Parallels between small-scale businesses in US and Kenya

I recently came back from travelling in the US after a long time of not having been there. What struck me was the robust presence of small business.

Often sitting in Africa, you only hear about massive American corporations and their achievements.

However, while I was there it struck me that there are similarities between small business in the US and in Kenya.

First, definitions are required so that the terms being used are clear. In the US, a small business is one that, depending on industry, has between 250 and 1,500 employees. Some say a ballpark definition for small business is one with 500 employees or less.

However, Kristie Arslan, who works with the Small Business and Entrepreneurship Council in the US, makes the point that 95 per cent of small businesses have fewer than 10 employees.

In Kenya there are three categories that can be defined as small business namely, micro (less than 10 employees), small (10 to 49 employees and medium (50 and 99 employees). These constitute the micro, small and medium enterprise (MSME) segment of the economy.

One key point of similarity is that small business in both countries lead in employing people.

In the US, small businesses employ 53 per cent of the workforce while in Kenya 83 per cent of Kenyans worked in the informal sector — which constitutes mainly of MSMEs — in 2017. Further, in both the US and Kenya, small businesses generate the most jobs.

In the US, Arslan argues that small businesses account for 64 per cent of net new jobs created.

In Kenya, the informal sector was responsible for creating 89 per cent of new jobs in 2016.

The final point of similarity between small business in the US and Kenya is financial constraints. Whether it was the global financial crisis or the interest rate cap, lenders seem to have a similar attitude towards small business, particularly when they are operating in a difficult environment.

In the US, after the global financial crisis, small business access to credit was severely constrained.

Financier Fundera points out small business loans fell more sharply during the crisis relative to the peak — both in absolute and proportional terms—than large business loans, and access has remained relatively constrained during the recovery.

This is exactly what has happened in Kenya when the interest rate cap was introduced.

A CBK report on the cap stated the number of loan accounts declined significantly between October 2016 and June 2017, and there was lower access to credit by small borrowers.

This trend continues and is not without consequence.

It is estimated that reduced lending to the MSMEs due to the cap, contributed to a 1.4 per cent decline in the growth of gross domestic product in 2017.

Clearly small business in both countries are marginalised due to attitudes of lenders, despite the fact that they are the segment of the economy that employ the most people and create the most of the jobs.

However, despite the challenges small businesses aren’t going anywhere. It seems the determination of the entrepreneurial spirit in both countries is alive and well.