Capital Employed (N$)
Fewer than 10 persons
Fewer than 5 persons
Wednesday, February 9, 2011
SME bank in Namibia, Collateral free: A big relief for SME
The recent move from the Ministry of Trade and Industry to push for the establishment of free collateral SME Bank is highly welcomed despite the Bank of Namibia initially advice against it
This article intends to reflect on the scope and the nature of SMEs in Namibia and its potential in job creation.
SME defined in Namibia
The Namibian Government identified the Small and Medium Size Enterprise (SME) sector as having the potential for significant employment-creation. Namibia’s Ministry of Trade and Industry (MTI) defined SMEs according to employment levels and turnover as indicated in table below.
MTI’s Small Enterprise Definition
Source: LaRRI and NEPRU 2002
This definition of the SME sector has some limitations. Measuring capital investment, as suggested by the above definition, is problematic because of the difficulty of achieving accurate measurement and also because of the impact of inflation. The employee characteristic is simple to verify and remains a valid criteria. A LaRRI/NEPRU study of 2002 found that about 68% of the SME businesses were small and employed less than three persons. Fifty-eight percent of these businesses were realising a turnover of less than N$ 35,000 per annum, whilst only 6% of the businesses had a turnover of over N$ 250,000 (LaRRI 2002:13-14).
A SME baseline study conducted by the MTI in the Erongo and Otjozodjupa regions suggested that the definition be reviewed in light of the findings that the average size of employees in the SMEs was only 2.2 employees (MTI, 1998b: 54). In northern Namibia, 58% of the enterprises had monthly turnovers below N$ 1000, and 84% had turnovers below N$ 5000. The data collected also showed that 78% of businesses were very small and employed less than three persons (MTI, 1998a, quoted in LaRRI 2002: 14-15).
The MTI study suggested that the current definition be reviewed in light of international definitions of the SME sector in order to allow for comparisons. It concluded that the majority of enterprises will remain micro-enterprises, with the exception of a few that might transform themselves into small or ultimately large businesses.
SME potential for job creation
There is no doubt that the SME sector has a large potential for employment creation which is desperately needed in Namibia. The Namibian Government’s ambitious target of transforming the SME sector into the lead sector of the economy may not have been achieved yet but its potential for employment creation seems significantly larger than that of Namibia's large business sector due to the SMEs’ labour-intensive nature and their use of local resources. The SME sector was estimated to grow by about 16,500 jobs per year compared to only 3,000 – 4,000 jobs in the larger business sector (LaRRI and NEPRU 2002). However, these figures are outdated and there is an urgent need for accurate data as well as a continuous assessment and evaluation of the sector. This should include an analysis of the effectiveness of support services available to SMEs.
Provided that the SME sector receives adequate support and protection, its impact on unemployment could be far more significant than that derived from Foreign Direct Investment (FDI) in Namibia. The mining sector, for example, which accounted for the bulk of Namibia’s Foreign Direct Investment (FDI) over the years, created less than 10 000 jobs. Although employment in the SME sector seems usually to be of a short to medium term duration, there are a number of positive trends such as the friendly and conducive employer – employee relationship that prevails in the sector. However, key labour challenges such as low salaries and lack of benefits as well as gender discrimination need to be addressed urgently to avoid the SME sector becoming a gathering of the working poor.
The dilemma posed by low earnings is exacerbated by the fact that the majority of workers in the sector do not have any other source of secondary income. Improved conditions of employment should be seen as being in the interests of not only SME workers but also SME owners, service providers and government because improved conditions will help to raise living standards, productivity, and demand for local goods. This should thus be a central element of an SME development strategy.
The generally positive employee-employer relationship could become an incentive for workers to stay in the SME sector if this is coupled with improved conditions of employment and ongoing training. It might be worthwhile exploring the link between more systematic training for SME workers, increased output and better working conditions which in turn would encourage workers to stay.
Today, Chinese, European and other imports have added pressure on SMEs. As a policy recommendation, government should guard against the creation of an environment in which small operators are pushed out of business by transnational corporations who tend to repatriate their profits. Nurturing small operators is desirable in that they are labour-intensive and thus may create and sustain more jobs than the larger business sectors. Government still has a larger responsibility and role to play in regulating the macro-economic environment. The issues of local value-addition and unfair competition faced by SMEs require particular attention. The policy space must be kept open for developmental interventions by the State, including measures to encourage and protect local processing, establishing linkages between state institutions and SME suppliers as well as SME linkages with larger private firms.
This article form part of the bigger study for the African Labour Research Network (ALRN) on youth unemployment in Africa.