Kenya’s small and medium-sized companies are riding the regional integration wave to increase sales in neighbouring countries, giving a fresh impetus to the rate at which the key middle segment of the economy is expanding, a new survey indicates.
Sale of goods and services in neighbouring Uganda and Tanzania was the top most driver of revenue growth in 76 per cent of Kenya’s Top 100 small and medium-sized firms (SMEs), positioning East Africa’s integration effort at the centre of the country’s economy, according to the survey by consumer market research firm, Synovate.
“These companies have shown a strong desire to expand and not put their eggs in one basket,” said Mr Phillip Muema, a partner at audit firm KPMG and the SME survey project manager.
The integration of East Africa’s five economies has deepened in the past five years with the coming into force of the Common External Tariff (CET) that reduced to zero the tariff barriers to trade among member states – save for Kenya that, because of its advancement, was left with a five per cent tariff charge for Uganda and Tanzania-bound goods.
The establishment of a common market that allows the free movement of goods, capital and labour across the region at the beginning of the year is expected to deepen Kenyan SMEs foray into neighbouring economies and add impetus to their growth in the medium term.
That expectation is supported by the fact that 93 per cent of Kenya’s Top 100 SMEs expect regional integration to have a positive impact on their business and that market expansion remains the biggest driver of their growth.
The promise of Kenya’s SMEs retaining their position as the main drivers of growth is also hinged on the fact that their confidence in the economy has risen steadily since the beginning of the year to peak at 75.21 points – higher than the average 68 points for corporate Kenya.
A high level of confidence is usually a positive indicator of future growth because the more optimistic business leaders are, the more they are likely to seek credit to expand their enterprises, employ more people, enter new markets or introduce new products.
The Top 100 SMEs survey – the brainchild of audit firm KPMG and Business Daily, ranks Kenya’s businesses with a turnover of between Sh70 million and Sh1 billion based on profitability, liquidity, return on equity and level of indebtedness among other performance indicators.
The survey, on its third edition this year, found that revenue growth was highest in the past 12 months for small businesses in construction at 61 per cent, services (46 per cent) and information technology (44 per cent) — segments of the economy reflecting the intensity of activity in the sectors — but was lowest in hospitality (22 per cent) and healthcare (20 per cent).
Shareholder value as measured by the average rate of return was however highest in the transport sector at 124 per cent, energy (75 per cent) and construction (66 per cent).
On the critical financing front, the survey found that Kenya’s entrepreneurs still rely heavily on personal savings as a source of seed capital and on bank loans for expansion – with control of the business as the main determinant of the sourcing.
Out of the 247 participants 78 per cent said they prefer to use personal savings to start the business up from 73 per cent last year, while the number of firms which would seek bank loans to finance growth stood at 72 per cent compared to 14 per cent, who said they would turn to private equity for money to expand.
Only three per cent prefer tapping the capital markets through an initial public offering (IPO), a fact analysts attribute to rigorous listing requirements and fear of losing control once new shareholders come on board.
“The feeling among the farmers is that if the company goes to the stock market, they will be losing control to “outsiders”,” said Mr Duncan Muya, the general manager at Mukurweini Wakulima Dairy Limited, a Top 100 SME.
“This therefore leaves bank loans as the most viable option” he said.
Public listing or partnerships with private equity firms have become important sources of fresh capital needed to fund growth plans for small businesses but are feared by entrepreneurs because the money comes with the entry of the financiers into the management ranks.
Some entrepreneurs however feel that rigorous requirements are the highest barriers to going public for most small firms.
“An IPO would be the best option but the requirements are too stringent and costly,” said Mr Parbat Dhanji, the chairman of Canon Alluminium.
Peter Mwangi, the Nairobi Stock Exchange chief executive, who has spent the past couple of years laying the ground for the listing of SMEs, says the bourse is working with the Capital Markets Authority to set up a separate counter with less stringent regulations for the small business, adding that the banks have greatly benefitted from the vibrant sector by designing specific products for their needs.
“Individual entrepreneurs have aspirations. We want to help them in their quest to becoming large companies by setting up a special counter for them that should be up and running in the next 12 months,” said Mr Mwangi.
This year’s survey found that only 24 per cent of the participating SMEs are considering listing at the bourse.
A company seeking to list on the main investment segment of the Nairobi Stock Exchange needs to have a minimum of Sh100 million in net assets prior to listing, a three-year profit growth record and a turnover of more than Sh1 billion.
The NSE’s new counter will be targeting about 100 firms with revenues of more than Sh1 billion ($ 12.4 million) annually to issue both equity and debt by 2015.
“By listing, the companies are able to grow to the next level and the founders can have the opportunity to unlock their shareholder value,” said Mr Linus Gitahi, the chief executive of the Nation Media Group.
Kenyan SMEs are concentrated, by size as measured by annual turnovers, at between Sh100 million and Sh300 million, according to the survey.
Firms in this range accounted for 46 per cent of all the 247 firms that took part in the competition.
The growth of Kenyan SMEs was in the past 12 months driven by four main factors including expansion to neighbouring economies, aggressive marketing, product improvements, and innovation/diversification.
Ten firms of the participating firms grew to realise annual turnovers of between Sh900 million and Sh1 billion.
Any Top 100 SME firm whose revenue surpasses the Sh1 billion mark graduates out of the club to join the corporate league.
Mellech Engineering, the winner of last year’s competition is, for instance, expected to make that move this evening after its turnover crossed the Sh1 billion mark early this year.
This year’s winners will be announced tonight at a gala dinner at Nairobi’s Carnivore grounds.
The services sector has made a strong showing in the competition, accounting for 25 per cent of the top 20 firms.
The SMEs reported major business improvements, citing less working capital challenges and remaining optimistic about hiring more staff in the near term.
To enter the annual Top 100 competition, firms need to have an annual turnover of Sh70 million to Sh1 billion and have audited accounts for the past three years.
The competition excludes firms listed at the NSE and banks and insurance companies.