Why World Bank is concerned over capital demand on SMEs: The institution says that minimum capital requirements for SMEs retard their development and

By James Anyanzwa

The World Bank says small and medium-size enterprises have less access to bank financing in economies with high minimum capital requirements. [PHOTO: FILE /STANDARD]

 The World Bank has raised concerns over the minimum capital requirement regulation for small businesses. The bank says such a rule stifles entrepreneurial activity in an economy.

According to the Bank’s Doing Business report 2014 minimum capital requirements directly hinders business development and growth.

The report minimum capital requirements, which refer to the share capital that must be deposited by shareholders before starting business operations, are comparatively higher in low-income countries.

It says a thriving private sector—with new ?rms entering the market, creating jobs and developing innovative products—contributes to a more prosperous society.

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The report notes that sound business regulations are important for a thriving private sector—and a thriving private sector is important for overall development.

According to the report high minimum capital requirements are associated with less access to finance for small and medium-size firms.

In most cases this required amount is specified in an economy’s commercial code or company law.

According to the report small and medium-size firms have less access to bank financing in economies with high minimum capital requirements.

“Higher minimum capital requirements are associated with weaker regulations on minority investor protections and tend to sustain the informal economy. They also impede the development of start-ups,” says the World Bank report.

“It could block potential entrepreneurs seeking to start businesses as alternatives to employment.”

According to the report economies that do not have minimum capital requirements or set them very low tend to better protect investors by being more likely to promote transparency in corporate transactions, provide easy access to corporate information and have stricter director liability standards.

doing business

This comes even as it emerged that Kenya’s rating in terms of the ease of doing business worsened last year after the East Africa’s biggest economy appeared to have overlooked key business reform programmes.

Rwanda, the region’s fastest growing economy, topped the list of 50 world economies, which made significant improvement in business reform initiatives over the last eight (2005-2013) years.

According to the report Kenya slipped eight positions, falling to position 129 from 121 last year.

A total of 189 countries were sampled with Singapore being the best country to do business while Chad emerging the worst.

Kenya, however, ranked second in East Africa after Rwanda in terms of the ease of doing business within the East African Community (EAC).

 It is followed by Uganda and Burundi in third and fourth positions respectively while Tanzania is the worst performer in the region.

The report dubbed ‘Understanding Regulations for Small and Medium -Size Enterprises,’ presents quantitative indicators on business regulations and the protection of property rights that can be compared across 189 economies.

enforcing contracts

Regulations affecting 11 areas of the life of a business are covered.These include starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and employing workers.

The economies ranking highest on the ease of doing business are not those with no regulation but those whose governments have managed to create a regulatory system that facilitates interactions in the marketplace and protects important public interests without unnecessarily hindering the development of the private sector.

Burdensome regulations

‘These economies all have both a well-developed private sector and a reasonably efficient regulatory system that has managed to strike a sensible balance between the protections that good rules provide and the need for a dynamic private sector unhindered by excessively burdensome regulations,” says the report.