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Fighting poverty

“A strong policy statement”

by Kennedy Manyala
“Fast food and restaurants are very important; many of these businesses  make good money”

“Fast food and restaurants are very important; many of these businesses make good money”

In low-income countries, the informal sector tends to employ far more people than any other sector. Typically, informal businesses are small and struggle to survive in an unfavourable environment with scant growth perspectives. Recurring difficulties include the inability to enforce contracts, the limited access to finance and the lack of qualified skills. The Kenyan government is unhappy with this state of affairs. It wants matters to improve because it considers the development of small and even micro entreprises a key to fighting poverty in the long run. Interview with Kennedy Manyala

According to official statistics, 80 % of Kenya’s working population is active in the informal sector. The ratio is similar in many developing countries. Why do you consider that a problem?
The problem is that the informal sector has not been thriving in Kenya so far. In an ideal situation, this sector would be a driver of growth and an agent of change, helping to minimise poverty. In Asia’s emerging markets – consider China, for instance – small-scale businesses employ a lot of people and are contributing to reducing poverty. That should happen in Kenya too.

In many developing countries, excessive rules and regulations suffocate private enterprise, with the result of many businesses staying informal and small in order to be beyond the reach of regulations. Is that the case in Kenya?
No, that issue has been dealt with. There used to be a complicated system of licenses; it was indeed quite confusing and even destructive. But things have changed. Today we have a single business permit. This permit is issued by the local authorities. They charge a fee according to the scale of the business – and that is it. According to World Bank data, doing business in Kenya is easier than in most low-income countries. In this category, we are in the sixth place according to the World Bank’s Doing Business Index.

Do all small businesses have the permit, even small road-side shops? And are they part of the tax base?
Yes, they have the permit, and they have been formalised to that extent. But most of them do not pay taxes. Our Value Added Tax kicks in when a company has sales worth of 3 million Kenyan shillings per year. That is the equivalent of more than $ 36,000. Most micro and small business in Kenya are far below that threshold.

What businesses typically belong to the informal sector?
The variety is huge. A lot of agriculture is done small scale. There are also car repair shops or carpenters, for instance. Fast food and restaurants are very important too; many of these businesses make good money. I know of one man who started as a road-side seller, went on to run a restaurant and now owns a five-star hotel in Kisumu, which, by the way, is still offering local cuisine. This is the kind of successful entrepreneurship we need. I know of the case because the Kenya Investment Authority, the agency I work for, facilitated a World Bank loan of 500,000 Shillings. That loan allowed this man to expand his business and thrive.

So access to credit is what the informal sector needs?
Yes, financial services certainly matter. Actually, the situation in Kenya is not too bad. According to the World Bank, we rank second in this category among all low-income nations. Of course, we don’t want to remain a low-income nation forever, so we need to do more. There certainly is room for improvement. In Kenya, we have many small-scale finance schemes, cooperatives and merry-go-round models with revolving funds. One of our goals is to scale up such schemes and turn them into micro banks.

Are there other relevant challenges?
Yes, we also need to develop markets in order to provide more businesses with more access to more customers, and we need to enable businesses to forge stronger links with business partners at the national and local levels.

What about skills training or legal advice for entrepreneurs and their staff?
Yes, these are also challenges we must rise to if we want to help small-scale businesses to grow into strong, profitable and tax-paying mid-sized enterprises. Qualified staff certainly makes a difference, and it would be helpful to have some kind of certificate. Unless skills are tested somehow it is very difficult to ensure that people actually posess them. So you see, we are facing a lot of challenges in terms of empowering the informal sector. We understand it needs to be done. In its Vision 2030, our government has spelled out that the change is necessary. We hope that the German donor agencies like KfW Entwicklungsbank and DEG (Deutsche Investitions- und Entwicklungsgesellschaft) will give us support.

Are you cooperating with other donors too?
Yes, we are cooperating with the World Bank and especially the IFC, its branch for promoting the private sector. Many international non-governmental organisations from Europe and North America, moreover, have tried to support the informal sector in Kenya in the past. They have probably spent more money on this matter than our government received in terms of aid, but these programmes did not solve the problems. Too often, they did not reach the target group. Typically, when you talk to small-scale entrepreneurs, they will tell you that they have heard of such programmes but never had access to them. So the question really does arise whether our policies were right. In retrospect, we wish we had tackled some important issues ten years ago, but we were not idle. The licence system was reformed and the Vision 2030 clearly spells out that we need progress in the informal sector, so there is a strong policy statement.

Are you planning to support entrepreneurship in the formal sector in general or is there a specific focus?
Well, we have to be strategic, so we are focussing on six sectors of growth. They are:
– tourism,
– manufacturing,
– agriculture and live stock,
– information and communication technology,
– wholesale and trade and, as I already explained,
– financial services.