Investment in SMEs Hold Key to Africa’s Growth

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This article first appeared in my weekly column with the Business Daily on August 19, 2018

I am often asked this question, ‘What will it take for Africa to develop?’ And my answer is simple: Invest in Micro, Small and Medium Enterprise (MSMEs) whether formal or informal. Unknown to many, they account for an increasing share of growth in GDP and jobs. Yet the typical response is, ‘Oh but they’re so high risk, we can’t possibly invest in that segment.’ And this is the issue. MSMEs are the most marginalised in terms of access to funds and technical support, across the continent. Then everyone sits around wondering why economic growth in Africa doesn’t translate to equitable growth.

A trader arranges her products for sale on Customs Road in Mombasa last April.

(source:https://www.businessdailyafrica.com/analysis/columnists/Investment-in-SMEs-holds-the-key-to-Africa/4259356-4719644-sdm1w8z/index.html)

In the past year or so in Kenya, we’ve seen private sector being squeezed out of credit by government. The interest rate cap created impossible risk margins and actually inverted monetary policy. Normally, a reduction in interest rates should expand credit provision, yet in the context of an interest rate cap, this logic fails. Lower interest rates lower the risk ceiling of credit provision and actually contracts liquidity. And reverse is true too. So where are we? We’re in a situation where monetary policy does not follow traditional logic streams, and as a result, has led to the Kenyan government to push private sector out of credit streams due to the interest rate cap and their own aggressive and substitutive appetite for credit.

So the question becomes: Given these extenuating circumstances, how can we revive credit to the private sector? There are two answers to that question. The first is incentives. Government has to create an incentives structure that extends credit to MSMEs despite the interest rate cap. The cap has led to a notable decline in credit provision to private sector. To stem this trend government has to create unique packages that allow private sector to access credit in the context of personalised assessment. The biggest problem with risk assessment at the moment is that it’s often done by junior officers with limited experience and who face hard and unforgivable targets. This has to change. Credit assessment should be done by the more experienced individuals who can understand the nuances of running an MSME. We need a holistic upgrade in assessing risk that leads to intelligent incentives provision. Because, if MSMEs are not financed, the economy is not financed. Government and financiers must create an incentives structures that drives funds to the MSMEs who create employment and fuel the economy.

Image result for sme kenya

(source: http://www.theeastafrican.co.ke/business/Kenya-launches-trading-floor-for-small-businesses/2560-1672302-123mcjn/index.html)

The second answer is development expenditure by government. First, government MUST prioritise development over recurrent expenditure. And that’s not enough, government should create structures that enable indigenous and domicile private sector to absorb the bulk of development spending. A failure to do so will translate to Kenyan taxpayers paying for services and goods that benefit outsiders. Let government ensure that the bulk of development spending goes to indigenous companies, particularly MSMEs. Only then will Kenyans feel the POWER of government spending. And in doing so, government will force MSMEs to improve their performance and develop the capacity to meet high level targets.

In short without MSMEs accessing credit and being the target of government development spending, not much will change. There must be a fortitude of spirit and determination of mind that builds the domestic private sector.

 Anzetse Were is a development economist; anzetsew@gmail.com

 

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