Kenyan SMEs Tap Cross Border Trade For Growth

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September 17, 2011
Border tradeSmall and medium-size businesses in Kenya are riding the wave of regional integration to increase sales in neighbouring countries. According to a new survey, this is giving a fresh impetus to the rate at which the ‘key’ middle segment of the economy is expanding.

Sales of goods and services in neighbouring Uganda and Tanzania was the revenue driver for 76 per cent of Kenya’s Top 100 small and medium-sized businesses (SMEs). This has placed East Africa’s integration effort as a main component in driving the country’s economy, according to the survey by consumer market research firm, Synovate.

These companies have shown a strong desire to expand and not put their eggs in one basket,

Phillip Muema,
Partner at audit firm KPMG and the SME survey Project Manager.

The integration of East Africa’s five economies has deepened in the past five years and has facilitated cross border trading among these countries. The coming into force of the Common External Tariff (CET) that resulted in zero tariff barriers to trade amongst member states – barring Kenya was to pay five per cent tariff charges for Uganda and Tanzania-bound goods, due to its prospering economy.

The establishment of a common market that allows free movement of goods, capital and labour across the region at the beginning of the year is expected to further help the Kenyan SMEs to foray into neighbouring economies and add impetus to their growth during the mid term. Nearly 93 percent of Kenya’s Top 100 SMEs expect regional integration to have a positive impact on their business. It is also widely felt that market expansion remains the biggest driver of their growth.

The promise of the Kenyan SMEs retaining their position as the main growth drivers is also hinged on the fact that their confidence in the economy has risen steadily since the beginning of the year to peak at 75.21 points – higher than the average 68 points for corporate Kenya.

It goes without saying that a high level of confidence is a positive indicator of future growth as the more optimistic business leaders are, the more they are likely to seek credit to expand their enterprises, employ more people, enter new markets and introduce new products.

The Top 100 SMEs survey – a brainchild of audit firm KPMG and Business Daily, ranks Kenyan businesses with a turnover between Ksh 70 million and Ksh 1 billion based on their profitability, liquidity, return on equity and level of indebtedness among other performance indicators.

The survey is now in its third edition. It was found that the revenue growth was highest in the past 12 months for small businesses in construction at 61 per cent, services (46 per cent) and information technology (44 per cent). It was lowest in hospitality (22 per cent) and health care (20 per cent).

Shareholder value as measured by the average rate of return was however highest in the transport sector at 124 per cent, energy (75 per cent) and construction (66 per cent).

The survey also found that Kenya’s entrepreneurs still rely heavily on personal savings as a source of seed capital and on bank loans for expansion – with control of the business as the main determinant of the sourcing, in the critical financial sector.

Out of the 247 participants, 78 per cent said they prefer to use personal savings to start the business, which is a direct 73 per cent up from last year, while the number of firms which would seek bank loans to finance growth stood at 72 per cent as compared to 14 per cent, who said they would turn to private equity for money to expand.

Only three per cent prefer tapping the capital markets through an initial public offering (IPO), a fact analysts attribute to rigorous listing requirements and fear of losing control once new shareholders come on board.

The feeling among the farmers is that if the company goes to the stock market, they will be losing control toThe feeling among the farmers is that if the company goes to the stock market, they will be losing control to ‘outsiders’

Duncan Muya,
General Manager at Mukurweini Wakulima Dairy Limited,
A Top 100 SME.

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