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WORD FROM THE PUBLISHER Mapping the Small and Medium Business Sector


ne of the most vibrant economic sectors in Kenya today is the small business sector. Not only is this the sector where most Kenyans get their livelihood from, it is also the area with the biggest potential for growing the economy, whether that is in terms of employment, economic growth, development of entrepreneurship, tax revenues etc. There has, however, been a huge missing link. Despite this acknowledged centrality of the small business sector in Kenya’s economy, the sector flies on largely uncharted. A lot of things happening in the sector remain undocumented in any coherent, consistent way.

Mr. Patrick Mwangi

The issues are many and varied. What are the policies the Government is instituting for the sector. New institutions are being created to support the sector like the newly established Micro and Small Enterprise Authority (MSEA) and the Uwezo Fund, yet information remains scanty on how they are making an impact and how small businesspeople can take advantage of their programmes. Corporates have now firmly moved into the sector, yet little coherent information is to be found on who is doing what, where, when and to what effect. This lack of consistent documentation has largely contributed to the image of the sector as one whose returns are minimal, and whose engagement is risky.


Yet, as the story of Optiven Page 32 shows, this is where Kenya’s entrepreneurship giants are cutting their teeth. The SME Digest has been launched to play just this role. We will endeavour to provide regular, consistent and credible information on what is happening in the small and medium enterprise sector. Who is doing what, when and how in terms of providing goods and services to serve these sectors, how can these businesspeople access these services, and navigating through the labyrinth of official regulations and other sanctions that they must address daily in their business ventures will be the bread and butter of the SME Digest. Further, we will profile entrepreneurs and institutions that are making a difference in the small and medium enterprise sector. This publication will provide a platform where the chief executive of a bank or any other corporate with products and services targeted to SMEs can interact with the SME that he or she is targeting. I wish you a happy and beneficial read, and do not hesitate to contact us should you feel that you have something you would like elucidated in this magazine. Patrick Mwangi CHIEF EXECUTIVE OFFICER Aquarius Media Limited

CONTENTS Publisher Aquarius Media Ltd Editorial Director Patrick Mwangi Marketing Manager Nancy Robai Editorial Team Editorial Cordinator Caleb Mutua Writers Zawadi Mudibo Omondi Onyatta Biko Rading Design and Layout Aquarius Media Ltd.

9 Blazing the Trail 12 SME’s Financing Dilemma 16 Saccos Aggressive Foray into SME loans 20 Who is an SME? 24 Plan For One-Stop Shop for Small Businesses

Finally Takes Off

28 35

ILO stimulating Growth of SMEs in Kenya

Everything Kenyan Entrepreneurs Ought to Know About Bid Bonds

Tax Regime 6 Simplify For SMEs to Enhance Compliance

Business Executive Faiza Wangari For all editorial/Marketing and Subscription inquiries please contact: The General Manager Aquarius Media PO Box 51239 - 00100, Nairobi, No.6 Kabiru Court, Daidai Road, South B, Tel: +254 20 553 510, Email:

32 A Huge Inspiration From a Huge Mistake

The editor welcomes comments on articles carried in this publication. Send your comments, questions and suggestions to All correspondence to the editor is assumed to be intended for publication. Aquarius Media Limited admits no liability for unsolicited articles or pictures. The views expressed in this publication are those of the authors and not necessarily shared by Aquarius Media Limited.



Simplify Tax Regime For SMEs to Enhance Compliance

Small Businesses Find Tax Regime Too Expensive and Burdensome By Zawadi Mudibo 6 | SME DIGEST


enya’s small business sector is generally viewed as comprising activities of petty traders operating in the streets of main urban centers. Most of these activities involve the sale of second-hand items like clothes, shoe shining, street

vending, carpentry, vegetable selling, repair and construction work, and are largely made up of micro businesses. The small business sector comprises the informal sector, as well as formal businesses in the


Budget Focus,” says that from the informal sector point of view, tax evasion is generally driven by a perception that the tax burden is too high. This poses a number of problems to tax systems, raising difficult questions over how tax policies and tax administration may influence tax compliance incentives and behavior.

service industry, manufacturing, construction and other economic activities. The informal sector could also be described as any activity generating income and profit on a small scale, using simple skills, and dynamic and not tied to regulation of the activities. Consequently, the micro, small and medium businesses dominate Kenya’s economic activity in line with trends in the developing world. The Small and Medium Enterprises Sector (SME) is estimated to account for an estimated 50 percent of the economic output in most developing countries. Statistics show that in Kenya, the SME sector forms at least 35 per cent of the GDP and accounts for close to 80 percent of employment. It is, therefore, no wonder that taxation authorities in Kenya are very keen on harnessing this sector as a source of tax revenues. However, taxing the SME sector has been replete with challenges, and Kenya Revenue Authority (KRA) continues to grapple with this problem. There are several issues that the Government must address if to increase taxation compliance from the SME sector that is recognized as a potentially huge source of tax revenues. According to Mr Nikhil Hira, Senior Tax Partner at Deloitte & Touche East Africa, there are no specific rules for SME’s in tax law in Kenya. They are taxed on the same basis as everyone else.

Mr Nikhil Hira, Senior Tax Partner at Deloitte & Touche East Africa

He goes further to dispel misconceptions that taxes are generally punitive for most SMEs. He says, “(Kenya’s) tax rates are by no means punitive – 30 per cent is a fairly average rate if you look globally. I think one of the issues is that we do not see much return for the tax we pay, and that gives the impression that we are overtaxed.” “One issue for all taxpayers, SMEs included, is that our laws are old, and administration is not as strong as it might be. We find that our tax system is unduly complex which also gives the impression that we are overtaxed,’’ adds Mr Hira. In a recent report, The Institute of Economic Affairs (IEA)indicated that there is a strong relationship between the informal sector, and the inability of the Government to collect the requisite taxes. The publication, dubbed “The

The compliance tax burden on the Informal Sector may be high relative to that of large companies (higher unit cost in relation to turnover). Further, the cost of complying with a given set of tax rules and regulations is generally higher for the Informal Sector as a percentage of turnover or profit. Which begs the question how the government can empower SMEs to enable them expand. According to Mr Hira, “a lower corporate tax rate will certainly help, and indeed this has been used in other parts of the world (e.g. UK) and helped the sector grow.’’ He further proposes a less stringent administration of the tax laws that make it easier to comply, such as having a quarterly VAT return instead of the current monthly returns. “These sort of breaks for SMEs will go a long way to help them concentrate on business development,’’ he adds. Tax breaks and, or grants, could also offer some reprieve, particularly, if the intervention helps to create employment, he notes further. SME DIGEST | 7


Which is to say, in theory, a taxpayer’s incentive to comply with a tax system depends on an assessment of the relative benefits and costs of complying versus noncompliance. Indeed, the large numbers of SMEs, their high turnover rates and their sheer diversity present challenges to all administrations. For SMEs, key considerations are to minimize administrative costs while ensuring compliance, including considering the drivers and impacts of operating in a noncompliant environment. However, Mr Hira feels that tax incentives might not be the way to go to ensure SME compliance with tax laws. He argues that giving tax incentives is not always good because exemptions tend to erode the country’s tax base. “SMEs have a finite life time and advantage. Giving them a lower tax rate is one good way of helping them.’’ Mr Jackton Omulo is a small trader in Kisumu’s Kondele area. He has been a fishmonger all his life. He earns at least Kshs.2,200 daily from the sale of local delicacies ‘ngege’ and ‘mbuta’ fish. ‘A fried ‘ngege’(Tilapia), for instance, will cost you between Kshs. 350 and Kshs. 650. And for me, what matters is the fact that the margins range at between kshs. 150 and kshs. 300,’ reveals Mr Omulo. He says he has never paid taxes, and the only levies he is aware of are those by the County Government with whose askaris he engages in 8 | SME DIGEST

running battles whenever they show up. These occurrences demonstrate the level of resistance and are evidence of dissatisfaction. Mr Fred Waswa is the Managing Director of Octagon Pension Services Ltd. His firm has interests in both Kenya and Uganda, and is looking to expand into Tanzania.

‘’They get taxes yet don’t offer relevant services. In Uganda, the taxing system depends on the town you operate and where your employees reside,’’ he adds. According to Nikhil Hira, the cost of compliance for all tax payers in Kenya today is too high. He says, ‘SMEs struggle more because getting help is often expensive.’ It is apparent that the taxman makes it difficult for SMEs to comply, hence the need to relook the entire system so as to ease compliance. A situation where the SME sector remains largely untaxed, as more people transition in to the sector, means that the government continues losing billions of shillings in uncollected tax revenues.

Mr Fred Waswa, Managing Director of Octagon Pension Services Ltd.

Comparing Kenya’s and Uganda’s tax regimes, Mr Waswa says, ‘I have been in business for over a decade, particularly in Kenya, and comparing the two tax systems, Kenya is fairer. In Uganda you pay so many taxes for almost anything and everything you engage in.’ He adds that Kenya’s main undoing is the fact that authorities only seem to be swindling the tax payers.

From the perspective of tax administration, the small size of many SMEs is the major obstacle hindering government in ensuring that they are incorporated in the tax bracket. The small sizes of the businesses make it easier for them to remain outside the taxation bracket. This situation is worsened by mistrust and weak structural dialogue between the Government authorities and the SMEs. There is, therefore, need to address the general mistrust between tax agents and taxpayers, with agents perceiving small businesses as tax evaders, unwilling and unable to pay their taxes.


Blazing The Trail CIC, Britam and UAP enter the field of microinsurance and start reaping early benefits By a Correspondent


espite the dire need for microinsurance to cushion small businesses against business adversities, the insurance market in Kenya has shied away from embracing this category of customers. There is a lot of hope, though, as major insurance companies, among them

CIC Insurance, British American Insurance and UAP Life, have started developing and marketing microinsurance products to this category of customers. Insurance coverage in Kenya is generally low. A FinAccess study carried out in 2009 revealed that only seven per cent of Kenyans

had insurance. Within business circles, a paltry 5 per cent, out of the insured portion, were employed in the formal sector. The study, therefore, deduced that majority of people in the informal sector – where the bulk of small and medium enterprises (SMEs) are based – were insufficiently SME DIGEST | 9


catered for by the conventional insurance schemes.

a lot of potential (for growth). “The low income market has a lot of potential to grow but unfortunately remains largely untapped,” he states.

The study laid bare the insufficiently satisfied demand for insurance services in the small enterprise sector, where such services are necessary to cushion entrepreneurs from the effects of risks that befall their businesses. This potential must have been the motivation for major insurance companies to become micro insurance providers, offering micro insurance services which target the low income population. Provision of micro insurance services has been growing steadily in Kenya. The country is ranked third in the region in terms of microinsiurance penetyration at 3.2 per cent. It, however, lags behind Tanzania, which is the leading country in the region with the highest micro insurance uptake at 7.2 percent of its populations, while Uganda ranks second with 4.6 percent of its population making use of these services. The Insurance Regulatory Authority (IRA) Chief Executive

The saturated upper and middle class markets are no longer generating huge revenues. 10 | SME DIGEST

Mr Sammy Makove, Insurance Regulatory Authority (IRA) CEO

Officer, Mr Sammy Makove, notes that while micro insurance coverage has undoubtedly increased, it is still not at the desirable level, which indicates that the microinsurance market still has some way to go before it fully develops. “When compared to other African regions, the microinsurance market in the country is not well developed. However, we have commercial insurers as well as informal insurers who have expanded into the market,” Mavoke explains. His sentiments are a reflection of the attitude of insurance companies towards microinsurance, which is, apparently, not very popular in the insurance industry. The FinAccess survey painted a picture of how many insurers sidestep low income target markets of which most SMEs in Kenya are included. CIC Insurance CEO, Mr. Nelson Kuria, concurs, noting that the lower cadre of the population has

Rafiki Microfinance Bank, General Manager, Mr George Mbira, cites the high-risk nature of the low income SME market as a reason why many insurance firms have shied away from the small business enterprises. “People in this segment have unpredictable revenue, which makes delving into it a high-risk venture,” Mr Mbira notes. Despite reservations about the challenges of developing microinsurance products for small enterprises, the insurance companies who have dived in note that the market holds a lot of potential for growth. That major insurance companies have begun trooping towards the SME sector with various microinsurance products and services is proof that the tide is turning. This is attributable to the saturated of the upper and middle class markets, which have been the target markets for most insurance firms in the country. “The saturated upper and middle class markets are no longer generating huge revenues. There is no choice but to go to the bottom of the pyramid,” Mr Kuria explains. A case in point is CIC Insurance, which has been one of the chief


providers of microinsurance products in the country. As of 2013, the three decade-old firm had provided microinsurance coverage to over 40,000 people. Mr. Kuria says that the microinsurance market has generated them Kshs 600 million worth of revenues since entering it in 2001. “The increasing popularity of chamas has made it easier for insurance firms to introduce and enhance the awareness of the microinsurance concept among the target market,” Mr Kuria states. British American Investments Company (Britam) has also been at the forefront of providing microinsurance services, which played a big role in the 27 percent rise in its after-tax profits for the halfyear ending June 2014. Speaking at a briefing to announce the results, Group Managing Director, Mr Benson Wairegi, underlined

Dr Benson Wairegi, Group Managing Director of Britam

the company’s intentions to fully exploit the goldmine that is the microinsurance sector. “We want to expand our microinsurance segment and fully exploit its potential. In the previous year, our microinsurance segment grew from Kshs 132 million to Kshs 187 million,” Mr Wairegi announced. Another major provider of microinsurance services and products

for SMEs is UAP Life Assurance Limited – the insurance arm of UAP – which unveiled a new microinsurance product dubbed Biashara Shwari in September 2014. The insurance cover contains five unique packages that cater for the varied needs of entrepreneurs and include: Group Life Cover, pension contribution benefit, Workers Injury Benefits Act (WIBA) as well as a medical cover benefit. At the launch, Mr. Kiprono Kittony, national chairperson of the Kenya National Chamber of Commerce and Industry, lauded the new cover describing it as a tailor-made solution to the problems afflicting SMEs with regards to insurance coverage. “SMEs face their biggest challenge in finding insurance products that are relevant to their needs. SMEs need protection and insurance,” he exuded.

Small traders also need insurance



SME’s Financing Dilemma

The Biggest Challenge for SMEs is Turning Themselves into Well-Run and Properly Managed Businesses to Attract Funding By Caleb Mutua



t is generally agreed that access to credit is one of the biggest hurdles facing small businesses that want to grow. However, there is actually enough money in Kenya’s financial system readily available to finance these businesses. The devil, as they say, is in the detail, as this money is only available for the well-run and


properly managed enterprises. And therein lies the biggest challenge for small enterprises, to turn themselves into viable businesses that funders can support. The business sector is arguably the country’s top employer and a major contributor to the country’s economic prosperity. The sector created 625, 900 jobs, constituting 89.7 per cent of total employment in 2013, according to the Kenya National Bureau of Statistics (KNBS, 2014). In addition, its contribution to the Gross Domestic Product (GDP) or economic output, increased from 13.8 per cent in 1993 to 40 per cent in 2008, according to the Economic Survey of 2009. The small and medium enterprises are a key part of the business sector. Despite the important role the SME sector plays in the country’s social-economic development, however, it has for decades faced a myriad of challenges among them the lack of proper legal, regulatory and operational mechanisms to guide the industry, poor access to markets (both locally and internationally) and lack of sustainable funding. The lack of sustainable funding in particular has created a financing gap, often defined as the difference between the demand for funds by SMEs mostly dependent on financial institutions for loans, and the supply of funds.

informality. You are likely to find many informal businesses at the micro level, where there exists a blurry line between an individual and the business. Nonetheless, most SMEs are formal, registered business,” explains Mr. Osoro

Mr Jared Osoro,Kenya Bankers Association Research and Policy Director

Different modes of finance that SMEs can utilize to access funding include bank loans, debt financing from development finance institutions, bond finance, through Saccos, micro-finance institutions (MFIs), Non-Bank Financial Institutions (NBFIs) and venture capital. Kenya Bankers Association (KBA) Research and Policy Director, Mr Jared Osoro, says there are misconceptions that make both the SMEs and policy makers miss the bigger picture as far as this segment of the economy is concerned. “It is usually a misconception that the biggest challenge facing SMEs is necessarily funding. Again, many people think that funding is necessarily a loan; that if you don’t get money from a bank or other financial institutions then you are missing funding as an SME. “It is also not true to look at the SMEs through the lens of

He concedes, however, that SMEs that have an aspiration to grow are actually constrained by funding. He is quick to warn traders that it takes more than a desire for funding for them to qualify to access these resources; SMEs must have both the willingness and the ability to meet the requirements. “There are enough resources for all the deserving SMEs, and well run enterprises in need of funding will always meet the requirements. The Kenyan SME sector presents a scenario where we have resources that if appropriately matched to the requirement of the SMEs can be channeled to those respective SMEs.” According to Mr. Osoro, the timing in terms of the life span of the SME and the potential strategy of that particular SME are the key determinants of the kind and amount of funding that an SME require. He advises businesses against rushing to the bank or a microfinance institution for a loan immediately they are convinced that their business idea is viable, but to think of funding as carefully sequenced actions. SME DIGEST | 13


“An SME’s own savings or equity is the first line of funding. They can then leverage their equity to attract additional equity from private equity players. Remember private equity players must be convinced that the business is a potential enterprise. With these two sources of funding, an SME can then approach a commercial bank for a loan.” The Head of SME, Retail Division, at the Kenya Commercial Bank (KCB), Ms Susan Ndiritu Situma,

Enterprises (MSMEs) in Kenya, Tanzania, South Sudan, Uganda, Rwanda and Burundi. The bank also runs Biashara Club, a specially designed business club that offers SMEs an opportunity to learn their trade, network and broaden their business scope. This is achieved through business advisory services through management seminars and workshops, regional and short-term loans, and overdraft offers at low interest rates among other ways. “As a bank, we realized that SMEs needed more than finance and as a result, we started business clubs six years ago to provide these businesses with the much needed capacity building.” SMEs also have other avenues open to them which are rarely explored. Mr Osoro urges SMEs to consider securing funding by listing at the securities exchange or even get formal borrowing through bonds.

Ms Susan Ndiritu Situma, Head of SME, Retail Division, at the Kenya Commercial Bank

says they prefer to fund SMEs who have already achieved some traction. “Research has shown that 25 per cent of startups fail. Thus, KCB prefers to finance businesses that are over one year old,” she adds. The bank serves over 200,000 Micro, Small and Medium 14 | SME DIGEST

According to Financial Sector Deepening Kenya (FSD, 2013), access to financial services was as follows; Banks Saccos Microfinance Institutions (MFI)

29.2 % 10% 3.5%

Informal groups


Mobile Financial Service Providers (MSFP)


The lack of sustainable funding in particular has created a financing gap, often defined as the difference between the demand for funds by SMEs mostly dependent on financial institutions for loans, and the supply of funds. “If there is an SME that is run extremely well, then there is no reason why that SME cannot list at the securities exchange to get equity as a form of funding. Such SMEs can also go the Capital Market and issue a bond for purposes of borrowing to meet their aspirations,” adds Mr. Osoro. Information available from the Capital Markets Authority indicates that equity financing through the equity market allows an SME to not only raise long-term capital, but also to get further credit due to additional equity cushion now being available. If successful, this approach would address the chronic lack of long-term credit available to SMEs. “When companies are in the growth phase, they tend to get leveraged. Beyond a certain point, banks are reluctant to provide further credit. Equity capital is


required to bring strength to the leveraged balance sheet. At this point, either the promoter will have to self-provide for injecting in the requisite levels of equity, or would have to do without the capital, which in turn would kill the impetus of growth,” says the Capital Markets Authority. The Micro and Small Enterprises Authority (MSEA) is also working with the government to

consolidate all funds meant for SMEs, the youth and the women, including KShs 6 billion Uwezo Fund and the Women Enterprise Fund (WEF) among others, which adds up to Kshs 21 billion.

existing categories and have an additional kitty to be accessed by anyone for purposes of fairness and balance. One without a limit; age or gender restrictions, ’’ states MSEA Chief Executive Officer, Mr. Patrick Mwangi.

‘’The Micro and Small Enterprise Fund will be the solution to entrepreneurship in Kenya because we will only require seed capital from the government. The Fund would, however, retain the already

As SMEs continue to drive the economy, and as they continue looking beyond the local markets to the regional markets, the more they want to get funding from across the financial spectrum.


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Saccos Aggressive Foray into SME loans They Face Immense Pressure for Banking Services From SMEs By Caleb Mutua


avings and Credit Co-operatives, popularly known as Saccos, lent Kshs 70 billion to micro, small and medium businesses in 2013 alone, buttressing the sector’s growing contribution in financing businesses at exceptionally low interest rates, a new report has shown. While tallying of the volume of all Sacco loans may seem dismal compared to banks, which in the same duration gave traders loans of up to KShs 1.2 trillion, a longrange look into the sector shows promising days ahead with most Saccos increasingly providing


other essential business finance services. These services include asset finance, cheque discounting, overdraft, insurance premium financing, LPO finance and invoice discounting. According to the report, dubbed The Extent to which Deposit Taking Saccos Provide Financial Services to Micro, Small and Medium Enterprises prepared by Associate Consulting Africa Ltd (ACAL), small enterprises benefited the most from the loan portfolio (40 per cent). Micro


enterprises received 29 per cent while medium and large enterprises received 22 percent and nine percent respectively. Remarkably, the report shows that most loan products are geared towards benefitting traders, and majority of the Saccos (67 per cent) are willing to expand their lending to these startups and small businesses. “This is an encouraging outcome since majority of Saccos have products for MSMEs. This is likely to rise as more Saccos adopt a bolder commercial orientation unlike the traditional social orientation. Nonetheless the Saccos need to diversify their business finance products and services to accord with the needs of MSMEs,” says the report. Notably, the finance sector is set to change substantially especially now that Saccos have access to Front Office Savings Activity (FOSA) deposits. Sacco societies operating FOSAs reflect near retail banking business operations. As such, these deposit taking Saccos pose additional risks and are, therefore, subject to closer regulation and supervision. “This will improve Saccos’ deposit volumes and in future, the size of funds available for business lending,” says the report. Between 2012 and 2013, the subsector performed well, recording double-digit growth rates in all metrics assessed: membership increased by 10 per cent, total

assets increased by 14.2 per cent, member deposit increased by 13.0 per cent, loans and advances by 13.7 per cent and total capital shot up by 18.6 percent. The Sacco Supervision Annual Report 2013 recorded a turnover of nearly six billion (16.1 percent increase) for the subsector. The survey, which was conducted between July and September 2014, further indicates that the issue of increasing lending to Micro, Small and Medium Enterprises is tied to sources of funds available for lending. Thus, Saccos need to be assisted to expand sources of funds. While access to external sources poses many compliance risks, access to internal sources especially in view of FOSA regime can be scaled up with less challenges. The major source of funds used for lending is member contributions

or savings which account for 76 percent of the kitty. Other internal sources include non-withdrawable deposits at 6 per cent, Fosa deposits at 2 percent and other Sacco income at 3 per cent. Thus internal sources account for 87 per cent of funds lent to MSMEs, while the other 13 per cent is accounted for by external sources such as loans. “Saccos in seeking alternative funding sources face a number of challenges key amongst them being strict requirements and bureaucracy at 33 per cent, inadequate government support at 29 per cent and legal restrictions, which include Sacco Societies Regulatory Authority (SASRA) regulations, at 21 per cent,” observes the report. The report concluded that the main motivation for many MSMEs to join Saccos was to borrow (40 SME DIGEST | 17


per cent). Developing a saving culture comes in second at 28 per cent, followed by low interest rates at 24 per cent. SASRA points out that Sacco membership rose to 3.3 million in 2013 and savings in Saccos accounted for 48.55 per cent of gross national savings. By the end of 2013, there were 1,995 active Saccos, with 135 already licensed as Deposit Taking Saccos. “The main reasons for preferring Saccos are low interest rates at 71 per cent, followed by favourable terms and

Key Trends in the Saccos Subsector According to Associate Consulting Africa Ltd (ACAL), Saccos are becoming more and more bank like in terms of activities and products. Consequently, Sacco clients are demanding nearly the same services as they are used expecting from a bank such as cheque clearing, Real Time Gross Settlement (RTGS) and ATMs among others. This, according to the report, is putting immense pressure on Saccos to contemplate acquiring banks or converting to banks. “Saccos through FOSA are becoming more open in terms of membership, thus breaking the


conditions at 16 per cent, and easy security options at 13 per cent. The key support needed so as to offer more services include capacity building at 40 per cent, access to more and/ or cheaper funds at 39 per cent, clear and flexible legal framework at 20 per cent, and government support at 20 per cent,” opines the report.

Savings Activities (BOSAs) or the Front Office Savings Activities (FOSAs), or both. More importantly, Sacco Societies Act, 2008 and Sacco Societies (Deposit-Taking Sacco Business) Regulations, 2010 provide legal, regulatory and supervisory framework commensurate to the risks in deposit taking business of Saccos.

It is also worth noting that membership cuts across different economic activities, both in rural and urban areas. The Saccos are engaged either in Back Office

SASRA is mandated by law to license, regulate and supervise Sacco societies. Thus the DTS are under the regulation and supervision of SASRA.

concept of the common bond. Consequently the guarantee mechanism dependent on social collateral is being undermined,” says the report. Notably, scrutiny and regulation of Sacco activities has played a pivotal role in increasing transparency and accountability among its customers. As a result, MSMEs and non-business Sacco clients are likely to confidently seek their services which in the long run lead to an upturn in the contribution of Saccos to the economy.

work with county governments to strengthen their kitty and lend more to businesses.

Some of the recommendations include the need for Saccos to be assisted to expand sources of funds such as government funds. In view of devolved government, the report recommends Saccos to

The report also cautions Saccos caught up in the bank transformation and acquisition craze to be careful not to increase their loan interest rates. “Much value is attached to low interest rates. Thus the interest rates are at the core of the competitiveness of Saccos. Saccos need to maintain and strengthen these characteristics that make them more preferable. Thus, even as Saccos become more bank-like, they should be advised not to compromise the factors upon which their competitiveness is anchored. Such compromise would result in Saccos losing


appeal and with it, the ability to mobilize deposits thus threatening their success and even existence,” warns the report. The survey was conducted in all the 47 counties except in Lamu and Tana River counties because

of security challenges. Most of the respondents of this survey have been in different industries for a long period of time with 61 per cent having been in the wholesale and retail trade, hospitality, agriculture, services (beauty, professional, repairs),

When passion

transport, real estate, construction, financial services, communication, manufacturing, electricity and water and mining and quarrying for more than 5 years. A total of 135 Saccos were surveyed and over 40 business enterprises.


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Who is an Vexed Question at the Heart of Government Interventions in the Small Business Sector By a Correspondent


inancial experts assert that there is no universally accepted definition of small businesses owing to the fact that different countries worldwide define these small enterprises based on varied factors, such as, size, number of employees as well as annual turnover. The World Bank, for instance, describes them as formally registered businesses that boast an annual turnover of at least Kshs 8 million, and with an asset base of Kshs 4 million. “In addition, these enterprises employ between 5 to 150 employees,” the definition reads in part. After grappling with this question for years, the Kenya Government 20 | SME DIGEST

finally settled on a definition for purposes of policy. This definition is enshrined in the Micro and Small Enterprises (MSE) Act 2012 that came into effect in 2013.

The Chief Executive Officer, Micro and Small Enterprises Authority (MSEA), Mr. Patrick Mwangi, emphasises the critical importance

The law describes all enterprises with a turnover of Kshs.500,000 or below and employing not more than 10 people as ‘micro enterprises’ while those whose turnover exceeds KShs 500,000 and less than KShs 5m annually, and employing between 10 and 15 people, are classified as ‘small businesses.’ This is not an idle question as Government interventions targeting small businesses are predicated on determining exactly this question.

Patrick Mwangi, Ag CEO MSEA


Turning business ideas into small business enterprises is the in-thing in Kenya as increasing numbers turn to entrepreneurship as a source of livelihood. of this dichotomy. He states that grouping micro and medium enterprises is defeatist. “Such grouping is only applicable in the developed world where there are only a handful of micro entrepreneurs. In emerging economies, especially Africa, however, most of the businesses and startups are micro,” he explains. “The Sessional Paper No. 2 of 2005 pinpointed the need for the government to develop a framework for micro and small enterprises. It also pointed out a major disconnect between the interventions required for the micro and small enterprises in terms of their structural framework and infrastructure requirements,” Mr. Mwangi adds. The Sessional Paper No. 2 of 2005: Development of Micro and Small Enterprises for Wealth and Employment Creation for Poverty Reduction formed the framework for the Micro and Small Enterprises Act of 2012, which is the legal basis for the existence of SMEs. The 1999 National Micro and Small Enterprise Baseline Survey carried out by the then

Central Bureau of Statistics (now Kenya National Bureau of Statistics) revealed that there were close to 1.3 million small and medium enterprises in the country. This number increased to 2.8 million enterprises by 2002. Evidently, this number has increased since then. Mr. Mwangi estimates that MSEs in Kenya currently number over 15 million. “Excluding the agricultural sector, there are about 11 million MSEs in the country. With the addition of an extra 4 or 5 million small enterprises from the agricultural sector, we can say they number over 15 million,” he states. The government has always encouraged Kenyan youth to harness their ideas into business opportunities while undertaking to clear the avenues for the latter to legally establish their entrepreneurial ventures. Most small business enterprises are not registered, and hence are classified as informal. However, Mary Mbithi and Jamuhuri Mahinga from the United Nations Development (UNDP) advise that it is important to register these enterprises. “Registering your business opens you up to formal financial services as well as government incentives,” they state. Aspiring entrepreneurs who want to establish their small enterprises should first propose their companies’ name before applying for the name to be reserved by the Attorney General’s chambers.

Depending on the type of enterprise to be established, documents required for the registration process include: memorandum of articles of association; details of company directors and secretaries; share capital form; declaration of compliance as well as a Notice of Situation of registered office. Other regulatory requirements for prospective SMEs include a Trade license, single business permit, value added tax (VAT) No., PIN No., NHIF No., NSSF No. as well as an Environmental Impact Assessment No. Turning business ideas into small business enterprises is the in-thing in Kenya as increasing numbers turn to entrepreneurship as a source of livelihood. In September 2014, Kenya was classified as a middle-income country after the rebasing of the calculation of the Gross Domestic Product (total domestic economic output), which hoisted the country to one of the top 10 largest economies in Africa. Small and medium enterprises, particularly those in the agriculture, real estate and ICT industries, played a key part in the achievement of the new economic status. With their pivotal role in creating jobs and boosting the economy, MSEs will continue to be a key driver of the economy. SME DIGEST | 21



Africa holds an estimated 60% of the world’s unused arable land, which if well utilized, can create eight million jobs annually by the year 2020. This makes Africa By Sammy Langat.


gribusiness in Africa is one of the top four sectors with the largest potential for growth, besides mining, power, and infrastructure development. Currently, the Agribusiness value chain is estimated to support over 70% of the livelihoods in Africa. With the world’s population expected to reach eight billion in 2025, Africa has a golden opportunity to be the world’s bread basket. The continent holds an estimated 60% of the world’s unused arable land, which, if well utilized, can create eight million jobs annually by the year 2020. Africa is therefore the green continent sitting on a land mine. Countries like China, India, and Saudi Arabia have invested millions of dollars in food production either directly and through private investors. This should serve as a wakeup call to African governments and the private sector to create policies on food production that support local food security and export to international markets. The 2012 African Green Revolution Forum (AGRF) in Arusha, Tanzania, focused on smallholder farmers’ key role in developing Africa’s agricultural sector. This sector supplies


18 | S M E D I G E S T

over 60% of the food that is consumed in Africa. It emerged that the farmers’ major hurdles are accessing markets and dealing with post-harvest food loss, which is estimated to be 40%. This is high compared to other developed countries in Europe, Asia, and North America, which have less than 1% post-harvest losses. This is thanks to the presence of value addition, manufacturing, and marketing structures plus good infrastructure. In Kenya, it is estimated that during the peak milk production months of April and August, processors can only take 60% of milk. The other 40% goes to waste or is sold at low prices to middlemen. Processing the milk into milk powder – one method of value addition – would have provided a safeguard for the glut. Increase in value addition also increases the shelf life of the produce, creates multiple uses for it, and increases its markets both locally and internationally, ultimately creating more value for the producer and manufacturer. The Lamu Port and South Sudan- Ethiopia Transport (LAPPSET) project, for example, will make it possible for produce to be transported from Rift Valley to South Sudan and even Ethiopia. Once completed in 2018, the Standard Gauge Rail-

way (SGR) project, which is under the LAPPSET project, is estimated to reduce the transport cost of a container from Kisumu to Mombasa by more than 25 times. In June 2014, Translocal agribusiness focused Bank in Kenya. The Bank is keen on becoming a major stakeholder in chain to ensure that the chain to ensure that the chain becomes a key economic driver in Kenya. Transnational Bank supports the agribusiness value chain through ital and assets, it helps farmers meet livestock purchase and breeding, crop production and harvesting and warehousing costs. Farmers need to succeed in the market to repay these loans. Therefore, if their products don’t reach the market at the right price the farmers are ultilike Transnational Bank, which hampers the growth of their agribusiness. One way of tackling this issue is by promoting contract farming. What drives contract farming is the ability of manufacturing companies to gain more returns from processing and value addition. Currently, the practice is mainly done by leading agribusi-

ness processors such as beverage companies, maize millers, meat packers, edible oil companies and milk processors. The higher prices offered to farmers through contract farming increases their creditworthiness. This in turn improves their ability to access funding through available. All in all, to sustainability grow ing institutions must look beyond crops and livestock and empower the larger agribusiness family: the value addition and processing businesses and improve the agribusiness players’ access to local and international markets. -

out more about the Bank, visit

Financing Agribusiness Value Chains Machinery & Equipment

Farm Inputs Working Capital

Asset Financing

Paying Farmers for Produce Chapaa Popote

Crop Production Crops Financing

Warehousing & Storage Warehousing Receipt Financing

Value Addition / Processing Working Capital


Distribution Asset Financing

Livestock Financing

Harvesting Investment Accounts

Contract Farming Contract Financing

Suppliers LPO & Invoice Discounting

Export Market Trade Finance

Financing SMEs to power the Agribusiness Value Chains

Trans National Bank


0704 331786 SME DIGEST | 23


Plan For One-Stop Shop for Small Businesses Finally Takes Off Challenges Causing Delays at the Micro and Small Enterprises Authority Resolved By Caleb Mutua


he planned establishment of a one-stop shop to handle all issues affecting micro and small businesses by the Micro and Small Enterprises Authority (MSEA) is finally on track, after most of the challenges that had caused delays in this initiative 24 | SME DIGEST

were resolved. The final step in clearing the way for work to begin was the launch of a 5-year strategic plan by MSEA in November 2014. The 2013-2017 strategic plan will guide the Authority on its decisions and programmes in the promotion, development and

regulation of the Micro and Small Enterprises (MSEs) sector for the next five years. Speaking when officially launching the 86-page roadmap, Industrialization and Enterprise Development Cabinet Secretary, Adan Mohamed, said the strategic plan


(From left) Adan Mohamed, Cabinet Secretary Industrialisation, (Second left) MSEA Chairman Paul Ngugi, (Third left) Patrick Mwangi, Ag CEO MSEA

of Small and Micro-enterprises under one umbrella so that they can get service; have a one-stop shop somewhere they can turn to when dealing with issues facing them,” said Mr. Mohamed.

Hon. Adan Mohamed, Cabinet Secretary for Industrialization and Enterprise Development

provides a reference point for activities related to the small business sector. “The launch of the strategic plan is a very big step in the MSEA’s journey of bringing together all aspects

The establishment of MSEA through the Micro and Small Enterprises Act No. 55 of 2012 was published on 4th January, 2013 in Kenya Gazette Supplement No. 219, setting the ball rolling for the operationalization of the authority. Speaking during the launch of the strategic plan at the Kenya International Conference Centre, however, the chairman of MSEA, Mr Paul Ngugi, revealed that various challenges made it impossible for the Authority to hit the ground

running. “Members of the MSEA board were appointed in March 2013 but the authority was slow in starting up the operationalization process. We needed to put in place the necessary structures required to fully operationalize the Authority. In this regard and with the support from our parent Ministry, we managed to establish support offices which included accounts, procurement, human resource, legal and office of the Registrar of Micro and small enterprises, which were very critical for the establishment of the MSE regulatory regime,” explained Mr. Ngugi. In addition, the authority developed guiding policy documents SME DIGEST | 25


The launch of the strategic plan is a very big step in the MSEA’s journey of bringing together all aspects ofSmall and Microenterprises under one umbrella. for the board and the authority, including the board charter, financial Mr Paul Ngugi, MSEA Chairman

Long journey For many years and despite accounting for 18 per cent of Kenya’s Gross Domestic Product (GDP), small businesses operated haphazardly with no credit finance and legal systems specifically tailored to address the needs of the fast-growing sector. In 2012, the National Assembly enacted the Micro and Small Enterprises Act, which set the ball rolling for the provision of a legal


management and the procedures manuals, human resource policy

framework that would establish rules and institutional mechanisms to guide the development of the MSE and for the creation of MSEA.

Key objectives The Chief Executive Officer of MSEA, Mr Patrick Mwangi, said that the Authority intends to achieve its mandate by focusing on four key result areas namely promotion, development, regulation and the creation

documents and the service delivery charter among others. “Having gone through the preparatory stages, it was time to embark on serious delivery of services to the sector. As such, we needed a strategic plan to help us provide these services in a structured manner. Consequently in October 2013, and with financial support from the United Nations Development Programme (UNDP), we engaged the Kenya School of Government to partner with us in developing this strategic plan,” he explained.

of MSEA’s institutional capacity. “In the strategic objectives, we have addressed the need to enhance MSE access to markets, to have conducive working environments, which we have been coordinating with the county governments, and to promote the entrepreneurial culture and technical skills in the sector,” said Mr. Mwangi. Other key objectives that the MSEA seeks to actualize through the strategic plan


include providing suitable facilities and funding for MSEs, promoting gender participation and inclusion of vulnerable groups, establishment and implementation of legal, regulatory and operational mechanisms for the MSE sector, enhancing coordination of sector players and facilitating integration of MSEs programmes, and embracing Information Communication Technology in all sectors of the Authority. “Plans are also underway to review Sessional Paper No. 2 of 2005 on development of MSEs for wealth and employment creation for poverty reduction, so that we are able to capture the real scenario of the informal sector, especially the inclusion of the ICT and all other items that have come into the market of late,” stressed Mr. Mwangi.

With the new roadmap and legislative framework in place, small businesses, especially those with an annual turnover of less than Kshs 500,000, now have hope that the Authority will fast-track the creation of a special Fund to provide affordable capital. In the 2010/2011 and 2011/2012 financial years, the Minister for Finance allocated Kshs 3.8 billion and Kshs 1 billion respectively to local commercial banks to be advanced to the youth and small businesses struggling to raise enough capital to start and run their enterprises, at an affordable interest rate of 8 per cent. Sadly, however, the banks increased the interest rates making it hard for most of the MSEs to service the loans. In addressing the financial constrains facing the youth

and women particularly the challenge of startup capital, Mr. Mohamed said Commercial Banks and Micro Finance Institutions (MFIs) will be encouraged to enhance lending to MSEs at fair interest rates. “The Ministry of Industrialization will support the establishment of resource mobilization schemes and encourage the primary level associations to mobilize savings. Most important will be the establishment of a fund to provide affordable capital. “In all, the ministry would like to shift the thinking of stakeholders from the concept of poverty reduction, and for that matter, poverty eradication, to wealth creation, an approach which will not only handle poverty but which will move up growth and sustainability,” he said.


ILO stimulating Growth of SMEs in Kenya The International Labour Organisation (ILO) has been one of the most proactive agencies that has over the years collaborated or undertaken various initiatives to boost the growth of entrepreneurs in Kenya. By Omondi Onyatta



ounded in 1919, ILO stands out as the sole tripartite agency among other UN bodies as it brings together representatives of workers, government and employers who collectively shape programmes and policies that adhere to Decent Work for all. The Genevaheadquartered UN body handles


various labour issues worldwide including forced labour, youth employment, child labour, green jobs as well as workplace health and safety. The ILO has initiated, sponsored and promoted several initiatives to boost small businesses in Kenya. The Youth Entrepreneurship Facility (YEF) The Youth Entrepreneurship Facility (YEF) is one of the key hallmarks of the work done by ILO in helping young Africans convert their entrepreneurial ideas into viable business opportunities. It is a partnership-based initiative involving the Africa Commission, ILO as well as the Youth Employment Network. It is implemented via ILO offices in Dar es Salaam (Tanzania), Nairobi (Kenya) and Kampala (Uganda). YEF’s activities include fostering entrepreneurial attitude among Kenyans, entrenching entrepreneurial education in schools, enhancing access to credit facilities for young entrepreneurs, providing access to business development services for SMEs as well as strengthening youth-led small and medium-sized enterprises. In Kenya, ILO works hand-inhand with the Ministry of Labour, Social Security and Services (MOLSS) as well as workers’ and employers’ unions in attaining the objectives of YEF.

Start and Improve Your Business programme (SIYB)

Business LaunchPad Competition

Start and Improve Your Business Programme (SIYB) is a flagship programme of the ILO. In March 2012, the ILO provided KShs. 48 million to YEF through SIYB as part of a new business skills training programme targeting young entrepreneurs countrywide. The initiative targets to reach 15,000 young entrepreneurs in three years.

Through YEF, ILO teamed up with Enablis Entrepreneurial Network East Africa to launch the Business LaunchPad Competition, an annual contest that seeks to stimulate entrepreneurship development in the country by awarding Kenyans who come up with excellent business plans showcasing their business ideas or innovations. Winners of the competition are awarded loans as part of capital for their enterprises through a loan guarantee agreement between Chase Bank and Enablis.

The SIYB management training programme aims to start and uplift SMEs with the hope that informed entrepreneurs will better their business ideas to create more employment in developing economies. Part of the initiative is a business mentoring programme, which ILO has undertaken in partnership with the Kenya Private Sector Alliance (KEPSA), Federation of Kenyan Employers (FKE), Copenhagen Business School, Inoreero University and Africa Youth Trust. The programme has an estimated reach of 4.5 million trainees worldwide, over 17,000 trainers as well as 200 master trainers. ILO has subsequently partnered with over 2,500 institutions globally in providing the business management training programme that has been translated into over 40 languages in more than 100 countries.

Aspiring contestants first have to submit their business plans to the Business LaunchPad Competition website at www. Those who have difficulties writing their plans can get assistance from Inoreero University, which conducts training and awareness sessions in selected counties. First launched in 2009, the Business LaunchPad Competition brings together various firms in the private sector including the Safaricom Foundation, Chase Bank, Inoreero University, in addition to ILO. Jobs For the Unemployed and Marginalised Young People (JUMP) ILO’s involvement with small and medium enterprises in Kenya can be traced to 2009 when the SME DIGEST | 29


agency rolled out the Jobs for the Unemployed and Marginalized Young People (JUMP) project that sought to facilitate the acquisition of entrepreneurship, life skills, technical and vocational education for youth-led SMEs to enhance access to microfinance for these groups. The project ran from 2009 to 2010 and targeted unemployed and marginalized youth.

Contact person and addresses of entrepreneurship programmes

The Growth Oriented Women Entrepreneurs (GOWE Kenya) Growth Oriented Women Entrepreneurs (GOWE) project, undertaken between 2006 and 2008, is one of the achievements of ILO in helping SMEs reach their full potential. Carried out in partnership with International Finance Corporation/PEP Africa and African Development Bank

(AfDB), the project liaised with selected financial institutions to provide loans to women entrepreneurs, enhanced access by women SMEs to gender-sensitive business development services (BDS), and built capacity of BDS providers, SMEs and financial institutions with regards to BDS approaches, gender mainstreaming and association building.

The Youth Entrepreneurship Facility(YEF), Kenya Tel. No. +254 702 625651 Fax: +254 702 623 540 Email: United Nations Office at Nairobi Block P, Ground Level, Gigiri P.O. Box 40513-00100 Nairobi, Kenya

Start and Improve Your Business (SIYB) Andreas Klemmer (Senior Enterprise Specialist, East and Southern Africa) Email: c/o UNDP Resident Representative P. O. 28832 Nairobi, Kenya

Business Launchpad Competition Kenya Fredrick Kariuki Enabllis House, Cedar Suite 1st Floor, Riverside Green – Riverside Drive P.O. Box 26136-00100 Nairobi, Kenya Source: Tel: +254 20445 4440/1/2 Fax: +254 20 445 5553 Email: Fredrick.kariuki@





Kenya’s Top 2014 SME Founder Built Company on Back of Land Deal Gone Horribly Wrong

Mr. George Waciuri, the Chief Executive Officer of Optiven Limited, talks to Our Correspondent, Biko Rading, on how a horrendous land deal in which he lost all his 10-year savings, inspired the creation of his real estate company which topped the 2014 list of 100 mid-size companies in Kenya.



aving set his goal clearly in a bid to become a wealthy individual and perhaps redeem his poor village and the world’s destitute from poverty, Mr. Wachiuri was happy when he met a man posing as a land dealer in Nairobi.


Optiven Limited CEO George Waciuri is congratulated by Nation Media Group chief executive officer Linus Gitahi after his company was declared the best mid-sized company, 2014, during the seventh edition of the Top 100 Mid-Sized Companies Survey at a gala on October 10, 20114 at the Carnivore in Nairobi.

The Optiven founder and CEO says his Kshs 5 million loss over a raw land deal in 2008 left him in depression for a year. He would later learn that the land belonged to the government. He had been defrauded off all his money.

campus, having come from a humble background in Laburra, Nyeri County. He lost his father at an early age, and knowing that their poor mother would not come to their rescue either, Wachiuri did all he could to earn a living in campus.

“It is the worst mistakes that I have ever made. I call it baptism by fire. After a thorough search for a prime land, I finally got what I thought was a good deal, especially because I had followed all the procedures. What followed nearly took me to my grave. I still have the big title deed to date,”says Mr Wachiuri.

The father of three took photos, sold old magazines and journals, and washed fellow student’s clothes to survive at the University of Nairobi, where he graduated with a Bachelor of Commerce (Marketing Option) Degree in 1997.

“It was the lowest point of life. I got depressed. I remember one time I even went to work with a wrong pair of shoes, only to realize during the day,” he says, urging those who want to invest to do their research well. Waciuri’s thirst for wealth began when he was in

“I would take people’s photographs during the Christian Union crusades and other university events and develop them at a studio in town at five shillings per copy. I would then sell the photographs at Kshs 10,” remembers Waciuri.

The Kshs 5,000 education loan given by the Higher Education Loans Board (HELB) was not enough. Evidently, selling onions, cabbages and working on people’s shambas back in his Laburra village in Nyeri County, Had sharpened his entrepreneurial skills at an early age. “I once made a whooping Kshs 20, 000 after taking photographs during a crusade where so many students got saved,” remembers Waciuri. He encourages today’s parents to give their children the room to have an entrepreneurial mind. The father of three knew that only education will save him and his poor mother. “I used to read widely. Soon I started making money out of it. I would buy old magazines in town and sell to students. My room in campus was like a liSME DIGEST | 33


brary. I would charge one shilling for reading any magazine and if someone delayed returning it, I would fine them one shilling and fifty cents,” he says. He performed very well in school. Nonetheless, he did not escape the wrath of poverty as he, alongside his siblings, tilled people’s land for food. “To us, two meals a day was a luxury. We got used to having one meal a day and I knew I would only come out of this situation by working extra hard in school,” Wachiuri recalls. Waciuri founded Optiven Real Estate in 1999 as a supply company with a capital base of Kshs 5 million. He later ventured into the real estate industry in 2008 with the aim of providing houses to middle income earners in Kenya. Since inception, the company has conducted more than 120 projects both in Nairobi County and other counties. Over the years, the company grew to become a household name in the building and construction Industry. Remarkably, Optiven became the first real estate company to win the Top 100 mid-sized companies survey (Top 100 Survey) since the competition began in 2008. It emerged top out of 258 companies that participated in the 2014 edition dominated by manufacturing and tech firms. According to Waciuri, it was a big surprise for the company since it 34 | SME DIGEST

Rapturouse - Waciuri and his staff celebrate

was the first time it had participated in the competition.



“What I hated most in life was paying rent, and this gave me the idea of starting a real estate firm with a difference,” says Wachiuri.

2008 2009 2010 2011 2012 2013

2 Million 23 Million 43 Million 167 Million 250 Million 600 Million (Projections)

Today, Optiven Ltd has over 50 permanent staff. “Empowering your staff is the best decision any CEO can make. And I am happy that my staff members take Optiven as their own company as they share in its vision.” Waciuri holds a Masters of Business Administration from the University of Nairobi and is now a Doctorate candidate at Jomo Kenyatta University of Agriculture and Technology. He is a published author of the recently launched memoir, ‘Soaring like an Eagle’, a motivational speaker, businessman, church elder, philanthropist and lecturer. Chart: Optiven- Revenue growth since inception

Like many other small businesses, Optiven faced regulatory challenges at its infant stage, which almost made it close shop. For Waciuri the property market in Kenya is booming, and as a company, they are just scratching the surface to get a share of the pie. On investment plans, he recommended Kenyans abroad to invest heavily in the real estate business in the country. “Real estate is the only investment that you acquire, go to sleep and wake up as a millionaire. The returns for real estate are far much higher than investing in stocks, treasury bills or any other investment, “says Waciuri. Optiven plans to expand to 20 counties come next year as a way of growing its business empire.


Everything Kenyan Entrepreneurs Ought to Know About Bid Bonds Relaxed Conditions for Bid Bonds by New Players and the Government Have Enabled Small Businesses Compete for Public Tenders By Omondi Onyatta


n October 2013, Kenyan entrepreneurs who belong to the youth, women as well as persons with disabilities were given a huge boost after President Uhuru Kenyatta stated his government would amend procurement regulations to set aside 30 per

cent of all government tenders for micro and small enterprises (MSEs) that are owned by people who fall in the three categories. One of the key challenges these entrepreneurs, most of whom fall under the micro and small enterprises (MSEs) still have to

contend with is bid bonds – also known as tender security – which have now become an important requirement in government tendering processes. Securing bid bonds is never a walk in the park for small entrepreneurs who find it difficult to satisfy the SME DIGEST | 35


stringent requirements imposed by banks due to their weak financial base. What is a bid bond and why does it present a headache for MSEs that wish to bid for government tenders? This is a commercial document that guarantees that the company bidding for a tender is capable of undertaking and implementing the project once it successfully passes the bidding process. Obtaining it becomes a headache when micro and small business entrepreneurs have to deposit with the bank an amount equivalent to their required bid bond. This means that the entrepreneur’s capital would be held up in the bank instead of being utilised in the business. Usually, tendering processes last 90 days or 150 days at most. The issuing of the bid 36 | SME DIGEST

bonds by banks can take up to two weeks, which could see a small enterprise that wishes to apply for tenders time-barred. This challenge, however, could become a thing of the past thanks to the entry into the bid bond market of various players with less stringent conditions. One of these entrants is PSL Capital, which is part of the seven registered companies under the AVLC Group, which also consists of AVL Capital, Advance Ventures, Wasili Kenya, BKY Insurance Agency, Becky Travents Concepts and Becky Logistics. Ms. Eva Muchina, the Business Development Manager at PSL Capital, says that the firm has struck agreements with various local banks and financial institutions to offer bid bonds to its clients. “We charge our clients 2.75 per cent of

the tender value before sharing the profits generated with the bank that provided the bid bond. The commission rate is paid before the bid is issued,� she explains. InvesteQ Capital Limited is another financial services provider that has emerged to help MSEs access bid bonds for tender applications. Founded in 2002 as TradeCO Capital, the firm charges its clients one per cent of the tender value for the first 90 days of the process, after which the rate increases to 1.5 per cent. In addition, entrepreneurs who need a bid bond worth over $ 1 million would have to fork out a refundable 10 per cent of the tender security as cash cover. Speaking during a company event in 2011, the then general manager, Mr Allan Ogendo, lauded bid bonds as one of the financial products provided by InvesteQ to help small


enterprises plug the capital gaps faced when applying for tenders. “Most small business owners do not anticipate the supply gaps they would face when providing the services or products they applied for in the tender. Our aim is to provide financial products, such as, bid bonds, performance bonds and bank guarantee payments to help plug these gaps that can cause considerable working stress,” Ogendo outlined. Small business owners will further be spoilt for choice when scouring the market for bid bonds with the announcement in November 2014 that the Kenya government has set aside Kshs 200 million in this financial year as part of a revolving fund to help youthful entrepreneurs apply for tenders in the public sector. Through the Youth Enterprise Development Fund (YEDF), small business owners will be able to get financial help to obtain bid bonds. According to Ms. Catherine Namuye, YEDF’s Chief Executive, the fund is in response to the

Bid bonds work by ensuring that the owner of the tender will recoup losses arising from failure by those awarded the tender to undertake and implement the project as stipulated in the contract

is helpful in instances where the bid bond can be converted into a performance bond as stipulated in the contract,” the expert explains.

Ms. Catherine Namuye, YEDF’s Chief Executive Officer

financial hurdles encountered by small enterprises when they win government tenders. “YEDF has since July 2014 disbursed more than Kshs 50 million to over 161 enterprises run by the youth. Most of them are from Nairobi County, but we plan to roll out the fund to other counties countrywide,” she revealed. Bid bonds work by ensuring that the owner of the tender will recoup losses arising from failure by those awarded the tender to undertake and implement the project as stipulated in the contract. A procurement expert says that tender securities are advantageous for MSEs, in this case, since these documents can be converted into performance bond by the issuer of the tender. “The tender security allows the owner of the tender to call the bond (request payment of the bond) to cut his losses. This

A tender security also allows small business owners to sort out cash flow problems that would interfere with the implementation of projects secured. When obtained under less stringent conditions – as is the case with various providers – entrepreneurs can avoid tying up their working capital until the tender process concludes. “Once the enterprise completes its project, it need not wait for 60 days to obtain payment but can furnish the bid bond provider with a copy of an invoice after which the latter will provide the payment. This allows businesses to pursue other projects without delay,” Mr. Ogendo explained. MSEs need all the help they can get from the government and the private sector to enable these enterprises continue their role as accelerators of economic growth and creators of additional jobs in the country. Obtaining bid bonds has been a sore thumb for most small business owners who want to apply for public sector tenders. Fortunately, the setting up of the Kes. 200 million revolving fund by YEDF and the emergence of providers with relaxed conditions have put MSEs on the right path to procuring tenders as envisioned by President Kenyatta when he announced intentions to amend procurement regulations in October 2013. SME DIGEST | 37

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DIGEST For Businesses that want to grow



Plan For One-Stop Shop for Small Businesses Finally Takes Off

Saccos Aggressive Foray into SME Loans Who is an SME?

Govt. Finally Settles the Question

SME's Financing Dilemma More Money; Insufficient Candidates


A Huge Inspiration from a Huge Mistake

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SME Digest Magazine Issue 1