Getting Angel Investors Together Will Save Kenya’s SME Sector

Kenya has recognised the Small and Medium Enterprises (SMEs) as boosters of its economy and they constitute a major source of employment, enhancing competition, fostering innovation and generate significant domestic and export earnings for the country.

According to the National Economic Survey report by the Central Bank of Kenya of 2017, SMEs constitute 98 percent of all businesses in Kenya, create 30 percent of the jobs annually and contributes 3 percent of GDP.

“Kenyans have an impressive entrepreneurial spirit …You see it everywhere you go and most of our people are self-employed or employed by entrepreneurs. The informal sector contributes the most to our economy. The next stage is to formalize these businesses so they can contribute more to the growth of our country and ultimately address unemployment,” says  Samuel Kimani, Jamii Bora Bank Chief Executive Officer.

It includes home businesses, domestic workers, street vendors, small-scale artisans, car repairs, bakeries, and livestock traders and the sector makes a huge contribution to the economy.

Dr. Chris Kirubi says, “While the obvious contributors to the fastest growth of Kenya’s GDP would be attributed to macroeconomic factors like political stability, exponential growth of the technological landscape, a robust and growing economic environment among others, it is important to note that the growth of the small medium and micro enterprise (SME) sector has contributed to an almost exponential growth of our GDP.”

“Consequently, out of these sentiments comes a stalemate, and the country continues to grapple with increasing poverty and staggering numbers in unemployment. There are, however, several ways through which we can bridge this gap and create working synergies between, government, corporations, and MSMEs. The most important tool to equip these businesses and government with is Knowledge” says Phyllis Wakiaga, Chief Executive of Kenya Association of Manufacturers.

The enterprise faces a myriad of challenges. Key among them: Financing, hiring, and retention, management, sales and marketing among others.

For instance, the cost of credit, as opposed to accessing to credit, is by far the biggest financing challenge facing SMEs in Kenya.

Samuel Kimani, Jamii Bora Bank Chief Executive Officer says there is a need to start getting angel investors together in Kenya.

Kimani during the weeks  #CEOChat by the Kenya Bankers Association ‘Startup capital strategies’ agreed that capital is one of the greatest challenges for startups and many get it wrong.  “…they think that to start a business they need a bank loan or a lot of money.”

“You only need money to register and start selling to friends, relatives, your community. And then you build a track record. Your friends and relatives are your ‘social’ capital because they want to see you succeed. After you have your business running, the next source of funding would come from the next level which includes ‘angel’ investors…within a locality, there are successful business people who are willing to invest in a good idea. So entrepreneurs should seek out these ‘angel’ investors who may be willing to take a stake in your business,” he says.

According to Kimani, “It would be nice to start something like that here. In Kenya, there are Venture Capital networks, but these are different from Angel Investors who are individuals who often are high net-worth and have extra capital to invest in startups or small businesses that want to scale up.

Venture Capitalists typically fund much bigger businesses — some VC firms look for USD 5 million upwards — which is quite high,” he observed.

He says Venture Capital would look at the viability of the business and the scale. Banks, on the other hand, will look at any business size, but focus on your cash flows. For any startup seeking capital.

Angel investors invest in early-stage or start-up companies in exchange for an equity ownership interest.

This is an idea the Jamii Bora CEO advises startups to reflect on if they have to elevate their businesses to the next level.

“ I think sometimes we want to own 100 percent of the businesses we start, but what we need to consider is that by opening up the ownership, you can raise capital…you’d rather own 50 percent of a successful business than 100 percent of an idea. So have a slice of a big business instead of a whole queen cake!

The government has set in place initiatives to ensure they are catered for.

One the, Micro and Small Enterprises Act No. 55 Of 2012  that provides for the promotion, development, and regulation of micro and small enterprises; and the establishment of the Micro and Small Enterprises Authority, and for connected purposes.

On the other hand, ‘Testing SME banking in Kenya – a mystery shopping exercise’ by the FSD Kenya noted that there is a missed opportunity here for banks!

“Banks need to present a clear and consistent message about who they see as their SME customers and how they can help these types of businesses if they are to profile themselves as SME friendly providers in the financial marketplace.

In order to serve SMEs effectively, banks need to identify different segments or subgroups within the overall group of SMEs. In this way, banks can better understand the nature and needs of particular SMEs and which types of SME customers they, as a bank, should be focusing upon.

“More than that, we must create an enabling environment for these businesses. If we look at the recently unveiled Kenya Industrial Transformation Programme by the Ministry of Industrialization and Enterprise Development, special attention is given to the role of MSMEs in catapulting our country to reach its industrialization goals. One of the ways we can do this is by using a sector-specific approach to elucidate the full potential of these businesses and then leveraging our networks, as private sector and government to open up their access to various markets,” Wakiaga adds.

“To what extent does Ease of Doing Business research reflect improvements in the business environment for informal businesses? Parameters such as the increased ease with regards to tax compliance and business registration inform Ease of Doing Business performance, yet these are parameters with which informal businesses largely do not intersect,” Anzetse Were, a development economist reflects on.

It is also worth noting that the Kenya Association of Manufacturers (KAM) among its five pillars of their manufacturing Priority Agenda 2018 (MPA 2018), there is “Government-driven SMEs development”  by enhancing credit and market access to SMEs.

“If the SMEs sub-sector in manufacturing, is to grow, there is a need to access more finances and at a lower cost,” KAM notes.

KAM notes that access to financial resources is constrained by both internal and external factors. Internally, most SMEs lack creditworthiness and managerial capacity, so they have trouble securing funds for their business activities such as procuring raw materials and products and investing in plant and equipment.

From the external perspective, SMEs are regarded as insecure and costly businesses to deal with because they lack required collaterals and have low absorption capacity of funds. They are therefore rationed out in their access to credit due to high intermediated costs, including cost of monitoring and enforcement of loan contracts.

However, Samuel says the financial sector is doing more in training MSMEs on accounting, writing business plans, and advice on finance and legal and other regulatory requirements. “And this makes the MSMEs attractive to banks and other investors.”

For Kenya to enjoy maximum benefit from the informal sector, there is need to better understand their characteristics and tame these for the benefit of the country.

Activities that are undertaken in the informal sector are usually characterized by unregulated and competitive markets; small-scale operation with individual or family ownership; ease of entry; reliance on locally available resources; family ownership of enterprises; labour intensive and adapted technology and absence or limited of access to institutional credit or other supports and protections.