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Rural-Urban Dynamics in the East African Mountains

Sylvain Racaud
Bob R. Nakileza
François Bart
et al.

Part 5

13. The Role of Small and Medium Enterprises (SMEs) in small towns in East Africa

Ephantus Kihonge

Texte intégral

1Urban growth has ever been emphasized at the expense of equally important rural regions in many developing countries. This has resulted in over exploitation of the rural and an erosion of the much needed energetic and skilled labour force in the productive rural areas, as many youth migrate to the already overburdened cities in search of quality life. This has not only seen an escalation of urban poor due to hyper-urbanization, but also an unbalanced and unsustainable economic growth. The rural-urban continuum is a new perspective for propagating sustainable economic development. The perspective calls for an integrated approach in analysing the development of both rural and urban areas as opposed to taking the two as distinct. On the other hand, devolvement of power and funds to local administrative units is known to enhance the rural-urban linkages.

2The study on rural-urban has explicitly depended on a virtuous circle of growth model (Friedman et al. 1978, Evans 1992, Douglass 1998). The virtuous circle model takes note of inter-sector (farm-nonfarm) and inter-settlement (spatial) dependencies. The proponents of such a model implied that growth could be propagated from sector to sector and place to place through the linkages and interdependencies.

3 One way of entering the ‘virtuous’ circles of rural-urban linkages is through non-farm activities especially in small towns close to areas of agricultural production. Proponents of this theory hold onto evidence which suggests that agricultural areas have, and even specialize in, activities such as manufacturing and processing among other services. Such specializations are common in nearby small towns and are mostly non-farm activities. From the theory, though large industries are better positioned to take over rural markets, there are certain productive activities that are not profitable for large-scale industries.

4SMEs are known to form significant nodes in rural-urban linkages. They have transformed agricultural-led economies to industrial giants and their activities are always enhanced by a devolved political structure. This has been made possible by improving SME activities in the local administrative towns. Consequently, these SMEs serve as strong nodes which link the surrounding rural areas to local, national and regional markets through forward and backward linkages. By strengthening and opening up opportunities for SMEs in these towns ‘virtuous’ circles of rural-urban economic linkages are created and ignited.

5These are important linkages in any industrialization process. The study of the rural-urban linkages activities is still in development. This paper therefore seeks to add to the literature by generating and documenting information on the role of SMEs in small towns in backward linkages. With a new constitution in Kenya, which calls for, among other things, a more devolved government structure, this is a timely body of knowledge to add. Kenya is an agricultural-led economy, hence the need to focus on small mountainous towns. The towns are surrounded by rich agricultural areas and are highly populated, making them busy hubs of mobility and exchange.

Study area and methodology

Study area

6The Mt Kenya region is the chosen area of study, with SMEs in Sagana and Karatina towns representing economic activities in small towns. Selection of the site was based on accessibility of the areas, the level of urbanization and the level of interface between the rural and urban settings as described below.

7The two towns are located between the Mt Kenya and Aberdare ranges and are intermediate towns between agricultural productive rural areas and bigger towns (Nyeri and Nairobi). Karatina town is in Central Kenya, located on the Nairobi-Nyeri highway, 140 kilometres north of Nairobi and 20 kilometres south of Mt Kenya. According to the Kenya National Population and Housing Census (2009) Karatina was classified as a municipality with a population of 8,228 inhabitants. The town is an important market centre, centrally located and connected with good road and railway networks.

8The town hosts Karatina Market, one of the largest markets in sub-Saharan Africa ( The market is famous for its fresh fruits and vegetables. In the rural catchment, people practice small scale tea, coffee, dairy and horticultural farming. In 2011, according data obtained from the town clerk, the town had 3,302 licensed SMEs (businesses employing between 0 and 9 employees).

9Sagana town is 100 km north of Nairobi. The town is situated at the edge of a large plain at the southern foot of Mt Kenya. According to the Kenya National population and Housing Census (2009), Sagana was classified as a town council with a population of 9,889 inhabitants. The town is surrounded by a rich agricultural hinterland and serves as a ‘gateway’ to the larger Mount Kenya region. Due to its strategic position, the town is home to several storage and distribution depots of economic products that serve the Mount Kenya region. Among them is the Kenya Breweries depot, the Kenol-Kobil fuel depot, the Kenya Planters Cooperative Union depot and the National Cereals Board depot. The town hosts Sagana market and had 400 registered SMEs in 2011, according to data obtained from the town clerk in 2012.


10Based on a representative sample and using the SMEs as the unit of research, the general survey aimed at obtaining overall information on: (a) the demographic characteristics of entrepreneurs and (b) the nature and status of the business e.g. source of supply, clientele base and chain of trade. Bearing in mind that SMEs in both towns are scattered in buildings, streets and in the market and that they fall into service, trade and manufacturing categories, an all inclusive and representative sampling process was required. To achieve this, stratified and simple random sampling procedures were used.

11In Karatina, 130 questionnaires were administered, with 100 being in the streets and buildings and 30 in the market. In Sagana, a total of 70 respondents were interviewed. The combined figure of 200 was decided to be an optimum sample that fulfilled the requirements of efficiency, representativeness, reliability and flexibility and was also manageable given the available resources and time.

Results and Discussions

12SMEs in small towns act as major nodes for the distribution of goods and services to their rural region. Small towns have been known to act as centres for production and distribution of goods and services to their rural population. Such concentrations reduce the costs and improve access to a variety of services for both rural households and enterprises. Those services include agricultural extension, health and education, as well as professional’s services and lower order services such as bars and restaurants and wholesale and retail sales of manufactured goods from within and outside the regions.

13The study assumed that SMEs in small towns acted as major nodes for the distribution of goods and services to their rural region. From the study findings, approximately 28 % of the SMEs traded goods and services to their rural surroundings, with a small difference when a comparison was done based on individual towns. The results indicated that 14 % and 58 % of SMEs served other towns and local town markets respectively (Table 33). The SMEs who got supplies from the rural region stood at 12 %, which can be taken to mean the town-rural trade (28 %) was approximately over twice that of rural-town trade (12 %) when correlated to the percentages of SMEs involved in the two trades (fig. 45)

Table 33. SMEs in small towns and the most common locations of clients

Table 33. SMEs in small towns and the most common locations of clients

Source: E. Kihonge (2011)

Figure 45. Inward and outward linkages network

Figure 45. Inward and outward linkages network

14Taking the small town (Sagana and Karatina) as the centre of focus, the study categorized linkages as inwards or outwards. The inward linkages can be said to comprise of forward flows from rural areas (forward linkages) and flows from regional and national markets. The outward linkages can be said to comprise of flows from the small towns to the rural consumers (backward linkages).

Sources of Goods and Services

Regional, national and international markets

15The links between the small town and large towns were found to be more pronounced with approximately 51 % of the SMEs sourcing both consumables and non-consumables from outside markets. Approximately 55 % of these mostly served the local town market, with 27 % mainly selling their supplies to the rural areas. The SMEs were also found to link national and international markets to regional towns with approximately 18 % of those who bought goods from these markets selling to other closer towns.

16SMEs in manufacturing lead in sourcing their suppliers from other towns (however due to their small number at 5 %, it can’t be argued the same in terms of total volumes flow). Approximately 60 % of SMEs in trade sourced their supplies from other towns (table 34). But it should be noted that some SMEs sourced supplies from more than one location as noted by high total percentages.

Table 34. SME sub-sector and regional/national sourcing of merchandise

Table 34. SME sub-sector and regional/national sourcing of merchandise

Source: E. Kihonge (2011)

17It was further observed that SMEs in the service sub-sector sourced fewer supplies from other towns and also had less clients coming from rural areas. An observation that can be attributed to dramatically improved Information and Communications Technology, which had seen some flows such as information and finance being linked to rural areas directly from larger cities, at the expense of smaller towns (table 35).

Table 35. SME sub-sector and rural clients

Table 35. SME sub-sector and rural clients

Source: E. Kihonge

18The spatial aspects of the rural-urban linkages are visible though illustration of sources and destinations of traded merchandise (fig. 46 and 47). From the two figures it can be observed that most (47 %) of the rural supply zones came from surrounding rural villages (less than 20 km); these regions were however less in numbers in Sagana than Karatina which had more vibrant economic activities. However, the regional market had large footprints almost FOUR times the supply rural radius for Sagana town. It can also be seen that the high altitude regions where we expect to find natural resources did not form part of the supply zones especially in Mt Kenya. However, we had significant selling zones in high altitudes especially along the Aberdare ranges.

Figure 46. Urban–rural trade links in Sagana town

Figure 46. Urban–rural trade links in Sagana town

Figure 47. Urban-rural trade links in Karatina town

Figure 47. Urban-rural trade links in Karatina town

19In Karatina, from the map it can also be seen that most of the rural supply zones mostly came from surrounding rural villages (less than 20 Km) but the regional market had large foot sprints almost FIVE times the supply rural radius for Karatina town. Again the high altitude regions did not form part of supply zones.

Supply flow patterns

20Supplies from outside markets came from near and far with approximately 80 % of the SMEs getting supplies from regions which were over 50 kms away. Though the sources could be traced to both international and national markets, most manufactured goods mainly came from Nairobi. Tanzania, Uganda and Ethiopia were found to be important sources of grains, with fruits being sourced as far as Rwanda. Most cereals (green grams, rice, jahi) and potatoes came from markets in nearby towns.

21Sagana town relied more on outside markets for supply, with approximately 60.8 % of its SMEs sourcing supplies from other towns, as compared to Karatina, which had 40.8 % of SMEs getting supplies from these sources. This can be explained by the small number of large enterprises such as wholesalers, supermarkets, hardwares, and banks which resulted to SMEs sourcing their services in the neighbouring towns such as Muranga, Makutano, Karatina and Kerugoya.

22The consumables were found to come from within and without. Vegetables and fruits were sourced from surrounding rural areas. The town relied on other towns too such as Kutus (tomatoes), Muranga (bananas), Thika (cereals) and Mwea (rice). Non consumables mainly came from Nairobi, Thika and Nyeri.

23Karatina had a larger catchment area with 84 % of its SMEs buying supplies from sources which were over 50 kms away. Approximately 66 % of the SMEs in Sagana brought supplies over the same distance. This could have been attributed to the busy Karatina market, which behaved more like an international border market with most of the traded goods coming from outside sources.

24A walk around the market reveals a variety of grains, fruits, high value crops and traditionally manufactured products. Most of the grains were brought in from Uganda (maize and beans), Tanzania (maize and beans), Mwea (60 km, rice), Meru (100 km, jahi) and Thika (80 km, green grams), while most fruits came from Tanzania, Uganda (watermelons), Kieni and Makueni (oranges), Thika (pineapples) and Nyahururu (100 km, Passionfruits).

Photo 16. Traders in Karatina market (H. Mainet)

Photo 16. Traders in Karatina market (H. Mainet)

25Though middlemen have been known to exploit the farmers and retail traders too, it was found that they played an important role in the Karatina market. Most retail traders could not afford bulk buying and so normally purchased in small portions from the middlemen. The latter also extended credit to the retailers. It was also noted that the middlemen were mainly men with the majority of the retailers being women.

26This can be explained by the fact that due to the role of a woman in African settings, the female gender is disadvantaged in long distant trade that involves “brokering”. However, some women were found to bold enough to go all the way and avoid middlemen. The case study does not only bring out the role of the Karatina market in linking the town to regional and national boundaries, but also exposes the unseen deals and their consequences as women traders survive in the male dominated African market.

Sourcing of merchandise by SMEs from small enclave industries

27Enclave industries in small towns have been known to be important sources of mostly manufactured products for the rural region and other nearby towns too. In Karatina and Sagana, these activities involved metal and furniture workshops, shoemaking, flour milling, bakeries, sawmills and tailoring.

28Though the manufacturing industry was found to have more rural clients who stood at approximately 44 %, collectively they played a small role in the production and distribution of products and services to both outside and rural regions. While they normally form the majority subsector in small towns and rural areas in developing countries, they only comprised approximately 5 % of total enterprises in the towns under study, with Sagana having less than 2 %.

29This could have been attributed to competition from larger and better equipped manufacturing units found in bigger urban centres (Nairobi, Thika and Nyeri) which, as stated earlier, had the advantage of proximity and were connected by good roads. The survival of small industries in Sagana and Karatina therefore called for continuous innovation to improve competitiveness. Apart from large capital required for innovation in product or production process, skills are of paramount importance too. The results indicated that the majority of entrepreneurs/ owners in this sub-sector were least educated with the majority having only primary education. This means unless intervention measures are put in place, the success of enclave industries remains in question in terms of acquired skills and knowledge.

30The Kenya Industrial Estate (KIE), which is entrusted with the mandate of supporting indigenous small industries through financing and business development through incubation, was found to have a regional branch in Karatina. Through funds from the Central Government, the organization offered both long and short term loans to the small entrepreneurs, however, though the interest rates were friendly, only a handful could have afforded the collaterals required to secure such loans. The collaterals included land, which needed to have been valued at 140 % of the loan applied for. Others included motor vehicles and heavy machinery which were worth a loan amount of 50 % and 80 % of their values respectively. Apart from paying the valuation fees, the entrepreneurs were also expected to pay for a three-day business training before they qualify for the loan.

31The business incubation which is supposed to assist the small investors in their initiation stages by offering among other things, working sheds at subsidized rent rates, experience and networking has never materialized. According to the then Chairperson of the KIE Karatina branch, while they are meant to change ownership and give room to new incoming small investors, the 30 sheds in Karatina still remained occupied by investors since their inception in 1980s with a good number having been permanently sold to these occupants by previous government regimes.

32By the time of the research, several new sheds were under construction in Karatina, Sagana, Kerugoya and Mwea town through the Economic Stimulus Program initiated by the government to boost the national economy which was greatly affected by the Post Election violence in 2007. Some money had also been received by the KIE Karatina branch to put up a 12 storey building for commercial sheds in the town.

33With the history of agglomerated and subsidized business space (as in the market stalls and Kenya Industrial Estate sheds in Karatina), all hung in the balance if these ambitious moves were going to boost the enclave industries in the small towns in question.


34Although most of the backward flows from outside markets went to serve local town consumers, SMEs in small towns were found to play a significant role in the distribution of goods and services to their rural region. The concentration of services, the periodic markets, favourable agricultural activities in rural hinterlands, proximity and good roads connectivity to big urban centres were noted to be favourable factors which might have accelerated the SMEs role in backward linkages. The junction node factor of Sagana town was noted to be important in serving clients from the rural region. The SMEs were also found to link national and international markets to regional towns with approximately 18.4 % of those who bought goods from these markets selling to other nearby towns. The traders, especially in the markets, were observed to play a key role in connecting the small towns with both regional and international agricultural production zones, with consumables coming from far and wide. However, improved information and communication technology may have resulted in low sourcing of supplies of the service sub-sector from national and regional markets and subsequently fewer rural clients due to some services being offered direct from big urban centres to rural areas and vice versa at the expense of small towns. Though the enclave industries had the most highest client density, their small numbers weaken their role in the production and distribution of goods and services. This was mostly attributed to lack of innovation in products and/or production processes, and therefore they may not have matched the competition from their counterparts in nearby large urban centres.



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Table des illustrations

Titre Table 33. SMEs in small towns and the most common locations of clients
Crédits Source: E. Kihonge (2011)
Fichier image/jpeg, 11k
Titre Figure 45. Inward and outward linkages network
Fichier image/jpeg, 37k
Titre Table 34. SME sub-sector and regional/national sourcing of merchandise
Crédits Source: E. Kihonge (2011)
Fichier image/jpeg, 10k
Titre Table 35. SME sub-sector and rural clients
Crédits Source: E. Kihonge
Fichier image/jpeg, 10k
Titre Figure 46. Urban–rural trade links in Sagana town
Fichier image/jpeg, 74k
Titre Figure 47. Urban-rural trade links in Karatina town
Fichier image/jpeg, 59k
Titre Photo 16. Traders in Karatina market (H. Mainet)
Fichier image/jpeg, 47k


Dr. and Lecturer, Jomo Kenyatta University of Agriculture and Technology, Nairobi (Kenya)
His work focuses on entrepreneurship and urban-rural linkages in Kenya.

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