General Resources ( )The other day Dr.Bitange Ndemo wrote an article on Africa’s poverty contradiction and dead capital which evoked heated and mixed reaction across the country.
The point that Kenya has too much dead capital is what I agree with and submit that can be directed towards SMEs for their growth and well being of Kenya’s economy.
Kenyan SMEs just like other African SMEs face a variety of challenges access to finance being a major reason for their mostly untimely demise. To add to Ndemo’s definition of dead capital of investing in land for speculation purposes, Building ceremonial homes in villages; I would propose to include; Insurance and pension funds investing in buildings and safe government bonds similar to blue chip companies among many other examples of safe investments. How come investing in stocks and government security is termed as dead capital one may ask. For starters if we were to use the Warren Buffet rule on stocks where we do simple arithmetic of subtracting liabilities from assets and dividing with total shareholders you will quickly realize that most listed companies at the Nairobi Securities Exchange are overvalued hence not a good investment.
Research done by Wylde International in 2017 on the state of SME indicated that 68% of SMEs that responded didn’t access finance yet over 40% registered revenue growth of more than 10% of which 23% of the 40% registered revenue growth of over 25% ; this in light of majority of listed companies issuing profit warnings.
The challenge of financing SMEs through financial institutions is a script that is not going to change in Kenya anytime soon in light of interest rate cap and the incoming IFRS 9. Kenya needs to develop alternative forms of investments appropriate for the growth stage of an SME.
What do I mean with this; entrepreneurs are constantly innovating and toying with new ideas every so often and they need funds to test and prove their ideas and concepts. As currently constituted the entrepreneurial ecosystem doesn’t have a channel for financing ideas and start ups; what is happening is such start ups are considered too risky for financial institutions as they don’t have cash flows nor collateral in order to access financing.
Ideally what start ups need is a risk taking financier or a benevolent philanthropist who believes in changing society through enterprise. I believe Kenya doesn’t have a shortage of neither. Donations from Kenyans of all walks of life are the most appropriate form of financing for such seed or idea stage.
Once an entrepreneur proves that their idea is commercially viable they move into what is called early start up a situation in which they are formally registered company. At this point they are still considered a risk by financial institutions hence the best alternative are angel investors who can be wealthy Kenyans such as C-Suite managers, entrepreneurs among others, pension and insurance whose current default investment is land and real estate . As the SME gains product or service acceptance and begins to grow they can now be comfortably be funded by Venture Capitalist and as they progress to towards becoming established companies Private Equity.
To achieve SME financial inclusion will require concerted effort from all stakeholders and a lead by government by taking a paradigm policy shift towards supporting SMEs and finally ensuring that Kenya pragmatically leaps towards Vision 2030.