How SMEs can create over a million jobs annually for the youth

Behind the 'middle-class' lifestyle is a booming SME sector that drives these economies and generates millions of new jobs every year. [Istockphoto]

It is a fact that small and medium enterprises (SMEs) form the backbone of the global economy, and Eastern Africa is no exception in that sense.

I recently reviewed interesting statistics and research findings on the inter-relations between banks and SMEs, as part of our build-up to launching a dedicated service centre for our SME customers.

The data reinforced my belief that commercial banks, as well as government policymakers, have a special role to play in enabling SMEs to thrive.

The reason why developed countries pay special attention to their 'middle class' citizenry is that they form a majority, stabilising factor for their economies.

Behind the 'middle-class' lifestyle is a booming SME sector that drives these economies and generates millions of new jobs every year, helping to keep a majority of the population productively engaged.

African countries have so far relied mostly on government expenditure to support their economies, which is not sustainable with rapid population and worrying unemployment growth. Accelerating economic growth will require special interventions and support to achieve the 'African dream.'

In Kenya, the region's biggest economy, SMEs constitute 98 per cent of all businesses, create 30 per cent of jobs annually and contribute three per cent of gross domestic product (GDP), according to data by the Kenya National Bureau of Statistics (KNBS).

Yet the potential of the SME sector is stymied by inadequate capital, limited market access, poor infrastructure, inadequate knowledge and skills and rapid changes in technology. Changes in the regulatory environment also catch many SMEs unaware, limiting their growth.

A KNBS survey released in 2018 indicated that approximately 400,000 micro, small and medium enterprises (MSMEs) do not celebrate their second anniversary. Only a few SMEs reach their fifth birthday, putting into doubt sustainability in this critical sector. In contrast, another survey by the African Development Bank (AfDB) established that SMEs are a strategic priority for East African banks.

SMEs, as per the AfDB research, is considered a profitable business prospect and provide an important opportunity for cross-selling.

Banks have a special preference for SMEs as they consider the market as being large, not saturated and with a very positive outlook.

AfDB identified obstacles constraining banks' full engagement with SMEs as being stringent business regulation, an unfavourable legal and contractual environment and the lack of a more proactive government attitude towards the segment.

The AfDB survey, which studied SMEs in Kenya, Tanzania, Uganda and Zambia, also concluded that some areas of prudential regulation and some bank-specific factors were behind the non-realisation of the SMEs' full potential.

Macroeconomic constraints

But even in the face of the constraints, banks have adapted to their environment and developed mechanisms to cope through innovation and differentiation.

The AfDB study recommended the support of SMEs through reforms to minimise the impact of regulatory and macroeconomic constraints.

It's high time that East African governments, in consultation with the private sector, teamed up to address regulatory bottlenecks that hinder credit flow to the region's SMEs.

A thriving SME sector could easily address the cross-cutting unemployment challenge and offer support to the large-scale manufacturing sector, which is the hallmark of solid and sustainable economic growth.

Credit is the oil that greases the economy, and it would therefore be a good start to address regulatory restrictions that make banks shy to lend to SMEs within the East African Community.

A common credit reference mechanism would be a good start, to ensure that lenders have clear visibility of all businesses from the community that approach them for loans.

The EAC could also benefit from adopting tax, labour movement measures and incentives that encourage the growth of SMEs.

The incentives could also be scaled up in other African countries under the nascent African Continental Free Trade Area framework.

A middle-class East Africa would be a great start to addressing the African dream.

The writer is CEO of the cross-listed Bank of Kigali