Building Robust SME Ecosystems to Strengthen African Economies

By Flora Mutahi

As a continent we are increasingly experiencing the difference made by Small and Medium sized Enterprises (SMEs).

SMEs have, over the years, become a reliable business segment through which African investors have innovatively built agile strategies to meet the dynamic needs of different communities.

In striving to meet market needs the SMEs have gradually over time cemented themselves into key stakeholders and an integral part of the systems meeting market demand and driving socio-economic progress at both national and regional levels. They are also the key drivers of diversity, often proving more gender and diversity inclusiveness and reaching their clientele through more innovative approaches and with more appropriate products than the larger enterprises can provide.

The challenges that the SME sector faces have been well document, and tended to be challenges in access to markets, capacity constraints and inadequate access to financing and other supporting services. The sector is characterised by instability and high business mortality rates. Most are also informal and not compliant with business regulatory statutes and standards.

In order to support the emerging SMEs there is need to shift beyond the old traditional approach of addressing Sme issues such as access to finance, capacity, skills independent of the national and international supply chains. There is need to begin to structure solutions to SMES not as a parallel system to the formal supply chains, but to resolve how best to integrate SMEs and the informal sector into the formal supply chain.

To achieve this we need to restructure the way we do business in order to include informal traders and SMEs as key contributors to formal supply chains. This is to establish systems that will include traditionally subsistence sectors such as smallholder farmers and pastoralists, and rural non-agriculture sectors such as cottage industries and rural processors as members of formal contracted supply chains that meet the national and international standards.

To achieve this inclusive environment where SMEs will be key players we will need to establish ways to formalize market relationships and contracting systems between markets and SMEs, and create conditions where there will be a supportive environment which will provide the SME and informal level with the resources and capacity needed to be contracted partners servicing an increasing share of the growing local, regional and international demand.

A key step will be the introduction of tailor-made and innovative approaches at sector and product supply chains level to reenergize and drive SMEs to coordinate with each other within structured supply chains. This needs to be in ways that will enable the informal sector, smallholder farmers, rural and urban based SME businesses to function in a coordinated environment where they are brought together to enable them reach the economies of scale and efficiency needed to meet the standards required in local and international supply chains. They need to be able to access commercial services and support systems that enable them to deliver quality products to the market, and to market their more innovative products.

The question is what can be done to enable SMEs to conduct business at a global level from an advantageous position? How can SMEs and the informal sector become reliable contributors to local and international supply chains? What are their strengths and how can we leverage this to make these businesses sustainable sources of growth for our future?

We can begin to identify markets and sectors where SMEs can be coordinated to contribute to the supply of agriculture and manufactured products, or in trade systems, within a structured supply chain, and where possible structure services on commercial terms to enable them play this role.

Formal SMEs contribute up to 45 percent of total employment and up to 33 percent of national income (GDP) in emerging economies, and this number is even higher in Kenya where an estimated 80% of the new jobs over the last decade have been in the SME and informal sector. If we add what is commonly referred to as ‘informal SMEs’, these numbers could be significantly higher.

What this means is that SMEs are already a major part of national and international trade systems. What we need to build is a robust and sturdy ecosystem that ensures that SMEs are able to provide services within better structured ecosystems.

A key step in this direction is for formal public and private sector markets/buyers to begin to engage SMEs by creating trading and contracting systems that include SMEs and the informal sector as an integral part of the supply chain; we need to restructure the way they are engaged and ensure that as a part of supply chains they have the requisite capital and skills needed to meet local and international standards. In this way SMEs will not just create jobs but productive jobs that will make a long-lasting contribution to poverty reduction

Initiatives such as the Kenya Industrial Transformation Programme that seeks to support SMEs to grow by USD 150 Million in GDP and employ more workers is definitely a crucial starting point for our country for instance. There are a significant number of SMEs that have reached the size and level of complexity to participate in more sophisticated value addition and export activities.

As we look forward to Kenya hosting the United Nations Conference on Trade and Development (UNCTAD 14), it will be interesting to see how we propose to uplift our SMEs. The Theme, From decision to action: moving toward an inclusive and equitable global economic environment for trade and development” promises to look into these issues and provide tangible and actionable ways forward. It is time to start looking inward for our economic solutions, and for Africa, the importance of SMEs to our goals of prosperity cannot be ignored.

The writer is the Vice Chairperson of the Kenya Association of Manufacturers and can be reached on info@kam.co.ke.