Small Business Environment in Kenya

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Introduction

Geographically, Kenya lies to the East of Uganda, to the Northern Part of Tanzania and to the West of Somalia. The country enjoys access to the Indian Ocean which it majorly uses for its imports and exports although comprehensively it covers an area of 592,909 square kilometers (Exports Processing Zones Authority 2005, 33).

The country has a total population of approximately 38.6 million according to recent 2010 statistics (World Bank 2010, 46). Predominantly, the country is agricultural, with its major exports being Tea and horticultural produce (like flowers) which it majorly exports to Europe.

Kenya has experienced a relatively peaceful political environment since its independence in 1963 with its major democratic hallmark being the peaceful transition of power from its longtime serving president Daniel Moi to Mwai Kibaki in 2002 (Exports Processing Zones Authority 2005, 68).

However, in the eve of the elections of 2007/2008, the country experienced both political and social tensions which also spilled over to the economic progress and backtracked on the country’s gains in economic development which stood at nearly 7% per annum (Business Daily Africa 2008, 52).

The country later adopted a political settlement that now sees the Sub Saharan nation under the leadership of a Prime minister and a President. This situation has led to a rejuvenation of economic and infrastructural changes that have especially been boosted by the country’s adoption of a new constitution in August 2010 (World Bank 2010, 50).

At present, prudent economic policies have been effected and the country now experiences tremendous infrastructural changes and a decrease in unemployment levels. The country also has most of its organizations and businesses centralized at the nation’s headquarters, Nairobi (Exports Processing Zones Authority 2005, 97).

The country’s leadership has in the past laid proper groundwork for creating an investment friendly atmosphere with economists projecting that the country could achieve economic growths at the rate of 8% per annum by the year 2025 (African Development Bank 2010, 74).

The Central Bank of Kenya is currently undertaking stable fiscal and monetary policies that have ensured a stable monetary policy in the past few years. Kenya being strategically located in the wider East African region because of its seaport (Mombasa); it has a strategic economic importance in the region (Exports Processing Zones Authority 2005, 54).

This study seeks to evaluate the small business environment in the region with a careful analysis of the pros and cons the country faces with regards to Small businesses. This study will also provide recommendations on how the country can improve its cons and take advantage of its pros to boost the growth of Small businesses

Infrastructure

The government of Kenya is currently involved in improving the country’s infrastructure to ensure current facilities in the country are working in an efficient manner. Such efforts are currently aimed at rehabilitating, improving, maintaining, and upgrading existing roads, airports, seaports and other infrastructural facilities.

Airports

Kenya currently has a well developed international and domestic air transport network that at least covers the entire strategic locations of the country. International airports are located in three cities while domestic airports (for small aircrafts) are located in two cities: Nairobi’s Wilson Airport and Kisumu’s airport (Exports Processing Zones Authority 2005, 52).

For areas that are inaccessible by road, the country has more than 150 airstrips scattered all over the country to provide access to remote locations (Exports Processing Zones Authority 2005). These airports and airstrips are strategically located to provide goods and services to most businesses in the country.

Seaports

Kenya majorly has one seaport in Mombasa which serves a major economic role for both micro and macro economic business entities. This seaport is termed as one of the most modern in Africa with its strategic importance extended to serving other landlocked countries like Uganda, Rwanda, and Burundi (Exports Processing Zones Authority 2005, 45).

The seaport serves a major strategic role in small businesses because most goods and raw materials dock at the port, after which they are transported countrywide.

Roads

Kenya has a relatively good road network serving most of its major towns. However, the country’s road networks in remote locations where many small businesses thrive are relatively poor with a huge majority of them being murram. Nonetheless, the country’s major highways are known to account for more than 70% of the total freight transported in the country.

The cost of transporting freight is advantageously negotiable and most often cheap (Exports Processing Zones Authority 2005). In this regard, small business owners are able to transport their goods and raw materials in virtually all corners of the country.

Notably, the country’s infrastructure is used to transport large freight including oil and other goods to the country’s neighbors. This carriageway is known as the Northern Corridor (Exports Processing Zones Authority 2005).

Railway

Kenya’s railway network is not as advanced as it should be because the rail infrastructure at present is the same rail network used during the colonial period. However, most of the country’s rail network covers major commercial centers.

On a positive light, the country’s rail network seeks to gain from reforms aimed at modernizing the country’s infrastructure in the coming few years due to massive transport reforms to be undertaken by the Ministry of Transport.

Telecommunication

Most small businesses in Kenya thrive from a good telecommunication network. Currently, Kenya is served by four GSM service providers with a relatively strong coverage across the country. In addition, more than 80 internet service providers are currently operating in the country through cut throat competition that has tremendously reduced the costs of telecommunication (Exports Processing Zones Authority 2005)..

Electricity

Electricity in Kenya is majorly created through hydropower and distributed in 250 volts 50 cycles single phase (Exports Processing Zones Authority 2005). The government is currently engaged in encouraging the private sector to involve itself in the production of more electricity because virtually all small business and large business entities rely on power for most of their operations.

Power is however generated through the country’s main electric generating parastatal, Kenya Electricity Generating Company (KENGEN) but it is distributed through another State parastatal, Kenya Power and Lightning Company (KPLC) (Exports Processing Zones Authority 2005).

Water And Sanitation

Water is majorly supplied by authorized water agents and local authorities (such as municipals and councils). Most councils and municipalities in major commercial centers are engaged in the provision of basic sewage and sanitation services for business entities.

However, due to the proliferation of small business entities and indeed the population, most of Kenya’s councils and municipalities are currently seeking to increase their water supply and expand their sewage services to meet the demand.

Investments Policies, Laws And Regulations For Small Businesses

The Kenyan government is currently aiming at increasing the confidence of both local and foreign investors to increase their investments in the country. A great part of this effort has been through a revision of existing laws and procedures of setting up small businesses in Kenya. Currently, the private sector contributes a greater part of the country’s Gross Domestic Product (GDP).

One of the government’s main strategies to induce both local and foreign investors is to sell most of its stakes to them. In this manner, the government has initiated a diversification from public sector investments to private sector investments.

The kinds of investments earmarked for privatization include some of the largest to the smallest state corporations (Kenya Investments Authority 2010, 232). This trend is projected to create more business opportunities for investors.

In addition, laws, policies and regulations are quickly being explained and eased through the investment promotion centre (www.investmentkenya.com) which assists both local and foreign investors in setting up businesses in the country.

The service has of late been upgraded to meet the modern needs of businesspersons in the country (Kenya High Commission 2010, 17). Application procedures and approvals are currently being facilitated through the medium as well.

Kenyan laws currently allow for the setting up of small businesses in form of partnerships, private companies, joint ventures and public companies. This provides many local and foreign investors with a wide selection of alternatives on the type of businesses the may wish to undertake.

The Kenyan Foreign investment act currently governs and safeguards all types of legal investments by Foreigners and undergoes periodic reviews which keep existing laws relevant with the changing business environment.

For instance, there was a previous requirement that if foreign investors wished to set up business in the country, they had to apply for a Certificate of Approval so that they may be able to repatriate capital and profits (Exports Processing Zones Authority 2005). This provision is no longer there; which means that investors do not have a limit to foreign participation in local businesses, in terms of equity input or otherwise.

The government currently wishes to adopt more business friendly rules and policies. These new regulations are expected to further streamline licensing and other application procedures while also increasing the degree of transparency and accountability in providing the same business provisions (Claasen 2010, 2).

Information is therefore expected to be easily available to investors, including the procedures and legislation governing small businesses in the country.

Investment Opportunities For Small Businesses

There are currently many investment opportunities for small businesses as outlined by the Kenyan government. These opportunities are outlines as follows:

Information Communication Technology (ICT)

ICT is a fast growing sector in the Kenyan economy and many small business owners are bound to gain from the increased ICT adoption in the country. Such opportunities present themselves in form of software development, telecommunication services, E marketing and the likes (Sudan 2010, 67).

Such opportunities are complimented by the huge human resource pool of skilled, English speaking, human resource experts who graduate from Kenyan universities each year.

Commercial Dairy Farming

Currently, the government is undertaking preliminary studies to asses the feasibility of privatizing most of its Artificial Insemination (AI) services. The same opportunity still exists in dipping services as a major dairy subsector (which has in the past been undertaken by the government).

Clinical services are also being privatized by the government and this also presents an opportunity for more private sector participation.

Tourism

Since the government has extensively undertaken major strides in marketing the country as a topnotch tourist destination in Africa, increased tourist figures are expected to boost small businesses that make local artifacts for sale to tourists. Other kinds of businesses expected to grow in this sector include tour agencies, tourist cafeterias, hotels, catering industries and the likes.

Other

Other small business opportunities exist in the agricultural sector, textile industry, food industry, education sectors, agribusiness, manufacturing sectors and transport sectors (Kinyanjui 2000, 15)

Technological Environment

Many countries with regard to small and medium enterprises (SMEs) have gained from technological changes that set off in the 1990s (Hill 1987, 5). However, in Kenya, technological changes have not impacted small businesses very positively. Many local investors are not well versed with new technologies and this has led to a lot of confusion regarding the incorporation of technology in day to day business operations.

In fact, most businessmen and investors who are strategically positioned to gain from technological changes are interestingly unaware of it, whereas investors who are aware of it, lack adequate access to technology but in some cases it is too expensive (King 2002, 67). Foreign investors have therefore in the past been better placed to gain from technological changes.

Kenya and most Sub-Saharan countries have often found immense difficulty in using technology to integrate the activities of small businesses with potential investors, both locally and internationally (Wanjohi 2008, 5).

The situation is further worsened by the wide technological rift between business men in rural areas and those in urban centers. Technological development in rural Kenya is also hampered because there is limited access to electricity among other social amenities that make internet connectivity available.

Access to information is therefore hampered in this sense and small businesses in rural Kenya are isolated from existing networks that can provide the break through most small businesses in rural Kenya need for growth and prosperity. Technological changes in Kenya therefore do not seem to help entrepreneurs in rural Kenya at all.

Credit Availability

Small businesses the world over, have been identified to suffer from limited access to capital. In turn the alternatives in technology are greatly limited due to a lack or insufficient credit.

For example, many small businesses have been observed to use inappropriate technology because they cannot afford the cost of using the right technology (IFC 2009, 65). Sometimes, even when credit is readily available, some investors may be forced to compromise their freedom in choosing the right purchasing equipments because of stringent regulations in lending.

The constraining nature of the Kenyan credit market has therefore forced many small investors to seek alternative ways of financing like self funding and seeking funds from friends and relatives. In addition, the limited access to long term financing methods has forced many businesses to contend with short term methods of financing which are often expensive (Muteti 2005, 27).

Other types of financial challenges many small businesses in Kenya face include high banking costs, high interest rates and exorbitant fees in borrowing funds. The year 2008, brought this issue to fore because most of the country’s small business investors were hoodwinked into joining pyramid schemes that never bore fruit.

However, from the whole scam, it was evidently cleat that many people were desperate for a lending mechanism that enabled them to pay back borrowed money in small interest rates.

Investment Protection Agreements

The government has made specific legislations in its constitution to safeguard both local and foreign investors against unforeseen business calamities. One such guarantee is the protection against expropriation of businesses or private properties which is often undertaken by governments for public interest. In case such an eventuality occurs, the law guarantees investors compensation.

Another such guarantee is the repatriation of profits and interests under the Foreign Investment Protection Act which allows foreign investors to repatriate their profits after tax (including retained moneys which have not been capitalized) (Kenya Investments Authority 2010, 112).

In the same regard, they can also repatriate any interest payments associated with borrowed loans. Also, Kenya is a member of the World Bank Multilateral investments Guarantee Agency which safeguards businessmen from risks of a non commercial nature (Kenya Investments Authority 2010, 16).

Investment Promotion Centre

Investment promotion centre was established through an act of parliament to assist micro and macro businesses to operate in the country. This body helps small businesses facilitate their licensing requirements before they commence business and also support the promotion of local investments in both local and international stages (Kenya Investments Authority 2010).

The body works closely with relevant government ministries and most notably the Ministry for local government in establishment of local businesses to assist investors procure licenses and required permits for business. Currently, the body assists small business investors in obtaining licenses within six months or less.

Small businesses are not governed by any equity ceiling, although foreign investors are required to partner with local investors when undertaking small businesses in the country (Kenya Investments Authority 2010).

With regards to business opportunities created from government privatization of its departments, the Investment promotion centre can assist small businesses acquire businesses within four weeks upon availability of the necessary documentations (Kenya Investments Authority 2010).

Recommendation

Kenya has a favorably good business environment for small businesses to thrive. However, since small businesses thrive majorly in remote commercial areas, it is important that the government expand the infrastructure in the rural areas to support the growth of small businesses. Such developments can be facilitated through private-public partnerships which are expected to hasten such developments.

Also, a great deal of the country’s small businesses is concentrated in major commercial centers of the country, thereby disproportionately growing small businesses.

The government should therefore provide more incentives for growth of small businesses in rural areas which account for a greater majority of the country’s population. This can be achieved through a reduction of taxes or a reduction of land rates as a factor of production.

Licensing has also notably been more bureaucratic than it should be. Considering most nations have achieved fast and more efficient ways of licensing, it is important that the country also follow the same precedent (Organization for Economic Cooperation 2010, 3).

Some licensing requirements are noted to take more than six months before being processes, meaning that the system needs to be automated to increase the speed of such processes.

Some of the country’s laws regarding foreign investments also backtrack on the country’s quest to improve foreign investments in the country. For example, the legal requirement that foreign investors ought to partner with local investors in owning agricultural land or setting up small business is retrogressive.

Such laws are therefore redundant and should be changed through increased pressures by the business community in improving the business landscape of the country.

Conclusion

Kenya is a major economic hub of the wider East African region. Its business environment is supported by the government’s commitment to change existing and archaic policies that have previously stunted the economic growth. When compared to other countries of its peers, Kenya is firmly on the path to growth prosperity especially boosted by small business development.

The growth of small business is especially expected to thrive from the government’s review of existing policies, growth of the ICT and tourism sectors plus an improvement in the country’s infrastructure.

The country is therefore expected to substantially grow from increased investor confidence and an upsurge of business opportunities across major economic sectors. That said, Kenya provides a good business environment for the growth of small businesses.

Reference List

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Claasen, Mario. 2010. Social Accountability in Africa. Practioners’ Experiences and Lessons. Johannesburg: African Books Collective.

Exports Processing Zones Authority. 2005. Doing Business in Kenya. Nairobi: International Research Network.

Hill, Thomas. 1987. Small Business Production/Operations Management. Nairobi: Macmillan Education Ltd.

IFC. 2009. Press Releases and Features: Doing business in Kenya, September 9, www.ifc.org/ifcext/media.nsf/…/DB2010_Kenya_Sep09 .

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Kenya Investments Authority. 2010. Kenya Investments Authority: Home, March 10, www.investmentkenya.com/.

King, McGrath. 2002. Globalization, Enterprise and Knowledge. Oxford: Symposium.

Kinyanjui, Maina. 2000. Tapping Opportunities In Enterprise Clusters In Kenya: The Case Of Enterprises In Ziwani And Kigandaini. Nairobi: Institute for Development Studies, University of Nairobi.

Muteti, James. 2005. SMEs in Kenya. Nairobi: The Catholic University of Eastern Africa (CUEA).

Organization for Economic Cooperation. 2010. Perspectives on Global Development 2010: Shifting Wealth. New York: OECD Publishing.

Sudan, Randeep. 2010. The Global Opportunity in IT-Based Services: Assessing and Enhancing Country Competitiveness. London: World Bank Publications.

Wanjohi, Mugure. 2008. Factors Affecting The Growth Of Mses In Rural Areas Of Kenya: A Case Of ICT Firms In Kiserian Township, Kajiado District of Kenya. Nairobi: Longhorn Publishers.

World Bank. 2010. Doing Business in Kenya 2010, January 20, psdblog.worldbank.org/…/doing-business-in-kenya-2010.html .

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