How SMEs Grow Kenya’s Economy

While Kenya’s small and medium enterprises (SMEs) continue to create jobs and boost the country’s GDP, they face challenges that always hamper their growth. Kenya’s 2017 overall  GDP  growth is projected at 6.4 percent, with SMEs contributing 3 percent.

A National Economic Survey report by the Central Bank of Kenya (CBK) indicated that SMEs constitute 98 percent of all business in Kenya, create 30 percent of the jobs annually, and contribute to 3 percent of the GDP.

According to the 2014 survey, 80 percent of the 800,000 jobs came from the informal sector by SMEs. “Overall, these businesses help many Kenyans from suffering unemployment while boosting their incomes. There are challenges but we create jobs as well for others,” said Sheila Njuki, an interior décor business owner in Jevanjee. She has an annual turnover of Ksh3mn (US$30,000).

Under the Micro and Small Enterprises Act of 2002, micro-enterprises have a maximum annual turnover of Ksh500,000 (US$5,000) and employ less than 10 people. Small enterprises have between US$5,000 to US$ 50,000 annual turnover and employ 10-49 people. Medium enterprises, while not covered by the Act, have a turnover of between US$50,000 and US$8 mn and employ 50-99 people.

The Jua Kali sector, where artisans make all types of merchandise, constitutes an integral part of the SMEs in Kenya. The artisans produce a variety of high-quality hard and softwood furniture, and priceless pieces of art created from scrap metals and carpets. All items are fitted to meet the customers’ needs.

Their products are mainly for local consumption or are exported to nations within the East African Community (EAC) and Common Market for Eastern and Southern Africa (COMESA) regions.


Yet, even with its immense contribution to the economy, Kenya’s SMEs are faced with numerous challenges.

According to a report Deloitte Kenya Economic Outlook 2016, SMEs are hindered by inadequate capital, limited market access, poor infrastructure, inadequate knowledge and skills, and rapid changes in technology. Corruption and other unfavorable regulatory environments present other bottlenecks to this vital cog of the economy.

A survey by the Kenya National Bureau of  Statistics released early this year indicated that approximately 400,000 micro, small and medium enterprises do not last longer than two years, leading to concerns of sustainability of this critical sector.

Although the World Bank’s Doing Business Report 2017 lauds the country for making it easier to start a business, major issues remain in smoothing the process.

In Kenya, starting a business involves seven procedures, takes 22 days, and costs 21.1 percent of income per capita for men and women.

The World Bank notes that the ease with which businesses can be registered has a bearing on the number of entrepreneurs who start businesses and lead to jobs and more government revenue.

The government has formulated strategies to quicken the processes of starting a business in favor of small firms. The government has addressed SME challenges by enforcing legislation and increasing access to funds, such as through the Uwezo Fund, a government financial tool to promote women and young people.

Experts, however, say some of the challenges with SMEs are beyond government bureaucracy.

“Most people prefer replicative businesses. Nobody does a  market survey to see whether the business is viable,” said Dr. Bitange Ndemo, an associate professor at the University of Nairobi’s School of Business and a former government official.

But finance remains the most critical challenge affecting SMEs in the country.

“The critical factor remains under-financing. Few banks are eager to finance SMEs, especially at the inception stage,” added Njuki.


To alleviate the financing gaps, the Kenya government in collaboration with partners created the Financial Sector Deepening (FSD) program to expand access to financial services among low-income households and smaller enterprises. Funders include the UK’s Department for International Development (DFID).

Two years ago, FSD, the World Bank, and the Central Bank of Kenya conducted a research project to understand the supply and demand side of the SME market. The report highlighted the difficulty in tracking the size of the SME and its need for financial services. According to the research, the evolution of the supply side of the SME between 2009 and 2013 resulted in a rapid expansion of Kenya’s financial sector.

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