Small and Medium Enterprises in Kenya

Introduction

Small businesses play a pivotal role in development of any country. In sub-Saharan economies, they play a significant role in mobilization of idle resources thus facilitating economic development. As noted by they contribute heavily in job creation, form a significant proportion of the national income and households’ income in Kenya. He adds that in Kenya they account for up to one third of the total labor force and 13% of the national income. This then emphasize their key role in stimulation of economic development in these countries.

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Small businesses in sub-Saharan Africa are faced with a host of challenges. These adversely affect their potential for growth ad profitability thereby reducing their ability to effectively offer their input towards economic sustainability. He observes that the development of small businesses often referred to as small and medium enterprises (SMEs) in Kenya have mainly been hampered by financial gaps. In this paper I am going to examine the main challenges affecting small businesses in Kenya and make possible recommendation to solve them.

Challenges facing Small and medium enterprise (SMEs) in Kenya

Limitation in capital

Small and medium enterprises in Kenya are usually hampered by financial constraints which hinder them from expanding and growing their businesses. As a result of inadequate collateral they find it exceedingly difficulty to access credit facilities as opposed to the large business enterprises. This tends to impose a ceiling on their growth leading to stagnation in production. In addition, investment into new ventures and purchase of capital equipment and machinery is highly limited. As a result they tend to be badly affected by the laws of diminishing marginal returns which states that as increasingly more and more variable input is injected into a fixed quantity of input, the firm experiences diminishing marginal productivity. The low of productivity in many firms can be attributed to this. Identifies poor access to funding as the greatest culprit in development of SMEs.

Poor infrastructure

Kenya just like other Sub-Saharan countries has very poor infrastructure which hampers the business activity of these small and medium enterprises. For several years the country’s road and rail transport has been decaying leading to increase in the cost of transportation of raw materials and distribution of ready products. Such harsh business environments discourage investment ventures among the SMEs. For example, transportation of raw materials to and from the port to the production centers takes too much time reducing efficiency in production. The telecommunication network is also not well developed which adds to the challenges facing these firms. This limits the flow of information and also increases the cost of information transfer which in turn increases the cost of production. Cite inadequate availability of water, roads, sewerage system, and telecommunication as the biggest hindrance for development of SMEs in Kenya

High cost of inputs

The cost of raw materials and labor is very high in the country, a factor that raises the cost per output. This has an effect of increasing the cost of production given the small nature of the firms which produce in small quantities. The situation becomes grim when one considers that these firms are largely labor intensive employing very little machinery. This usually tends to limit their capacity in production thereby limiting their growth potential.

High cost of energy

Energy is one of the most important inputs in the production process. It forms a sizeable proportion of the variable cost which as result accounts for a huge proportion of the price of the final output. Apparently the country’s installed capacity of energy is very low relative to demand. This makes it particularly dangerous to the small business given that the country is mainly reliant on hydroelectricity which is highly unreliable as a result of frequent droughts. This causes serious electrical outages interfering with production process thus resulting to huge loses. In addition, installation of diesel powered emergency generators drives up the cost of energy thus reducing the profit margins drastically.

Inadequate technology

Many of the SMEs in Kenya employ the use of redundant technologies in production which reduces their competitiveness relative to the lager firms. As a result their cost per unit of output is higher including their efficiency in production. Research facilities for these firms are also inadequate and underdeveloped which limits their innovativeness. The quality of their products is thus usually lower in comparison to that of larger companies.

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Globalization

The effect of globalization has had catastrophic consequences to the small businesses that are largely underdeveloped. This was due to exposure to external competition from the international firms which are better capitalized and have lower production costs relative to the domestic firms. The entry of these firms in the local market caused some firms to wind up their business operations as a result of competition from outside. Apart from the mainstream competition from foreign firms there also emerged damping of substandard goods which threatens to kill the domestic businesses as they are cheaper relative to domestic goods. The situation is further worsened by the smuggling of counterfeit goods to the local market which mainly evade taxes giving them an advantage over the domestic goods.

Corruption

Graft is very rampant in Kenya especially in the transport industry which tends to squeeze the profit margins of the small businesses. Many a times the businesses are forced to part with bribes to government officials in order to receive important services and also to avoid harassment by the officials. This is particularly common in procurement of public services and commodities making it hard for the small enterprises to win government tenders. The lack of competitive bidding places them at a disadvantage compared to larger business players. High bureaucracy and red tape in government only serves to fuel corruption.

Inadequate management skills

As a result of the many financial constraints, the small enterprises has limited potential to attract skilled and experienced management personnel, a situation that hampers the quality of management and thereby their production. Skilled personnel are usually out of reach for many of these small enterprises due to their limited budgets. In fact the salaries involved account for a very huge proportion of their operation cost making it not viable to engage them. As a result, the owners who are usually poorly endowed with management skills are forced to undertake most of the management processes.

Lack of adequate market for products

The local market in Kenya is underdeveloped which further limits the potential of the small businesses. The unequal distribution of wealth in the country and the subsequent high level of poverty tend to reduce their marginal propensity to consume which in turn decreases the per capita demand. The depressed per capita demand and aggregate expenditure further shrinks the domestic market thus hampering the production process.

Political instability

Intertribal clashes and political conflicts usually inflict their worst harm on SMEs. For example, the post election skirmishes that followed the 2007 election in Kenya had catastrophic results on them. Many of the business premises were burnt down, others vandalized while others went underground. According to, larger companies had cash reserves to keep them afloat during the chaotic period as opposed to the small businesses that operated under shoe string budgets. This reduced their chances of withstanding such effects even if they were to recur in future.

Competition

A study carried out in Nairobi, the capital city of Kenya, on the small and medium scale enterprises pointed on competition as their greatest challenge. Since most of those businesses surveyed relied on the urban market, the effects of globalization had exposed them to international competition. This is in addition to that posed by inter-business competition and also competition from large companies. The latter is especially fierce since they are better placed to engage in expensive advertisements which are beyond reach of small firms.

Recommendations

Policy formulation

The Kenyan authorities ought to formulate comprehensive policies to increase accessibility of credit facilities to small and medium size enterprises. By reducing the requirements for one to assess to credit, the small business will be encouraged to invest in better technology and therefore to produce more quality products. This will increase their competitiveness in their market and help to boost their sales volumes and profitability in the market.

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Improvement of infrastructure

Construction, repair and maintenance of road and railway networks, improvement of telecommunicating facilities will help lower the cost of production besides stimulation of investments and expansion of the capacity of the small businesses. This will reduce the cost of transportation and distribution which will in turn lower the cost of each unit of output. The savings will be reflected in stimulation of economic development and increase in employment opportunities.

Reduction of the cost of energy

As I mentioned earlier in my discussion, energy forms a vital component in the production process. The cost can only be reduced by increasing the energy generation capacity of the country in tandem with the growing demand. The governments will have to invest heavily in energy generation in order to increase the reserve capacity which will help the country to avert the effects of fluctuations in energy production as a result of droughts. In relation to this, the government must seek alternative energy sources to dependency on hydro power which is unreliable. More research needs to be carried out on other cleaner renewable sources of power like wind and geothermal which are more sustainable in the long run.

Investment in education

Education has a very positive impact towards development of businesses according to. They further add that those business owners with a considerable level of education are able to adapt their businesses better to the changing business environments. Investment in education helps inculcate knowledge and skills required to run a profitable and sustainable SME. This will also allow the training of a pool of skilled management and technical staff to spur growth of the SMEs.

Sound management

Disciplined management and leadership prudence is pivotal to success of any business. Many other small businesses fail due to lack of sound management which prevent them from identifying opportunities for growth and also deny them the chance to optimize on their economies of scale. In this regard the management staff ought to possess the right training and experience so as to steer the firm towards success.

Embracing globalization

As much as globalization is seen to pose a potential challenge to local firms, it also presents a big opportunity to the small businesses. One of its greatest opportunities is the chance to expand and diversify into the international market. It also allows easy transfer of information and technology that could lead to improved quality of products and services. Aargue that small businesses ought to expand their business opportunities beyond their local market boundaries to fully exploit their full potential.

Marketing promotions and competitive pricing

For SMEs to compete effectively with their competitors, they will have to evolve innovative ways of marketing their products and also pricing them. In this regard efficient customer care service will play a huge role in ensuring high customer retention and also attracting new ones as was employed by majority of those surveyed in Nairobi as reported by. Offering of discounts and competitive pricing will also go along way in achieving these goals. The most reasonable business strategy for these firms would be the one that incorporates differentiation of their product range and services in order to meet the varied needs of the customers. The business should also be strategically located within reach of its target market for it to succeed.

Conclusion

Small businesses in Sub-Saharan Africa are faced with a cocktail of challenges and Kenya is not an exception. Many such businesses experience declining performances within their few years of formation. Many small and medium enterprises identify competition as their greatest challenges that lead to collapse of many businesses within a few years of formation according to. Poor governance and weak regulatory structures are a big impediment to the growth of small and medium enterprise that will need to be addressed amicably. Inadequate funding according to diminishes any prospects of business development processes of these small businesses.

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Reference

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Bokea, C., Dondo A., &, Mutiso J. “Physical infrastructure.” In: A. Mullei and C. Bokea, eds. Micro and Small Enterprises in Kenya: Agenda for Improving the Policy Environment. Nairobi: International Centre for Economic Growth. 57–80. 1999.

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King, K. & McGrath, S. Globalization, Enterprise and Knowledge: Educational Training and Development, International Review of Education, Vol. 50(1), 74-76(3) (2002)

Michael Bowen, Morara Makarius and mureithi Samuel. Management of business challenges among small and micro enterprises in Nairobi -Kenya. KCA journal of business management: vol. 2, issue 1 (2009). Web.

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Ronge, E., Ndirangu. L. and Nyangito, H. Review of government policies for the promotion of Micro and small scale enterprises in Kenya. KIPPRA Discussion paper (2002).

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Wanjohi, Anthony M. “Challenges Facing SMEs in Kenya”. Buzzle.com, 2009. Web.

Wesonga, John. “Facing and addressing the challenges as an SME in Kenya”, n.d. 2009. Web.

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