Personal Finance

Why Kenya needs a standalone SMEs law

A past National Assembly proceedings
A past National Assembly proceedings. FILE PHOTO | NMG 

If you are reading this article chances are that you work in an Small and Medium Enterprise (SME) which account for over 90percent of Kenyan businesses. They typically employ not more than 99 people. Since SMEs provide employment for tens of millions of Kenyans, it then stands to reason that they ought to be given more attention to ensure they are streamlined and organised.

There is no clear cut definition of SME in Kenya considering that there is no standalone law on SMEs. A lot of reliance is placed on secondary sources when it comes to defining SMEs. There is no universally accepted definition of what an SME is. It largely depends on the region. However, SMEs are defined according to number of employees, revenues and assets of the company.

In Kenya they are defined as businesses that have between one and 99 employees, which is where most businesses lie. The Public Finance Management Bill (2019) proposes a definition of a medium enterprise as an enterprise that has between 51-250 staff members and a turnover that doesn’t exceed Sh100 million.

The lack of a clear definition is the first challenge when it comes to SME legislation. For example if a one man consulting firm earns more than Sh500 million per annum does this exclude the consulting firm from the definition of SME? Take another example where an organisation has more than 100 staff members, but makes less than Sh5 million. Where would such an organisation fall? Under Kenyan law the fact that it has over 100 members means it does not qualify us an SME.

There have been several studies of challenges that SMEs in Kenya face. Some include lack of adequate managerial training in that, business owners do not have adequate skills to maintain and grow their enterprises to the next level.


There is also limited access to credit, largely because SMEs usually do not have enough collateral. As a result they find it hard accessing capital for growth. SMEs are a source of many innovations in Kenya especially the jua kali sector. However, the sector has very few capital sources. Most banks will not finance innovations. Larger corporations on the other hand are able to compete for credit as they have more collateral.

Another challenge that ought to be addressed is the lack of an adequate SME legislation. Currently there is a Micro and Small Enterprises Act, 2012 which governs regulation on micro enterprises. These are organisations which make less than Sh500,000 annually and employ less than 10 members. There have been several developments in the MSE sector including the proposed authority that is expected to have a credit fund that will give MSEs affordable loans at a lower price.

There’s a legislative gap in SMEs that earn between Sh500,000 to Sh100 million, yet this represents a fair percentage of all SMEs. The tax treatment between this and large non-SME corporations has almost been the same.

I therefore make a case for a standalone SME law in Kenya that will cater for all groups. There are a few African countries which have SME laws that can be emulated. The SME Act of Zimbabwe provides for the setting up of an SME Authority. The SME Act of Mauritius allows a special registration for SMEs as is the case with the SME Act in UK which provides special registration. The UK law has provisions on access to finance, provisions on procurement and different regulations for different sectors.