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Ideas & Debate

Time to jump-start the informal sector

A Jua Kali artisan. Despite their importance, small businesses are neglected by the government. file PHOTO | NMG
A Jua Kali artisan. Despite their importance, small businesses are neglected by the government. file PHOTO | NMG 

The informal economy consists of micro and small enterprises (MSEs) which are the source of income for 90 per cent of employed Kenyans as well as an important economic engine of the country.

Indeed, late last year CBK Governor Patrick Njoroge credited small businesses for keeping the economy afloat terming them the backbone of the economy’s resilience in a difficult year.

Despite their importance, MSEs are neglected and economically under-leveraged.

The first step to directing MSEs towards optimal performance and strengthened growth is data collection.

There is currently no single repository with detailed information on the number, size, geographical footprint, sector composition of MSEs and their associations in the country.

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There should be a drive to register all MSEs and collect data through the process. What must be made clear during the registration process is that it will not be used to tax MSEs. If a sense develops that the aim of registration is to put businesses into the Kenya Revenue Authority (KRA) database for taxation purposes, MSEs will not show up for the exercise.

Registration ought to be incentivised such that it is linked to financial and non-financial support organised and deployed by the government.

Indeed, only registered MSEs should be allowed to qualify for government support. MSEs can be integrated into the KRA tax system at a later date. The second stage is to develop a fund focused on MSEs. This could fall under the Biashara Bank that is being developed by government.

The main point is that there should be a facility focused on MSEs. MSE sector organisations and associations should be represented on the board of the fund such that the needs and priorities of the sector inform how the funding is structured and deployed.

Through working with MSE sector leaders, the process of developing criteria for qualification of financing can begin such that funds are absorbed and effectively used. The government ought to learn from the challenges faced in the Uwezo, Women and Youth funds such that the same mistakes are not repeated.

A reality that ought to be considered is that there will likely be early stage MSEs that are not ready for debt financing and have to be graduated from grant financing into debt. The financial packages deployed thus can consist of grant and debt as well a blend of both.

The crucial element is that financing alone will not suffice. There ought to be deliberate coordination between financial and non-financial interventions such that support sophisticates as MSEs graduate into mainstream debt.

The bouquet of support linked to financing should include up-to-date technical skills training of the sector; modernising technology used by MSEs and training them on their use; and physical infrastructure upgrades that will improve the physical locations in which MSEs operate including ensuring access to water and sanitation facilities as well as electricity.

Finally, MSE owners should be trained in basic business management to help them better plan and manage growth and possible expansion.

The training should be partnered with business mentorship.

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