Manufacturers need to support the SME agenda

The amount of credit lent to Small and Medium-sized enterprises (SMES) by Kenyan financial institutions rose by seven percent in January, according to media reports citing the National Treasury.

This trend is expected to continue now that interest rate caps have been repealed, paving the way for banks to resume lending to SMEs, which had largely been overlooked in the rate-cap era due to the inability for banks to price for risks in the segment.

SMEs in Kenya typically face working capital constraints due to the constant pressure to expand and unlock economies of scale in an environment where revenue growth isn’t always sufficient to support long-term business growth. Improved access to credit is therefore a shot in the arm for many small businesses.

They will be able to expand operations in the coming months, creating jobs and leading to overall wage growth in an economy that has been hit by lay-offs and tepid consumer spending. This is good for the manufacturing sector, which depends on stable employment levels and strong wage growth to support demand for locally produced goods.

It is instructive to note that SMEs account for as much as 98 percent of all businesses in Kenya, according to a 2017 study by the Central Bank of Kenya (CBK).

They also employ as much as 80 percent of the workforce. Growth in the SME sector therefore leads to growth in consumer spending, which is one of the key drivers of growth in the manufacturing sector.

Kenya’s manufacturing output currently accounts for around eight percent of GDP. For it to expand to 15 percent of GDP by 2022, as envisaged under President Uhuru Kenyatta’s Big 4 Agenda, reforms need to be broad-based.

They should not narrowly focus on improving the operating environment for manufacturers – such as through affordable energy and elimination of multiple levies and laws in counties—but should also focus on growing and sustaining domestic demand. This is why the SME agenda is critical to manufacturers. Without successful SMEs, we will have no consumers to sell to.

The move to increase lending to the SME sector, which has the full support of the CBK, is therefore timely. For its full benefits to be unlocked, it needs to be accompanied by parallel efforts to improve the capacity of SMEs, many of which fail due to addressable issues such as poor record keeping, governance gaps and lack of access to markets.

There is obviously a lot that the government can do in this regard, including partnering with training institutions to provide SMEs with access to knowledge, tools and networks. There is also a lot that we as manufacturers can do.

As manufacturers, SMEs are a key part of our supply chains. We rely on them for inputs and services and also rely on them for distribution, especially in informal and rural markets where last mile distribution can be a challenge.

We therefore need to create mechanisms for knowledge, skills and technology transfer to ensure that an SME that works with a big manufacturer benefits from the relationship.

Manufacturers that produce consumer packaged goods have a particularly heavy responsibility as they rely overwhelmingly on informal retail networks to reach the final consumer. Today, less than 30 per cent of Kenya’s retail market is formal, according to a report by KMPG. The remaining 70 per cent is informal and largely consists of SMEs. The stability of SMEs in the informal retail market therefore has a direct impact on the stability of the manufacturers that rely on them to reach consumers.

The government’s renewed push to uplift SMEs is therefore a move in the right direction. It presents multiple benefits to players in manufacturing, who are counting on improved economic fortunes this year to restore growth. As we explore ways of growing the manufacturing sector, let us not forget the SME agenda. There is no faster and more sustainable way to put money in Kenyans’ pockets than to support the growth and success of SMEs.

The writer is commercial director, Pwani Oil.