Columnists

We must give our SMEs new lease of life

We all saw President Uhuru Kenyatta fuming at his ministers during the Small and Medium Enterprises (SME) Presidential Roundtable at Strathmore Business School in Nairobi on Tuesday, apologising for how his government had failed to give enough support to the sector.

In a rare display of public rage, the President tossed away his prepared speech and lamented that the government had persisted in ignoring SMEs despite the fact that the sector created more than 70 per cent of jobs in the economy.

Here is what Mr Kenyatta must do if he is serious about making a real difference by redressing the neglect the SME sector continues to suffer. First, recognise that the institutions created by the government to support the SME sector have more or less become dysfunctional.

Secondly, Mr Kenyatta should check his shelves and pick a document that has all the solutions that the government needs to implement to resolve the problem of dysfunctional institutions in the SME sector.

I refer to the recommendations of the Presidential Task Force on Parastatal Reforms of November 2013, which came up with several solid suggestions including the creation of a single SME agency bringing together all government institutions in this space including the Youth Development Fund, Women Development Fund, Uwezo Fund and Micro and Small Enterprises Authority and the Kenya Industrial Estates.

Allow me to go back to history and trace how this space has evolved over the years to see how the framework suggested by the task force made a great deal of sense.

Once upon a time, we had a graduated financial model for the SME sector.

The first place you went when you wanted to create an SME was the District Loan Board, which advanced small business loan of up to Sh3 million.

If your business grew to a level where you needed more money, the next stage was to go to the Kenya Industrial Estates (KIE) where support for small businesses included provision of sheds.

If your needs exceeded KIE and you had now graduated into a mature business that required loans of up to Sh50 million- you went to the Industrial Development Bank(IDB).

Beyond IDB, you were now considered qualified for a mix of financing involving a mix of larger and long tenor loans and equity financing, hence you headed to the Industrial Commercial Development Corporation(ICDC).

What is my point? That considering that this graduated SME funding model has clearly become dysfunctional, we clearly need a new and working framework for this key sector of our economy.

The task force looked at international best practice and came up with very interesting ideas.

Indeed, merger of the existing SME agencies was only one part of the recommendations it came up with.

The key point it made was that reforming the sector and coming up with a new support system required several interventions, starting from support and facilitation of SME registration.

SMEs need to be supported on how to develop linkages with markets and how to acquire labour and raw materials at competitive prices.

They require support in acquiring linkages to large enterprises for sub-contracting work. They need to be supported supported and facilitated to plug into global value chains.

On credit, the task force made the point that offering credit without giving SMEs credit guarantees was an inefficient way of supporting these institutions.

What the sector needs is a working credit guarantee system where resources and finances committed by the government are leveraged and used to unlock even more money from the banking system.

In its recommendations, the task force came to the conclusion that the best way to create a system where all these support services SMEs require was to establish a single consolidated SME agency by the name, Biashara Bank.

The recommendations were put on the shelves for nearly four years. Last year, out of the blue, the government announced it was establishing Biashara Bank. The proposal exhibited muddled thinking because it proposed to bring even commercial banks into Biashara Bank. It has not worked.