By - Kiraithe Daniel Mutemi
Small and Medium Enterprises (SMEs) are crucial business segments benefiting people and the nation at large. They are a significant source of employment and wealth to individuals. Similarly, they serve specific markets and mobilize resources that form an essential economic backbone.
SME’s are playing a crucial role in the economy, but they face various challenges and opportunities that affect their performance.
Micro and small enterprises dominate the SMEs industry in the majority of African countries. SMEs makes over 90 per cent of total African business operations, and their contribution to employment is estimated to be 50 per cent. Developing economies rely heavily on the input of these businesses for economic and social challenges solutions. Their operations cut across all sectors from financial services, manufacturing, agriculture and informal industry that employ the majority of developing economies’ workforce.
Kenyan SME Market
In Kenya, SME contribution is even more significant than that of average Africa. Data shows that Kenyan businesses are made up of 98 per cent SMEs. About 4 percent of the GDP is gained from the contribution of the SME sector. Additionally, this sector employs about 80 per cent of the Kenyan workforce. This significant contribution, therefore, needs to be guarded and improved to maintain a better economy as the business environment continues to change.
However, the rate of SME’s failure in developing economies such as Kenya is much higher than that of developed economies. With the majority of them not reaching their fifth year of operation without closing, SME entrepreneurs face hurdles that cripple their long-term dreams. It is, however, essential to note a unique business environment may be contributing significantly to the success or failure of these businesses. The economy that relies considerably upon such companies, therefore, may suffer immensely if a remedy is not found to help them thrive through sustainable performance.
In 2017, Kenya national bureau of statistics (KNBS) released a report showing close to 400, 000 SMEs (micro, small and medium enterprises) do not survive the first 24 months. If such a large number of organizations fail while employing an average of 10 people, it means 4 million jobs are lost! This scenario could partly explain why many jobs are created, yet ordinary job seekers do not feel the effect. Therefore, economists should not be concerned only with the jobs created but the net number of jobs retained. High number of unemployed youths, who are mainly graduates, continues to cause mayhem to the Kenyan society and the global community at large.
Whenever a business fails to perform, it may result in a reduced number of employees, reduced earning and even worse, if it closes down, wealth is lost. The government loses substantial tax revenue as everyone in the value chain gets adversely affected. Technology is growing faster than before presenting a different infrastructure focus to growing firms.
Finance access has been one of the most significant pain points to entrepreneurs. Attracting financiers in a new business which could be just an idea may be difficult, but trying many options can bear fruits. Majority of SMEs are supported by family and friends who most of the times pull out their support before the venture becomes sustainable, leaving the business with less to operating capital and challenging even to meet financial obligations.
Knowledge and skills required to steer an organization is also a common problem facing Kenya SMEs, according to the Deloitte Kenya Economic Outlook (2016) report. Additionally, management styles and types have a substantial influence in determining the chances of success of these organizations. Entrepreneurial managers who are open to new ideas, risk-takers and team players are likely to succeed in leading an organization. Compensation for the appropriate managers to lead these companies is still hampered by the inadequate finance challenge they face.
Developing countries are in pressing need of improving their roads rails and market infrastructure to support entrepreneurship. Most of the roads in rural areas remain impassable, especially during the rainy seasons discouraging the investors. Agriculture, which is the backbone of the Kenyan economy, lags behind due such infrastructural challenges. Transport, value addition and even marketing farmers their produce is an uphill task with the current infrastructure network.
Inadequate Government Incentives
The political and economic goodwill can make or break a country in terms of attraction of investment. Kenyan investors are decrying that the government is taxing them heavily and disrupting their businesses with tax evasion claims. A local brewer, Keroche Breweries CEO and chairman were arraigned in court on August 2019 accused of evading ksh 14.4 billion (USD 144 million) a claim they denied. Several other investors have condemned how the taxman is handling them when the Kenya
Revenue Authority (KRA) locks horns with them
Other concerns such as Environmental concerns, poor research, unethical behaviours such as corruption and nepotism also pull back the SME industry in Kenya. Technology changes are quickly becoming an opportunity from a challenge that it used to be as many organizations are keen on integrating technology in their operations early.
A unique training course should be unveiled to help entrepreneurs in SMEs space to gain much-needed knowledge and skills at a subsidized cost. While internal factors such as management types and strengths are critical for their success, external factors are equally holding their future now. Government policies that not only create incentives and motivation can go a long way in ensuring they survive even in hard economic times.
If any country has to be an economic giant, it must embrace a strong manufacturing industry, which helps in reducing imported products as they can be manufactured locally. SMEs are playing a vital role in this sector and others in the economy that requires not only financial support but also conducive business operating environment. To tackle unemployment, reliance on cheap imported products, food insecurity and other economic challenges, SMEs must thrive.
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