MSMEs

Parallels between small business in the USA and Kenya

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This article first appeared in my weekly column with the Business Daily on September 16, 2018

I recently came back from traveling in the USA after a long time of not having been there. What struck me was the robust presence of small business. Often sitting in Africa, you only here about massive US corporations, and their achievements. However, while I was there it struck me that there are similarities between small business in the USA and here in Kenya.

First, definitions are required so that the terms being used are clear. In the USA, a small business is one that, depending on industry, has a maximum of 250 employees or a maximum of 1,500 employees. Some say a ballpark definition for small business is one with 500 employees or less. However, Kristie Arslan who worked with the Small Business and Entrepreneurship Council in the USA, makes the point that 95 percent of small businesses have fewer than 10 employees. Here in Kenya there are three categories that can be defined as small business namely, micro (less than 10 employees), small (10 to 49 employees and medium (50 and 99 employees). These constitute the Micro, Small and Medium Enterprise (MSME) segment of the economy.

Image result for small business USA

(source: https://www.nerdwallet.com/blog/small-business/small-business-grants-for-women/)

One key point of similarity is that small business in both countries lead in employing people. In the USA, small businesses employ 53 percent of the workforce; in Kenya 83 percent of employed Kenyans sat in the informal sector (which constitutes mainly of MSMEs) in 2017. Further, in both the USA and Kenya, small businesses generate the most jobs. In the USA, Arslan argues that small businesses account for 64 percent of net new jobs created. In Kenya the informal sector, was responsible for creating 89 percent of new jobs in 2016.

The final point of similarity between small business in the USA and Kenya is financial constraints. Whether it was the global financial crisis or the interest rate cap, lenders seem to have a similar attitude to small business, particularly when they are operating in a difficult environment. In the USA, after the global financial crisis, small business access to credit was severely constrained. Fundera points out that small business loans fell more sharply during the crisis relative to the peak—both in absolute and proportional terms—than large business loans, and access has remained relatively constrained during the recovery.

Image result for small business Kenya

(source: https://informationcradle.com/kenya/directory/small-business-in-kenya/)

This is exactly what has happened in Kenya when the interest rate cap was introduced. The Central Bank of Kenya report on the cap stated that the number of loan accounts declined significantly between October 2016 and June 2017, and there was lower access to credit by small borrowers. This trend continues and is not without consequence. It is estimated that reduced lending to the MSMEs due to the cap, contributed to a 1.4 percent decline in the growth of GDP in 2017. Clearly small business in both countries are marginalized due to attitudes of lenders, despite the fact that they are the segment of the economy that employ the most people and create the most of the jobs.

However, despite the challenges small businesses face, they aren’t going anywhere. It seems the determination of the entrepreneurial spirit in both countries is alive and well.

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

 

 

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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

 

TV Panel: The Interest Rate Debate

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On the June 18, 2018 Fanaka TV held a debate in collaboration with the Kenya Bankers Association, The institute of Economic Affairs and Strathmore Business School. The debate engaged both sides of the capping divide with an intention of deeply analysing the impact of capping of interest rates and came up with possible solutions and way forward. I was among the panelists for the debate.

Fiscal consolidation opportunity to address private sector issues

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This article first appeared in my weekly column with the Business Daily on May 6, 2018

The government seems intent on implementing a course of fiscal consolidation that will put Kenya on a more sustainable fiscal path. While fiscal consolidation is welcome and should be supported, it raises new challenges with which the country has to grapple. The intent of government is to ramp down spending, reduce borrowing, bring down the fiscal deficit and raise revenues. The combination of these factors translates to the reality that government will not be able to finance its new agenda, particularly the Big Four, as robustly as perhaps was initially intended.

Image result for fiscal budget

(source: http://www.thebluediamondgallery.com/handwriting/f/fiscal-budget.html)

As a result, government has already began calls for the private sector to actively engage in the Big Four. The Budget Policy Statement has made it clear that Public Private Partnerships (PPPs) will be fast tracked in order to fully leverage private sector engagement. However, there are realities of which we ought to be aware as government makes the call to private sector to help realise and frankly, co-finance, the Big Four.

Firstly, over 90 percent of the Kenyan private sector consists of Micro, Small and Medium Enterprise (MSMEs). While the presence of the large companies is dominant and well publicised, the reality is that the engine of the economy is run by smaller businesses that sprawl across the formal and informal economy. MSMEs are thought to contribute at least 30 percent to GDP and employ over percent of employed Kenyans. However, MSMEs work in an environment, and have internal firm dynamics, that negatively inform their productivity and economic strength. The fact that they constitute over 90 percent of business in the country yet only contribute about 30 percent to GDP signals serious productivity problems.

Thus, while government intends to pull in the private sector to work on their agenda, they ought to be cognisant of the composition of private sector in the country. I am of the view that MSMEs can be engaged to deliver on government projects, but the nature of the engagement will likely be more involving than government initially envisioned.

Linked to the point above is the issue of the capacity and experience of indigenous firms. Given that foreign firms are angling for Big Four projects, the question of the competitiveness of domestic private sector becomes important. Will government deliberately reserve a portion of projects for indigenous private sector to ensure local participation? If not, does Kenya risk outsourcing the bulk of government projects to foreign companies, and what would be the implications?

Image result for business kenya

(source: http://kassweekly.co.ke/KW/?p=1021)

Linked to the point above is the issue of PPPs, where it has been widely noted that domestic firms do not have the financing, experience, and enablers that foreign firms do. For example, domestic firms get credit at 14 percent while this figure can be as low as 2 percent for foreign firms; this reduces the former’s competitiveness. Government seeks efficiency in the context of limited funds thus the question becomes how domestic private sector can secure contracts and competitively deliver on them in the context of international competition.

In truth, fiscal consolidation will shine a spotlight on the domestic private sector and the factors that inform their ability and competitiveness. Government and private sector ought to use this opportunity to address key issues decisively, such that the process strengthens the domestic private sector.

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

How Kenya can recover in 2018

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This article first appeared in my weekly column with the Business Daily on December 3, 2017

After what has been widely noted as a difficult year for Kenya, the conversation must now turn to how Kenya can recover. The first step to doing so is acknowledging the factors that held economic growth back and those that sustained and propelled growth.

The first sector that was hit was obviously agriculture, due to the drought which made many Kenyans food insecure, hit forex earnings from the export of agricultural commodities and of course led to aggressive inflation. The financial sector was negatively affected by the continued unfolding effects of the interest rate cap and linked to that, credit growth, particularly to SMEs shrunk considerably. Finally, a great deal of investment was held back over the course of the year. Indeed, a few weeks ago, the Kenya Private Sector Alliance stated that the business community had lost more than KES 700 billion in just four months of electioneering. This figure was arrived at by costing not only business lost due to disruptions linked to protest and general unrest, but deferred investment decisions as well.

Image result for agriculture Kenya

(source: https://agra.org/news/wp-content/uploads/2016/11/MWfarmer-maize-green-790×527.jpg)

It is important to unpack the impact of deferred investment because there are negative ripple effects linked to this, particularly in the African context. When investors choose to hold off on investing, several entities are hit. These include market research companies, product developers, manufacturers, advertising companies, suppliers, and distributors. The entire ecosystem around investors suffers as investors make the decision to postpone or defer investment. As a result, the multiplier effect of suspended investment has left many Kenyan feeling particularly financially strapped this year.

On the bright side, Micro, Small and Medium Enterprises (MSMEs), most of whom actually sit in the informal economy, proved to be hardy. The Central Bank of Kenya (CBK) stated that MSMEs showed ‘extraordinary resilience’ and helped cushion the economy. The factors behind this resilience has not been formally unpacked but studies on the informal economy reveal an nimbleness, flexibility and litheness that larger, more formal businesses may find difficult particularly within short time frames. Challenges aside, informal businesses have an ability to change their business models and adapt to a changing environment much faster than formal businesses with more rigid structures and processes.

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(source: http://www.goldmansachs.com/citizenship/10000women/meet-the-women-profiles/kenya-women/mary-kenya/slide-show/mary-slide1.jpg)

Going forward, it is important to take remedial action on what emerged as weak spots. This will begin by ensuring better coordination between national and county government on the management of agriculture in the country as well as serious consideration of the repeal or adaptation of the interest rate cap. In terms of positive aspects, MSMEs ought to be prioritised going forward and given the necessary support by government, financiers and business development agencies to scale formal MSMEs with promise, and support informal MSMEs on the journey of sustained profitability and formalisation.

Finally, both government and domestic private sector have to give candid and honest signals on the state of the political economy in Kenya. Investors need to be given a clear indication of when and where to invest such that the investment ecosystem is sustainably revived.

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