What is an SME?
SMEs is an abbreviation of small and medium-sized enterprises. It refers to those type of businesses that can only accommodate assets, employees and revenue below a certain level. Thus, an enterprise has to meet a given threshold for it to be termed as an SME. In regard to this aspect different nations have a different definition of what SMEs are depending on the number of employees.
For instance, in the United States, an SME is defined as an enterprise with fewer than 500 employees. In the European Union, an SME is a business that can accommodate up to 250 employees. On the other hand, Kenya’s definition of SME in regard to the number of employees is a business that can engage up to 99 employees and is spread across all sectors of the economy.
It is important to note that SMEs operate seasonally, formally or informally and are established in different locations such as along the streets, in the markets, mobile shops as well as households.
Small businesses are very important in the economy in several different ways. They help in the creation of new markets and consumers, foster innovation, create employment and help in alleviating poverty for Wanjiku. In addition, SMEs forms a higher tax base which is very useful to the government when it comes to revenue collection.
Contribution of SMEs to the National Economy
Until the outbreak of the Covid-19 pandemic, the Kenyan economy was increasing at an increasing rate. The outbreak of coronavirus in Kenya affected all fronts of life with the government fixed between two rights; working to maintain the economy or to save the lives.
Since the year 2011, the Kenyan economy has continued to register tremendous progress and growth despite the challenges noted in 2012. These challenges included drastic depreciation of the currency, inflation and the effects due to the turbulent global economy. According to statistics though, the economy improved in 2013 where the GDP grew by 4.7% and more than 5% in 2014. This has been the trend ever since.
The government admits the contribution of SMEs in the national economy. This is the reason as to why the recently released budget by the Kenyan Cabinet Secretary of the National Treasury had an allocation for the Small and medium-sized enterprises. Also, over the years, Kenya has made tangible strides towards easing SMEs lending. these are the most crucial and key factors in the realization of economic growth and development – Vision 2030. Small scale businesses also help the government’s strategy of stimulating economic growth through creating jobs which reduces unemployment and poverty level among the citizens. Some of the ways in which the micro-, small and medium-sized enterprises contribute the economic growth include among others, the following.
a) Contribution to the Gross Domestic Product, GDP.
SMEs have a huge contribution to economic growth. According to available data from The Kenya Institute for Public Policy Research and Analysis (KIPPRA), this sector contributes more than 25% to the GDP. This is especially due to its ability to create employment and hence helping to solve the macroeconomic issue of unemployment.
b) Creation of employment
Figures show that the economic growth of Kenya is solely dependent on the private sector more so the SMEs. It is therefore important for the concerned departments from the government to support the potential of the SMEs in creating jobs in the country especially when there is notable stagnation in creation for jobs.
In addition, the government has witnessed a sharp increase in the public wage bill and so the need to combat that. SMEs solves this problem by creating self-employment which facilitates earnings as incomes for families and households. SMEs contribute to more than 50% of all jobs created in the economy.
c) SMEs act as suppliers to the extractive industry
The chain of supply is very important in any economy. This implies that suppliers must exist in the market to make it complete. Thus, some stakeholders in the economy will have to play the role of supply. SMEs come in to fill this gap in the extractive industry. For instance, in the extraction of oil, SMEs provides essential services in production such as manufacturing and transportation. It is important noting this interdependency of sectors since some of the final products in one industry may be a raw material in another.
d) SMEs facilitate innovation processes both in technology and management
Most of the SMEs are self-employment entities which are run by an individual or a group of individuals, the majority of whom operate in small jua kali industries. They are therefore responsible for making their own decisions of production and the suitable technologies necessary for their activities. This has seen many innovations taking place in the private sector especially the production of cheap goods that can serve effectively in addition to being pocket friendly.
Many entrepreneurs in research-developed investments have come in to showcase their prowess towards achieving self-reliance. This way, most of the small-scale companies have a big potential and opportunity to grow into big companies.
SMEs are very essential in posing a competitive environment for some already existing companies. This improves the quality of goods produced in the economy and which can fight for a position in foreign markets.
During this period of Covid-19, we have witnessed very many innovations among the Kenyans across the country from the manufacture of handwashing machines, personal protective equipment as well as ventilators which can all make a way in the international market. It is also important to note the efforts the government has shown to support local production to supplement the supply as a result of shortages originating from the disruption of the global chain of supply.
It is important also to support more research focused ventures to promote talents and make use of locally available resources. This way, the private sector which harbours most of the micro-, small and medium-sized business will boom and continue to contribute tremendously in the economic growth and especially the realization of Kenya’s vision 2030.