1.1. Background
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).
1.2. Problem statement
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.
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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).
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