It is always boring to talk about definitions, but when it comes to SMEs (small and medium enterprises), the matter is extremely urgent. I’ve read between 1 billion and 1 trillion papers on SME finance over the last few months, and I’ve come to the conclusion that SMEs are a place in the heart of the people (imagine the hard-working entrepreneur paying taxes and tuition fees), rather than any identifiable component of the private sector. The term SME is used by politicians to gain consensus, by non-governmental organizations to attract donor funding and by academics to publish papers. The problem is that there is absolutely no agreement about what we are talking about. Just imagine an evil corporate multinational exploiting workers and the environment. Now think the opposite: there we go, that’s a SME.
I hope I’m not going too far with my rant here, but lately I’ve started to think that the term “SME” is used in policy-making circles in the exact same way the term “Africa” is used among do-gooders in the aid community: it tells us no detail about the topic of the conversation, but it surely hits a soft spot. Who would say anything against SMEs? Who would say anything against Africa? Let me quote my favourite line in Binyavanga Wainaina’s classic essay: “Never, ever say anything negative about an elephant or a gorilla”. In some odd way, I feel we are all talking about the same problem here.
Now I’ll stop the rant and try to get closer to the core of the problem. I’ve had many meetings over the last few months with government institutions, banks, research organizations, NGOs, and academics about the potential of expanding SME finance in Kenya and Africa at large. As soon as the term SME is brought to the table, you see confusion in the eyes of the people: what are we talking about? Are we talking about the informal sector? Are we talking about formal businesses? Which ones exactly? This discussion usually lasts until the end of the meeting.
The confusion is very easy to spot online. I just googled “SME + Africa” in the news section and that’s what I got: Source: “The Star” (a Kenyan newspaper). Title: “Kenya: SME Authority to Be Set Up”. First line: “OPERATIONS of micro and small and enterprises will soon be coordinated by …” You probably notice that the “M” of SME does not mean “medium”; in this case it is used as “micro”. The entire definition of SME is therefore shifted down a notch. You’ll see similar confusion in many other venues, for example bankers all over Africa define SMEs by the size of the loans instead of the size of the businesses. That definition tells us nothing about the actual characteristics of the enterprises using financial services and a whole lot of crucial knowledge is wasted for no good reason.
So, I use this blog to make an appeal to the development community through the web: let’s find a common definition for SMEs. This would allow banks, governments and researchers to collect data in a more meaningful way making it comparable across sectors and across countries. This would be in EVERYBODY’S interest and our understanding of the private sector would increase enormously. Personally, my impression is that the term SME should be refined in a complex economy like Kenya – more precision is necessary especially for the lower end of the market. I’d like to see, for example, small enterprises divided in “lower end” and “upper end”. Medium enterprises divided between “lower middle” and “mid-corporate”. Of course there would be plenty of space also for micro-enterprises, which should also be divided between lower and upper ends (survival and growth oriented), or something like that.
Having a common understanding of SMEs nowadays has become more important than ever. Now that “job creation” and “industrialization” are slowly reappearing in the development agenda, we need to come up with good definitions before it’s too late, or we will end up wasting entire meetings not knowing what we are talking about.