Stop paying lip service to MSMEs, better fund them to stimulate the economy

Small and medium-sized enterprises (SMEs) stand along Kigali Road in Nairobi. [Wilberforce Okwiri, Standard]

Kenya may not industrialize unless we make drastic changes. Not only with regard to politics – which is wrong because it promotes the import of machines and tools. We also need to reconcile political pronouncements with action. Here’s why.

This year’s Africa Industrialization Week celebrations took place in Nanyuki, Laikipia. The wording – celebration – is a joint effort by the State Department of Industrialization and the Laikipia District Government that is both hopeful and misleading. African industry, particularly micro and micro enterprises, is struggling. The question arises: Can or will Kenya industrialize?

Industrialization requires conscious politics and, above all, conscious action. It won’t happen by accident. Not even through simple political statements. You may remember that we had a sessional paper on industrialization through 2020. Today we have Vision 2030, which aims to make us a middle-income country with industrialization.

On the micro, small and medium-sized enterprise (MSME) side, we are on our 6th Session Paper, starting with Session Paper No. 10 from 1965. It was loved and vilified in equal measure, and emphasized access to credit for aspiring African entrepreneurs, which led to the expansion of Development Finance Institutions (DFIs).

DFIs included Small Enterprise Finance Company (Sefco), Kenya Industrial Estates (KIE), Industrial Development Bank (IDB) Development Finance Company of Kenya (DFCK, now Development Bank of Kenya), and the Industrial Commercial and Development Corporation (ICDC).

This was followed by Sessional Paper No. 1 from 1986, No. 2 from 1992, No.)) 2 from 2005 and the current Sessional Paper No. 5 from 2020 on promoting small businesses to create wealth and jobs.

However, our political statements were not backed up by action. And when we act, it is often at odds with the desired result.

For example, consider small business loans versus public sector loans. The latter grows three to four times faster every year. That is, the public sector is displacing the private one. In addition, the state’s enormous hunger for credit leads to high interest rates. If the government is willing to pay 12 percent of its borrowing, why should a commercial bank lend a small business at a lower rate?

To examine the contradicting nature of government action, let’s examine what it is doing to improve access to credit for small manufacturers. The government has offered a paltry Sh3 billion partial guarantee under which current bank lending is reportedly in the range of Sh500 million. Second, the government is folding up all of the government development finance institutions listed above, ostensibly to build a larger and more sustainable one.

Kenya Industrial Estates (KIE) awards about 1 billion shn annually, a tiny fraction of what is needed. I estimate it takes Sh150-200 billion annually to go beyond lip service and fund small businesses meaningfully.

The current 2020 Sessional Paper # 5 on Empowering Micro and Small Businesses to Create Wealth and Employment says there are 7.4 million MSMEs in Kenya employing 14.1 million Kenyans.

But the combined resources with KIE (Sh1bn), Industrial Development Bank (Sh300m), ICDC (Sh500m), Development Bank (Sh400m) and the State Department of Industrialization (Sh1bn) are about Sh3 billion annually.

Compare that to the national annual budget at Sh3 trillion. Even 1 percent of that would be Sh30 billion.

So the sector that employs 93 percent of the workforce receives around 0.1 percent of the annual resource allocation.

The total allocation of funds to all MSME-focused institutions at the national level is less than the $ 3.3 billion economic incentive that a county (Laikipia) and partner banks are providing small businesses with to fund working capital to recover from the effects of Covid-19 Have provided.

In Laikipia Economic Stimulus Lending, most (83 percent) of borrowers are micros taking out loans of Sh500,000 or less, with the largest group (49 percent) taking Sh100,000 or less. Thus, the average loan size is Sh200,000. This brings the financing requirements for the 7.4 million MSMEs to Sh1.5 trillion. Since not all companies are borrowing at the same time, the annual estimate puts it in the range of Sh150-200 billion.

Nowhere is our actions more contradicting the declared result than in the manufacture of machines and tools. In every piece of legislation, from the Law on Export Clearance Zones to the Law on Special Economic Zones, imported machines are given tax preferential treatment over locally manufactured machines. This makes the import of basic items such as motors, pumps, cutting, bending and bending machines cheaper.

To help micro and small businesses with mechanization and automation, we need to repeal all these laws that force them to import machines and tools. We should also give the more demanding manufacturers the opportunity to produce these machines and tools.

Most cities have primary engineering shops capable of making machines, which in turn use secondary engineering shops to make, for example, agricultural processing machines such as mixers and fillers.

All of these MSMEs pay three times (Sh21) per unit of electricity compared to their Far East competitors. To ensure competitiveness, we have to reduce these costs.

This requires serious reform of the energy sector, which should begin with the dismantling of the dominance of the distribution monopoly.

The author is the governor of Laikipia County. @NdirituMuriithi?

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