13th Annual International Management Conference Proceeding

economy activities that include one or more persons or enterprises in the formal economy employing up to 50 persons
(Stevenson and St-Onge, 2005). The Ministry of Labour and Human Resource Development (MLHRD, 2004),
which is the lead agency for the SME sector, makes provision for both formal and informal enterprises, classified into
farm and non-farm categories, employing 1 – 50 employees (MLHRD, 2004).
Considering the fact that Kenya has unemployment rate of 50%, and a labour force of 9.2 million (1998 est.) of
which agriculture takes 75%-80%, the importance of SMEs in economic development especially the aspects of job
and wealth creation in Kenya cannot be more emphasized (1Up Travel (n.d)). Njeru (2006) has underscored this
point by arguing that “Small Medium Enterprises (SMEs) play a major a role economic development as they generate
jobs hence eliminating poverty that afflicts people; however, they are faced with challenges such as small local markets,
inadequate region integration, poor infrastructure, failure to access credit and adopt information and communication
technologies (ICT) among others.” They employ more than half of the workforce (Mahinda, 2004). It is hence
imperative that the capabilities of the SMEs be increased for the future of Kenya’s economic deveopment. Research has
shown that with the increase in access and affordability of Information Technology and Communications (ICTS),
companies have adopted technologies to make their management more effective. However, this is not the case with
most SMEs in Kenya (Njeru, 2006) .
According to the (CBS, 1999), there were approximately 1.3 million SMEs, creating employment for 2.3 million
people. An estimated 26 percent of households were involved in some kind of non-primary business activity.
Approximately two-thirds of Kenyan SMEs are located in the rural areas which provides home to over 80 percent of
the population (CBS, 1999). The survey indicated that only 11.7 per cent of SMEs indicated they were registered and
39.4 per cent operated with licenses. About two-thirds of all enterprises were in the trade of buying and selling
commodities while 13 and 15 per cent were in manufacturing and services respectively.
According to the Department of SME development, the SME sector experienced growth from 2000 – 2002,
increasing to 2.8 million enterprises with employment of 5.1 million persons, accounting for 74.2 per cent of total
employment in 2002 (MPND, 2003; ERS, 2003). This dramatic increase was largely due to retrenchment in both the
public and private sectors. In 1999, the average size of an SME was 1.8 persons. The owners themselves accounted for
almost 75 per cent of total SME employment. In fact, 80 per cent of total SME employment involved only the owners
and their family members (CBS, 1999). Only 11.6 per cent accounted for regular hired employees in SME
employment. Ninety six point seven percent of SMEs employ less than five employees, 2.6 per cent employ 6 – 10
persons. There were no employees in the rural towns and areas with more than 15 employees and none in the major
towns with more than 25 employees (Stevenson and St-Onge, 2005). The SME sector in Kenya is mainly
concentrated in the micro enterprise segment. Only 9041 SMEs fell into the category of small. These small firms
accounted for an estimated 154,267 workers or a paltry 5 per cent of total SME employment. This lack of enterprises
in the 11- 50 employee range comprises a missing middle both in terms of numbers of enterprises and their
contribution to employment (Stevenson and St-Onge, 2005)
United States Agency for International Development (USAID) support to the (MSME) sector has had major impacts
on its development which is important to the overall welfare of the population in Kenya. To illustrate this
importance, a 1999 survey estimated that there are 1.3 million micro-enterprises employing 2.4 million people, two
thirds of whom are in rural areas. This figures increases to 5 million people, an equivalent of 30% of Kenya's labour
force, when informal businesses are included. They contribute 18% of the country's Gross Domestic Product.
According to figures released by IFC (2006) Statistics, the total number of SMEs in Kenya in 2004 was about
22,104 giving a figure of 0.7 SMEs per 1000 people (IFC, 2006). A Comparison of 11 African countries shown in
Figure 1 reveals that the 0.7 SMEs per 1000 people index for Kenya is the lowest in the group, yet SMEs contribute
74.2% of total employment (IFC, 2005). The Kenyan Government realizes this and aims to groom SMEs into
globally competitive business entities. To foster growth of a strong SME sector, the government has embarked on a
number of SMEs sector reforms.
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