Why manufacturers want five-year tax break on SME loans

A five-year tax moratorium for small and medium enterprises (SMEs) is one of the new proposals that manufacturers are fronting to the government.

This, they argue, will save small businesses from heavy operating costs.

The Kenya Association of Manufacturers (KAM) says this moratorium will unlock the cash flow, which is a key challenge for small businesses owing to the high cost of credit in the mainstream financial market.

As detailed in the Association’s Manufacturing Priority Agenda (MPA), 2024, Kenya Industrial Estates (KIE) a State agency whose roles include availing affordable credit, offers its loans to small businesses at an interest rate of 10 per cent  - which range from short, medium to long term loans.

The sources of these funds, says KAM, are national government and internally generated revolved funds.

The breakdown by the manufacturer’s lobby shows a short loan, which is a group guarantee loan of between Sh100,000 and Sh500,000, has a repayment period of up to 24 months.

A medium loan, mainly for working capital needs offers of between Sh100,000 and Sh3 million and takes up to three years to repay.

A long-term loan is credit required for capital expenditure and comprises mainly renovation of existing buildings, and manufacturing facilities, purchase of machinery and equipment, and expansion projects.

This takes up to eight years and the maximum offered is Sh20 million.

When it comes to collateral, businesses are required to avail land title deeds for the commercial plot, chattels as additions or motor vehicle log books of less than seven years.

This should be accompanied by the necessary documents which include business registration, bank statements, photographic evidence of the property, audited book of accounts, and tax compliance certificates among others.

KAM states that access to finance is a key constraint to SME growth, citing it as the second most cited obstacle to SME growth in emerging markets and developing countries.

“SMEs are less likely to obtain bank loans than large firms. Instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises,” says KAM in the document.

Budgetary allocations

These hard-to-go-through hoops have seen the association ask the government to increase budgetary allocations to KIE to increase the size and number of loans offered.

“The government should give a five-year tax moratorium to SMEs to enhance cash flow and foster sustainability beyond the initial (five-year) period,” says KAM.

Additionally, the State should enact and implement other pending micro, small and medium enterprises (MSMEs) enabling legislations and bills such as the startup policy.

These interventions should extend to the enactment of the Local Content Bill, 2018, which will enhance governance and transparency in the utilisation of resources; review and update the current MSMEs policy to align with the current government structure under the Ministry of Cooperatives and MSME Development to streamline regulatory process and fast track implementation of the reviewed MSE policy to demonstrate government’s commitment to supporting SMEs.

“SMEs share distinctive challenges that require specific governance practices to support them navigate through the four growth stages (stage one - start-up, stage two - active growth, stage three - organisational development, and stage four - business expansion),” says KAM.

The Manufacturing Priority Agenda (MPA) 2024 details how the government can grow manufacturing from a 7.8 per cent contribution to the Gross Domestic Product (GDP) in 2022 to 20 per cent by 2030.

“Kenya can turn the tide and increase manufacturing GDP contribution from 7.8 per cent in 2022 to 20 per cent by 2030 by taking advantage of export markets in the region and internationally; develop SMEs in manufacturing by providing solutions to their market and finance access challenges, and improving their governance frameworks as they grow to become sustainable businesses,” the documents reads.

In this journey, SMEs are expected to play a pivotal role with KAM noting that formal SMEs contribute up to 40 per cent of national income (GDP) in emerging economies such as Kenya.

They are also instrumental in the provision of employment. KAM documents that they constitute 52 per cent of their membership.

“Manufacturing SMEs remain central to Kenya’s industrialisation agenda. SMEs in manufacturing can be promoted through access to markets and finance, and improved governance,” said KAM Chief Executive Anthony Mwangi.

Produce goods

KAM states that one of the many pains SMEs face today is the lack of a ready market for their products.

They struggle to manufacture or produce goods in readiness for the market and at the same time, must go and search for markets to sell their products.

“To enhance market access for SMEs, the Ministry of Investments, Trade, and Industry should regularly update and implement the preferential procurement master roll in support of the Buy Kenya Build Kenya strategy and incentivise export-led growth for SMEs through subsidised standardisation fees and cost of registering Intellectual Property rights,” says KAM.

Building and materials and garments and textiles are the two value chains of the identified eight where the government has emphasised the role of SMEs.

In garments and textiles, a key export for Kenya, the State seeks to attract more investments in the manufacturing of garments and apparel, promote the modernisation of textiles mills and cotton ginneries and promote linkages of MSMEs with schools and education institutions to provide a market for uniforms.

Materials identified in the building and construction sector include clinker, cement, cabros, prefabs, electrical and electronics fittings, cables, and products.

The State seeks to ring-fence certain components of the low-cost housing project for MSMEs.