the county Government level following implementation of stronger checks and balances.

Lack of credit is a major challenge for most SMEs in Kenya. This has been a key constraint in the operations of most SMEs in the country where underdeveloped capital market forces small medium enterprises to rely on self-financing or borrowing from friends and relatives since most financial institutions are reluctant to give them a hand. Other challenges tied to credit include the high cost of credit, high bank charges, and fees.

Other challenges include inadequate skills, insecurity especially during political years like 2017. Kenya has always been a politically charged country with businesses, most of the SMEs being on the receiving end. Politics have had a devastating impact on the SME sector in Kenya. For instance, when the Supreme Court of Kenya nullified the 2017 presidential elections, in less than 10 minutes, the stock market lost a whopping 50 billion shillings, plunging the whole stock market into a 9.71 percent hole with the shilling weakening by 0.44 percent. This was in less than 10 minutes. According to KEPSA, Kenya’s business sector has already lost more than 100 billion shillings from the period the Supreme Court nullified the presidential election.

What is more, during political demonstrations, businesses are always at the mercy of the demonstrators. ‘Angry’ and ‘hungry’ demonstrators often opt for businesses as a way of expressing themselves through looting and destruction. The SME sector is ailing. We console ourselves that more SMEs are upcoming every day but equally the same number is dying daily.