Contribution of small and medium enterprise to the economic development of Rwanda
par Valens NYANDWI
Universite Nationale du Rwanda - Licence 2013
The aspirations of Rwanda's Vision 2020 are founded upon six main pillars, one of which is private sector led economic growth. The emergence of a viable private sector that can serve as the principle engine of the economy is paramount to Rwanda's development and key to this will be fostering an environment conducive to SME growth and development.
According to the Rwanda SME Policy of 2010, Small and Medium Enterprises and micro enterprises in Organization for Economic Cooperation and development countries account for over 95% of all firms, 60-70% of employment and 55% of GDP and create the majority of new jobs, indicating the impact SMEs have on employment. In contrast, currently over 80% of Rwandans are engaged in agricultural production.
The SME sector, including formal and informal businesses, comprises 98% of the businesses in Rwanda and 41% of all private sector employment though the formalized sector has much growth potential with only 300,000 currently employed (Rwanda SMEs policy, June 2010). Most micro and small enterprises employ up to four people, showing that growth in the sector would create significant private sector non-agricultural employment opportunities.
The 2011 Establishment Census enumerated 123,256 establishments (Rwanda SMEs policy, June 2010). The private sector accounts for 96.5% of total establishments, with 4,256 non-profit (3.4%), 73 public and 46 mixed establishments.
Sole proprietorship is by far the most common form of legal status with 112,169 establishments (90.8%). There are 2,520 establishments limited by shares and 8,573 with other forms of legal status (e.g. non -profit associations, government).
Rwandan small and micro businesses comprised 97.8% of the private sector and account for 36% of private sector employment. SMEs in Rwanda comprise approximately 98% of the total businesses and account for 41% of all private sector employment.
SMEs in Rwanda face many macro level challenges faced by large companies, including limited transport and energy, a missing insurance agency, low level of societal trust, challenges with contract enforcement and a weak education system.
Unlike large firms that may have the time and resources to invest in resource and human capacity building, SMEs often have limited abilities to develop the skills of their staff or take the advantage of local economies of scale in terms of energy, transport or raw materials.
They also often lack the ability to gather and process market information outside of what is immediately relevant to their current business due to lack of technical knowledge and training on how to make a use of this information.
They also are dependent upon a single individual or small group of individuals to develop business ideas and assume the risk of start-up or expansion and the burden of taxation and other regulations. This means that even for entrepreneurs that do see opportunities in the market, it is difficult to bring those ideas to fruition due to the potential costs of failure.
This challenge is exacerbated by the fact that financial institutions find it too high risk to lend to SMEs given the cost/benefit ratio in terms of time and resources required to process SME loans as well as the difficulties most SMEs face in consolidating capital and creating business plans to become viable lending candidates. This creates a blockage to growth where SMEs that have the skills to scale-up or move into manufacturing and processing are constrained due to their limited access to finance, even if they are willing to assume the risk.
However, despite the above challenges, the SME sector has the potential to lower Rwanda's trade imbalance. Rwanda reported a trade deficit of 285.5 millions USD in 2010. Rwanda's exports remains dominated by traditional products such as coffee, tea and minerals like tin, Coltan, wolfram and cassiterite.
Rwanda's main export partners are China, Germany and United States. SMEs in Rwanda have remained less competitive compared to regional neighbors and if no effort is made to make them more competitive, this situation is likely to worsen with Rwanda's accession to the East African Community and the implementation of the common market protocols. Making existing and new Rwandan SMEs more competitive in value added exports is therefore one among other vital actions necessary to reverse the trade imbalance and building competitiveness.
It is in this context that the Entrepreneurship Development Unit within the Ministry of Trade and Industry is in the process of identifying the most competitive SMEs, sectors pre District across the country in order to support SMEs undertake business activity within sectors with the aim of unlocking SMEs competitiveness(MINICOM, June 2010).
The establishment census confirmed that SMEs have a critical role to play in creating jobs for Rwandans, whereby SMEs comprise approximately 98% of the total businesses and account 41% of all private sector employments.
The SME sector, with formal and informal businesses, plays a crucial role in the country's development; it has a potential to lower Rwanda's trade imbalance and generate off farm employment. Strengthening this sector has been highlighted as a successful tool in achieving economic goals that is why the Government has taken the lead in SMEs sector development.
Focusing on this priority, clustering strategy will serve as a vehicle for enhancing competitiveness among Rwandan SMEs. When SMEs work collaboratively within a cluster, they can take advantage of market opportunities that they could not achieve alone and share certification or monitoring systems which reduces cost and increases learning.
Cluster based intervention engenders collective action, dialogue, trust, experiences transfer and capacity building within clusters and with other linked organizations and sectors.
Clusters organization can also offer a useful entry point for stakeholders seeking to support business and private sector development.
The fact is that firms working together in a cluster should be able to respond to the challenges of global market than isolated ones that is the motive that the Ministry of Trade and Industry has in run of linking SMEs together in cluster.
Despite the role of SMEs in the Rwandan economy, the financial constraints they face in their operations are daunting and this has had a negative impact on their development and also limited their potential to drive the national economy as expected. This is worrying for a developing economy without the requisite infrastructure and technology to attract big businesses in large numbers.
Most SMEs in the country lack the capacity in terms of qualified personnel to manage their activities. As a result, they are unable to publish the same quality of financial information as those big firms and as such are not able to provide audited financial statement, which is one of the essential requirements in accessing credit from the financial institution.
This is buttressed by the statement that privately held firms do not publish the same quantity or quality of financial information that publicly held firms are required to produce. As a result, information on their financial condition, earnings, and earnings prospect may be incomplete or inaccurate. Faced with this type of uncertainty, a lender may deny credit, sometimes to the firms that are credit worthy but unable to report their results.
Another issue has to do with the inadequate capital base of most SMEs in the country to meet the collateral requirement by the banks before credit is given out. In the situation where some SMEs are able to provide collateral, they often end up being inadequate for the amount they needed to embark on their projects as SMEs assets- backed collateral are usually rated at `carcass value' to ensure that the loan is realistically covered in the case of default due to the uncertainty surrounding the survival and growth of SMEs (Binks et al., 1992).
These are some of the factors already acknowledged by some researchers as blocking most SMEs in accessing credit from the financial institution in the country. But are these really the case in Rwanda?
SMEs in Rwanda do not also have the luxury of picking a financing scheme that will be appropriate for their businesses. The major type of financing open to them is debt financing from the financial institutions, which most often comes with a long list of requirements that most SMEs find them difficult to meet. The other type that is Asset financing, aside the long list of criteria also requires operators of SMEs to provide 50% of the funds and the financing institution providing the other half to fund the purchases of the assets.
This type of financing do not allow for growth of the SMEs sector since they are all short term in nature (John Ackah and Sylvester Vuvor , June 2011).