What ails our SMEs and how to remove barriers to take-off

What you need to know:

  • SMEs. Why don’t we in Kenya have many graduating into multinationals, either setting up outside the borders or becoming regular exporters of products or services?
  • The reasons given, include the high cost of bank loans, infrastructure, energy and all the usual arguments.
  • If an SME was to borrow at 20 per cent, make goods or services, which are paid for after even 30 days, the situation would be way more bearable and many would grow rapidly.

In Kenya, and, indeed, the developing world, business conversations at policy level are never complete without talking about small and medium enterprises (SMEs).

Actually, after independence, the government started the Kenya Industrial Estates (KIE), which were specifically aimed at creating and nurturing homegrown SMEs.

The Industrial and Commercial Development Corporation was also set up with a similar mandate.

There was, and still is recognition that for us to have, in future, homegrown multinationals, we need to help nurture this sector.

It’s a subject I am particularly passionate about and nine years ago, I invited KPMG to partner with us at Nation Media Group to start the Top 100 SMEs competition.

It’s been a roaring success and is now replicated in four countries.

In Turkey, not only are SMEs given space like in the KIE model, but the government goes further and affords them cheap finance and most importantly, helps market them globally.

Most of the brochures we see of some of their light industries are government-supported.

No wonder now Turkey is very competitive in light industries like modern farming implements, cooling systems, solar systems and also in making parts that are used by big industries.

I visited some of those SMEs recently and, frankly, they are no more than sheds, measuring 30 by 50 metres.

However, a look at their brochures and the turnover they post simply blows you away.

Many would easily turnover $20 million and above. Reason? They serve the domestic market and are encouraged and supported to export, particularly to the developing world.

SMEs. Why don’t we in Kenya have many graduating into multinationals, either setting up outside the borders or becoming regular exporters of products or services?

The reasons given, include the high cost of bank loans, infrastructure, energy and all the usual arguments.

UNBEARABLE COST OF CREDIT FOR SMEs

However, one factor is hardly ever talked about and which is a really significant. This is the cost of credit or receivables at the retail level.

For an SME to grow and become export-oriented, it must rise from the domestic market to export. This is where many companies find most difficult.

If you have an SME selling to supermarkets in Kenya, the average credit period now averages between 120 and 150 days.

If a small company is selling about Sh20 million per month to all the supermarkets and taking the current cost of money for SMEs to be 20 per cent per annum, then the 120 days your money is stuck in the supermarket would have an opportunity cost of Sh1.33 million.

If the business had borrowed that money, it becomes double jeopardy because one would still be paying that money as interest to the bank

The trouble, though, is that the same supermarkets would be selling for cash as happens everywhere in the world.

So, in fact,  the supermarket would be holding the cash and investing it for at least three of the four months as stocks are normally replenished monthly.

How many SMEs can afford to give such ‘credit’ to supermarkets? What ends up happening is that many small organisations which have a lot of potential avoid selling to the supermarkets altogether or if they do, live from hand to mouth with very little opportunity for growth.

In the meantime, many supermarkets use the same cash to open new branches and buy many goods from abroad that could easily be made locally.

The government is even worse at payments. In spite of its very welcome policy of supporting local businesses, payments to the enterprises sometimes can exceed 180 days.

Very few small businesses can afford this kind of credit and still continue producing products. At the end of the day, we become our own worst enemies.

If an SME was to borrow at 20 per cent, make goods or services, which are paid for after even 30 days, the situation would be way more bearable and many would grow rapidly.

The current debate is around capping the interest rate for banks in the interest of SMEs, but I feel that a kind of regulation on credit for SMEs would have much more immediate and far-reaching effects on the health and growth of this vital sector for the future of this country.

The author is chairman of Oxygene Marketing Communications Ltd and a former CEO of Nation Media Group