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Oct 15, 2020

Does the government have a role in stimulating growth in the SME sector?

The government plays a leading role in the provision of an enabling environment for businesses to thrive. One such way is through the provision of incentives to attract investments in the private sector. 

Small and micro enterprises (SMEs) particularly require a host of incentives to enable them survive, given the numerous constraints that affect their growth.  These are some of the measures that the government can take to promote growth of the SME sector: 

Credit guarantees

SMEs sometimes lack the required collateral to access loans from financial institutions. Governments can help by providing partial guarantees for loans taken by SMEs. In Kenya, the government is currently amending the Public Finance Management Act, 2012 to allow for credit guarantees to SMEs. If enacted into law, SMEs will be able to access loans to expand their operations under an arrangement where the government promises to pay part of the loans advanced in case of default. Financiers will also get attracted to lend to SMEs because of reduced risks.

Tax Incentives 

To woo investors in the SME sector, the governments can also reduce or exempt such businesses from certain taxes. Tax incentives lead to growth of SMEs as they allow them to channel most of their profits back to the growth of the business. For instance, in the wake of COVID-19 earlier in the year, the government reduced rate of turnover tax from 3 per cent to 1 per cent for all micro, small and medium-sized enterprises.

Doing Business with SMEs

Government tenders frequently have demanding financial requirements that make it difficult for SMEs to qualify. The government can relax its tender requirements and procurement barriers in a bid to accommodate SMEs. Trade and Industrialisation Cabinet Secretary Betty Maina recently announced at a post-budget forum that “the government will ensure SMEs supply goods that were previously being imported”, with preference going to women, youth and persons living with disability. 

Market Exposure

Governments can also help SMEs with the marketing of their products. This can be done for example by organizing events such as expos which allow SMEs to showcase their products. 

Capacity building 

Through capacity building programmes such as trainings, mentorship as well as linkages with academic institutions and organisations offering support for business development, government-led capacity building programmes play a great role in modelling SMEs.

Research and Development

Governments can also fund research that will help benefit the growth of SMEs. They can do this for example by giving grants to universities and investing in technological advancements that support SMEs. 

Improvement of Infrastructure.

When governments improve on infrastructure, it improves businesses. Governments should build and maintain roads, airports, bridges, sea ports, energy transmission lines, telecommunication systems and any other infrastructure that promotes business success. 

Conclusion

In addition to the measures outlined, the government can also promote ease of doing business by doing away with bureaucratic restrictions on licensing and registration that make it too tedious and expensive for SMEs to formally register. The fact that over 79% of SMEs are operating informally makes it harder for them to get the much-needed support. Estimating their contribution to the economy may also prove complex. 

By Vincent Ogaya and Wangechi Ngatia

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