DOING BUSINESS WITH

SMEs IN KENYA
Research Report
MARCH 2017
INTRODUCTION:
RESEARCH ON DOING BUSINESS WITH SMES BY IIA AND SBS

OBJECTIVE METHODOLOGY

• Conduct empirically-backed quantitative • Three regions were identified - Nairobi,

study aimed at identifying the main SME Mombasa and Nakuru
skill gaps and barriers.
• Sample of 274 SMES, turnovers up to
• Compare how these gaps compare to the $10,000,000 and 22 large companies
expectations of MNEs across 63 diverse industry sectors

• Inform future solutions and a training • Questionnaires and interviews conducted

curriculum March-June 2016

• Cross tabulation, factor and correlation

anaylses were performed
KEY FINDINGS
5 REINFORCING THEMES EMERGED

Access to
Practical & Affordable Linkage With Access
Appropriate Training Limited Effective Inability to Scale Up
& Effective Use of to Business Corporate (Growth)
& Capacity Building Finance Opportunities in Big Governance
Business
WHY DOES THIS
MATTER? 18% Contribution to the
national GDP
Source UN (2015)

90% 17%
Local content
legislation coming
of all sectors are
into force
SMEs

84% Employment
contribution
Source: Ngui (2014)

70% “Majority of SMEs are unable

to grow vertically resulting in
SME failure rate the gap between SMEs and
within the first 3 large enterprises”
years after
Source: Fatoki (2014)
inception
EXPLORING THE 5 THEMES
AND THEIR IMPLICATIONS
THEME 1: PRACTICAL AND APPROPRIATE CAPACITY BUILDING
MANAGERIAL CHALLENGES vs. EDUCATIONAL LEVEL

• One would expect that the more learned the SME owner/manager is, the better they would be at
handling managerial challenges relative to less learned SME owners.
• This is not the case. The study found an inverse relationship between education levels and high
bidding requirements.

PhD

Masters

Degree

Diploma

O Level

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Lack of capacity to identify new opportunities especially from large companies/MNEs

Lack of capacity to handle bigger jobs
Complicated and lengthy requests for proposals
High bidding requirements e.g. minimum deposits, turnover requirements
Complicated reporting requirements e.g. finacial statements requirement to bid (3-years)
THEME 2: ACCESS TO AFFORDABLE AND EFFECTIVE USE OF FINANCE
THE CHALLENGES IN SEEKING AND MANAGING FINANCES

Fear of inability to Access to financial High cost of financing Access to financing Lack of understanding
repay due to uncertain markets high interest rates information of the various financial
business performance options

17% 19% 37% 12% 15%

18% 26% 28% 43%

O Level Diploma Degree Masters

• The cost of financing is the single

largest challenge identified at 37%
followed by access to financial
markets at 19%.

• Money from family members and

personal savings are the most
29% 21% 15% 13% 12% 10% popular sources of capital and
finance. This rivals banks.

• The more people are learned, the

Family Members Personal Savings Loans from Donations/ Friends Joint
Financial Institutions Grants Partnerships more risk averse they get.
THEME 3: LINKAGE WITH BIG BUSINESS
MANAGERIAL/OPERATIONAL CHALLENGES

Lack of capacity to identify
new opportunities esp.
from large
companies/MNEs
Lack of capacity to Complicated and High biding Long credit periods
handle bigger jobs lengthy requests for requirements e.g. from MNEs
proposals minimum deposits,
turnover
requirements

18% 30% 22% 21% 18%

• The single largest managerial/operational challenge cited was the lack

of capacity to identify opportunities from large and MNEs.

• The biggest impediment SMEs face while trying to do business with big
business relates to bidding (high requirements by big business (22%)
and complicated bidding processes (21%)).
THEME 3: LINKAGE WITH BIG BUSINESS
WHAT DO BIG BUSINESSES LOOK FOR WHEN CONSIDERING SMES TO DO
BUSINESS WITH VS WHAT SMES THINK BIG BUSINESSES LOOK FOR
WHAT SMEs THINK BIG
BUSINESS LOOK FOR
• Length of business history
• Proper financial
management
• Managements integrity
• Financial performance
• Customer base
• Compliance with
regulatory requirements
• The uniqueness of the
product/service provided
THE DISCREPANCY
SME thinking on what MNEs
look for in suppliers is
misaligned
Only points of agreement are
compliance and financial
performance
Communication gap between
perception & reality
WHAT BIG BUSINESSES
ACTUALLY LOOKS FOR
• Financial and technical
resources
• Capacity requirements
• Competitive pricing
• Location of the SME
• Order fulfillment to
satisfactory levels
• Previous relevant
experience
• Quality & international
standards
• Registration & compliance
• Support to local content
THEME 4: LIMITED EFFECTIVE CORPORATE GOVERNANCE
NO REAL IMPACT OF GOVERNANCE BY HAVING A BOARD OF DIRECTORS IN
PLACE

Publicly listed companies Sole proprietorship Partnership Limited Partnership Privately held, Limited
Liability companies

19% 12% 5% 1% 63%

YEARS PROPORTION OF SMES

WITH A FORMAL BOARD
1-5 30%
6-10 21%
11-15 15%
16-20 19%
21-25 7%
26-30 4%

The study found that newer SMEs seemed to have

formal board of directors compared to older SMEs
THEME 4: LIMITED EFFECTIVE CORPORATE GOVERNANCE
NO REAL IMPACT OF GOVERNANCE BY HAVING A BOARD OF
DIRECTORS IN PLACE
With a Board Without a Board

Lack of information by key owners of available business 5% 8%

opportunities

Choosing business opportunities that have proved costly or not 6% 6%

viable/profitable

Lack of board/key owner’s ability to win business opportunities 2% 1%

Unethical business conduct 24% 20%

Lack of transparency in the business 3% 2%

Wrangles within the management and the board 4% 2%

Family wrangles 6% 5%

Domination of the business by a few individuals 3% 3%

Lack of integrity by board members 8% 8%

Mismanagement of the business 38% 34%

Embezzlement of funds 21% 24%

Majority of the SMEs are privately held Limited Liability Companies (63%) only 19% of these are publicly listed. A majority (51%) are young SMEs below 10yrs.

No difference between SMEs with Boards and those without Boards in terms of the key governance challenges cited. A high number 34% & 38% reported
mismanagement of the business as a governance challenge. Majority with and without Boards also experienced challenges with embezzlement of funds (24%
and 21%) while over 20% cited unethical conduct
THEME 5: INABILITY TO SCALE UP
BUSINESS DEVELOPMENT CHALLENGES

Limited access to primary resources and research

Limited availability of external support and help for SMEs
Need to simplify the bidding and RFP processes for SMEs

Sector Lack of access from new firm Too many forms Lack of external
to new research and required to be filled for assistance of plans
technology as large firm bidding purposes for entrepreneurs
Health 30% 30% 40%
Business Consultancy 31% 44% 38%
Tourism 14% 43% 29%
Transport 29% 29% 29%
Construction & Estate Development 22% 17% 26%
Agriculture 31% 38% 23%
Manufacturing 14% 14% 21%
Pharmaceuticals 40% 40% 20%
Automobiles 25% 25% 20%
Trade 19% 26% 19%
Insurance & Risk Management 17% 33% 17%
Information Technology 26% 29% 17%
Private Security 33% 0% 17%
Hospitality 17% 21% 13%
Advertising & Media 24% 41% 12%
Timber 11% 11% 11%
Chemical & Allied 0% 40% 0%
Textiles 0% 22% 0%
Logistics 0% 17% 0%
Banking & Finance 40% 0% 0%
Clearing & Forwarding 0% 0% 0%
THEME 5: INABILITY TO SCALE UP
MANAGERIAL CHALLENGES

As well as the stringent demands of bidding and RFPs, SMEs are also
constrained from winning new business by the collection of debts
from previous contracts.

Sector Debt collection High bidding requirements Complicated and

challenges e.g. minimum deposits, lengthy requests
turnover requirements for proposals
Transport 17% 50% 67%
Pharmaceuticals 25% 50% 50%
Insurance & Risk Management 20% 20% 40%
Clearing & Forwarding 40% 0% 40%
Advertising & Media 24% 29% 35%
Trade 15% 27% 35%
Business Consultancy 0% 47% 27%
Timber 13% 13% 25%
Agriculture 8% 8% 25%
Chemical & Allied 50% 0% 25%
Banking and Finance 25% 0% 25%
Construction & Estate Development 55% 27% 23%
Information Technology 41% 38% 21%
Private Security 0% 40% 20%
Logistics 20% 20% 20%
Tourism 33% 50% 17%
Manufacturing 31% 15% 15%
Hospitality 26% 0% 13%
Health 33% 22% 11%
Automobiles 26% 32% 11%
Textiles 0% 25% 0%
SUMMARY CHALLENGES
OVERALL, THE STUDY FOUND THAT SMEs CHALLENGES
CENTERED AROUND FIVE KEY ASPECTS

CHALLENGES BASED CHALLENGES BASED CHALLENGES RELATED CHALLENGES BASED

CHALLENGE/CATEGORY ON GENDER OF THE ON EMPLOYEE BASE TO ACADEMIC ON TURNOVER BASE
RESPONDENT QUALIFICATION (IN KSHS)

F1: Access to affordable finance

F5: Bank requirements for

collateral

R1: Unfavourable government

policy in support of SMEs

R4: Ineffective government

programme in support of SMEs

O9: Bribery and corruption,

which locks out SMEs in the
bidding process
SME CHALLENGES ACROSS 5 CATEGORIES

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80%

60%

40%

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F1: Access to affordable finance

F5: Bank collateral requirements
R1: Government policy not favourable to new business
R2: Ineffective government program for supporting entrepreneurship
O9: Bribery and corruption
IN CONCLUSION:
THE 5 THEMES AND THEIR IMPLICATIONS

Access to
Practical &
Affordable & Linkage with Large Effective Corporate Scaling Up
Appropriate Training
Effective Use of Corporations Governance (Growth)
and Capacity
Finance and/or MNEs
Building
Resources

There is not a level playing field for SMEs to compete on;

The gap between big and small is consistently growing
THE BIG TAKEAWAY:
SMES ARE DISADVANTAGED

WE NEED TO LEVEL THE PLAYING FIELD

THE APP
WHAT IS THE AFRICAN PARTNER POOL (APP)?
The APP is a core service of IIA, that connects SMEs to larger companies,
domestically and internationally. It facilitates trade business through an
interactive online technology platform.
What access to APP provides:
SMEs can:
Become more visible to potential buyer
organizations
Access tenders online
Get access to knowledge and online learning
Get third party validation
Access financial support services such as
credit finance, international sourcing support
Network buyer organizations to suppliers,
suppliers to suppliers and suppliers to
mentors, coaches or donors
Get direct linkage to buyers – no brokers
Buyers can:
Access a database of hundreds of vetted and
ready-to-do business suppliers
Reduce their procurement turnaround time
as suppliers have already been vetted
Conduct an end to end, start to finish full
cycle procurement process
Analyze business done with SMEs, include
local content and/or social impact for
regulatory reporting
Conduct transparent and clean business with
SMEs
 KENYA’S FIRST INTERACTIVE BUSINESS PLATFORM;
BRIDGING THE SME GAP WITH AFRICAN PARTNER POOL (APP)

THE RESEARCH FINDINGS GAPS
Access to opportunity
APP FEATURES
One marketplace for accessing tenders,
profiling SMEs & raising visibility, dialogue &
1 feedback

SMEs can apply for both trade financing and

Acess to Finance 2 tenders through the platform

AFRICAN Throught he platform, training s offers throu

Training and Capacity 3 webiners, seminars, e-learnng coaching
Building PARTNER POOL

By establishing a standard for SMEs, creating

Governance 4 transparency & promoting ethical practice with
globally recognized bodies

5
Scaling Up By raising standards through incentivizing,
validating & tiering SMEs who are on the APP
THE AFRICAN PARTNER POOL (APP)
AN INTERACTIVE ECOSYSTEM FOR SMEs, BUYERS & OTHER STAKEHOLDERS

ACCESS TO FINANCE GOVERNANCE

Apply directly on the Direct networking

platform between buyers and
suppliers. No Brokers

APP
ACCESS TO BUSINESS TRAINING &
OPPORTUNITY CAPACITY BUILDING

Peer to peer
Instant notification of e-learning, online
tenders and business discussion forums and
opportunities a knowledge base

SCALING UP

Vetted and rated,

ready-to-do business
suppliers
 WHO WE ARE
Invest in Africa (IIA) is a private sector initiative that brings
together leading companies across sectors to develop local
enterprise and support investment into Africa

OUR PURPOSE
To enable trade between larger companies and
SMEs by providing better access to markets,
enhancing SME skills and improving access to
finance.
JOIN OUR GROWING ONLINE COMMUNITY
 Bush House, Hibiscus Suite
Kabarnet Road off Ngong Road
Nairobi, Kenya

+254 795 058 590