Why informal sector is theatre of survival
John Nyamai, 25, runs his own business. He sells boiled eggs at the City Stadium Market along Jogoo Road in Nairobi.
Though sales have not been good, he is enjoying the feeling of being his own boss.
Mr Nyamai has not always been in business. After he finished his Kenya Certificate of Primary Education exams in 2011 in Kibwezi, Makueni County, he moved to Mtito Andei to find a job. Any job.
His first job had him waking up at 3am to make and sell mandazis until around noon. For his troubles, he was paid Sh200 a day. It was too much work for too little pay, so after enduring almost four years of this drudgery, he quit to join his cousin in Nairobi.
There were no jobs in the country’s capital city, Nyamai told Business Beat, so his cousin, who he was living with in one of Nairobi’s slums, bought him a trolley, squeezed a Sh1,000 note into his hand and wished him all the best in his new occupation hawking boiled eggs. That was in 2015.
Nyamai is one of the millions of Kenyans who have found themselves in the goldmine that is the ubiquitous informal sector.
Their hope is that they might turn into the next business magnate, or at least make enough money to survive on as they wait for a job to come by.
While there are those who have grown their businesses in the informal sector, Nyamai is far from striking such fortune.
On a good day, he earns Sh300 from the sale of his eggs. Most times, he makes about Sh150, which affords him a simple meal of ugali and sukuma wiki at a kiosk.
Nyamai is neither an entrepreneur nor an investor.
He is a survivor who simply yielded to the much-hyped, politically correct belief that when there are no jobs in factories and offices, there is salvation in self-employment.
There are about 7.4 million owners or operators of micro, small and medium-sized enterprises (MSMEs) in Kenya, according to a survey released last week by the Kenya National Bureau of Statistics (KNBS). According to the agency’s 2016 MSME Survey, just over 20 per cent of the 7.4 million MSMEs — 1.56 million – are licensed by county governments.
The rest are unlicensed businesses, such as Nyamai’s.
The 5.8 million unlicensed businesses make up the informal sector, which has been praised for its “significant” role in growing the economy and alleviating poverty.
But the survey, the first of its kind, paints a bleak picture of ‘entrepreneurs’ who are barely chugging along.
Although unlicensed businesses employ more than half of the people in the MSME sector, they contributed the least to the country’s gross domestic product (GDP), according to survey.
The sub-sector employed about 8.6 million people, against a total of 14.9 million employees in the entire MSME sector in the last five years.
However, its gross value addition to the economy (or the value of goods and services it produced) stood at a paltry Sh173 billion against a total gross value addition of Sh1.6 trillion for the entire MSME sector – or just 10 per cent.
Many of the owners of these unlicensed businesses are more desperate to maintain a roof over their heads than to erect one for their businesses – that is, their profits do not go into growing their businesses but to nourishing their bodies.
And with 67 per cent of their net income going to family needs, operators of these businesses are not likely to be concerned about their establishments’ posterity.
According to the survey, most of these entrepreneurs are unskilled, with little, if any, formal education.
It is just as stark for their employees, some of whom are minors, according to the report. Close to half a million of these workers have no formal education.
Although some of the operators said they started the business because they had the skills, most of them – 24 per cent – started their business because they had no alternative.
Another 23.5 per cent started the business in the hopes of earning better incomes.
But they have been poor business administrators, with nearly 70 per cent not keeping any records, including on sales or purchases.
“People are in the sector because they cannot get gainful or meaningful employment. And some of them go into it for sustenance reasons,” said Joy Kiiru, an economics lecturer at the University of Nairobi.
Rebecca Makokha, 27, is another example of the entrepreneurs who make up the unlicensed MSME sector.
She works as an office messenger at an insurance agency and earns a monthly salary of Sh10,000, which is nowhere close to being enough to meet her needs. To complement her income, she sells soap, steel wool, toilet paper and sweets.
“I am doing business part-time so that I can at least get bus fare,” said Ms Makokha.
Her business occupies a sack on the ground outside her house. When it rains, business moves into the house.
Dr Kiiru said the country’s “non-performing economy”, which is not creating enough jobs, is to blame for the pervasive informality in the SME sector.
The result is that close to half – 46 per cent – of such businesses close in their first year.
The about 400,000 enterprises that do not live to see their second birthday tend to collapse due to increased operating costs, few customers, declining income and losses incurred in the course of doing business, KNBS found.
Bitange Ndemo, an associate professor at the University of Nairobi’s School of Business, and a former Permanent Secretary in the Ministry of Information and Communications, blames this on Kenyans’ habit of copying others.
“The problem is that most of our people prefer replicative enterprises,” said Dr Ndemo.
“I see Dominic has bought a motorbike so I also buy one. Nobody does the market research to say: the total number of people who can ride a motorbike from this place is 20. So, if 10 of us buy motorbikes, it means we can only get two customers, who may not be sufficient to help us recover our investment.”
His sentiments are supported by XN Iraki, also a University of Nairobi economics lecturer.
Dr Iraki notes that competition kills SMEs “because they often do the same thing”, but innovation could save them.
However, unlicensed businesses spend a paltry 0.04 per cent of their total revenues on innovation, according to KNBS survey.
Still, the informal sector is not entirely a theatre of desperate souls. And, as economist David Ndii, who is also the managing director of Africa Economics, notes it is not possible for large corporations to employ all Kenyans.
According to Dr Ndii, corporates create less than 50,000 jobs every year, while the country needs more than 750,000 jobs.
This means Kenya needs a functional MSME sector, including the informal part of it. With the never-say-die attitude displayed by young people like Nyamai and Makokha, the informal sector can create productive jobs and grow the economy.
Makokha had refused to take up a teaching course forced on her by her parents; she wanted to study business. To have the right to chart her own path, she decided to find a job so she could save enough money to open a beauty parlour. She still plans to enroll for a business course to understand the world of enterprise.
But for her to achieve her dream, there is need for “clear policy interventions” from the Government, according to the World Bank.
In its latest Kenya Economic Update, it looked at the country’s Jua Kali sector and called for increased productivity from firms in the informal sector.
These firms, said the global lender, need access to broad skills such as business management, marketing and accounting; they also need to access technology, credit and markets.
There is also a need for linkages between formal and informal businesses, and for MSMEs to be assisted to enter local, regional and global value chains.
Ndemo added that the Government should develop capacity to understand the costs of production, the market and supply chains.
“That is how you can help reduce the death rate of these enterprises,” he said, adding that more incubation centres should be established to help entrepreneurs develop their ideas.
Iraki noted that entrepreneurs do not need money to start their businesses – they need better ideas.
“Money is not the most important issue for start-ups, it’s the quality of ideas and our attitudes. More importantly, the Government has never had money. Entrepreneurs take 70 per cent of earnings, leaving the State with only 30 per cent. So it makes sense for SMEs to get money where it can be found – in the private sector.”
But then there are those largely unskilled labourers who are in business because they have no other option, but are not cut out to be entrepreneurs.
According to Kiiru, the Government can do more to improve the state of the economy so that firms can come in and absorb such people. She said the country is experiencing “jobless growth” in which, although productivity has improved, jobs have not been created.
“Even if we have jobless growth, we should then have redistribution. The redistribution should be in such ways that even those who have no jobs are guaranteed minimum standards of living,” she said.
“In that case then, you will not be forced to go and open a njugu karanga [peanuts] business that is more expensive to run than the income you get from it.”
She maintained that there is a need to extend the structure of the economy so that even as the country improves productivity, it also grows jobs.
Ndemo added that there is a programme at business incubator iHub to help such people.
“Even if you are not an entrepreneur and you come to me, I will sit down with you and say: can you see any problem that you can solve?” he said.
Should such a person identify a problem and solve it, they earn a ‘premium office’, which does not have too many people in the space.
“And this applies to anyone, irrespective of their academic qualifications.”
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