How graft is turning Kenya into a graveyard for startups

World Bank notes among the factors limiting growth in Kenya is a high level of informal businesses in the economy. [Denish Ochieng, Standard]

Corruption and excessive bureaucracy are among the key factors turning Kenya into a graveyard for startups, the World Bank has warned.

In a new report, the institution says the economy overly relies on established companies, some of which have been around since independence.

And with few new businesses entering the market and finding the room to grow, the country is at the mercy of some underproductive firms that are not instrumental in creating new jobs.

The World Bank’s Systematic Country Diagnostic report – which identifies country-level actions and investments – also identifies the large presence of State-owned and State-linked enterprises among factors limiting the growth of firms in Kenya.

Informal economy

Other reasons highlighted are high levels of informality in the economy, several entry barriers and a private sector with limited access to loans.

With the government borrowing heavily from local banks to fund various projects, businesses have found themselves crowded out as lenders opt to deal with low-risk State institutions.

As a result, there has been little growth overall, which would be driven by the entry of more productive companies as less productive ones exit.

However, Ethiopia – Kenya’s neighbour and its biggest rival in the race for economic superiority in the region – has registered the entry of a significant number of new productive firms and the exit of less productive ones.

Other countries that have done better than Kenya, according to the World Bank survey, include Chile, China, Columbia and Malaysia.

The only country that Kenya beats in the study is India. ?

The report further notes that there has been minimal contribution to growth from “dynamic reallocation” in Kenya. This happens when resources such as labour, entrepreneurship, land and capital are easily shifted from less productive to more productive areas.

This reallocation represents less than five per cent of recent increases in the total factors of productivity.

“This is lower than in other countries, indicating that Schumpeter’s creative destruction process, which historically has accounted for long-term prosperity, is remarkably weak in Kenya,” the report says.

Perhaps Kenya’s best example of the creative destruction process is mobile phones, which killed or replaced letters and dealt a blow to the Kenya Posts and Telecommunications Corporation (KPTC).

The government has long maintained that it has made significant policy changes to improve the ease of doing business in Kenya. This, says the State, has made it easier to start a business.

Ease of business

“We have recorded many milestones thus far, such as Kenya’s 80-slot improvement since 2014, with our nation currently ranking at 56th globally and ranking third in sub-Saharan Africa on the Ease of Doing Business Global Ranking Report, from a low of 136th globally in 2014,” said President Uhuru Kenyatta in his seventh State of the Nation address.

The president noted that Kenya now ranks first in protecting minority investors and fourth globally on getting credit, according to the World Bank report.

At the height of the Covid-19 pandemic last year, added President Kenyatta, the number of companies registered daily increased by 500 per cent to an average of 300, from 30 in 2014.

On aggregate, 400,000 companies are registered each year in the country.

“My government has heeded the cries of Kenyans for bold and decisive actions to reduce the unnecessary regulatory burden occasioned by the multiplicity of licences at both the national and county levels,” said the president.

He noted that his regime had since waived single business permits for all new businesses registered in Nairobi for the first two years of their operations, effective March last year.

The government, he said, had also waived the presumptive tax requirement for all new businesses, adding that similar measures would soon be rolled out nationwide.

However, a 2016 survey by the Kenya National Bureau of Statistics showed that close to half a million small enterprises die annually, with most of them citing increased operating costs and a drop in earnings.