An Investigation into the Awareness of the Provisions of the Companies Act by Small and Medium Sized Companies (SMEs)

in Gaborone District of Botswana

By

Student Name:

Student No:

Chapter 1 Introduction This chapter will introduce the concept of SMEs as it operates in Botswana, the challenges they face, the provisions of the Company Act, the main research question, aims and objectives of the thesis and a brief on the methodology. 1.1. Background to the research Across the world, small and medium enterprises (SMEs) have been identified as vital instruments for a nation to achieve its industrial and economic objectives. In fact according to Murphy (2009), SMEs have been regarded as the cornerstone of economic growth in both developed and developing countries. Governments have recognized SMEs as major sources of employment, revenue generation and wealth creation. In addition, this sector is considered to be vital to poverty alleviation and to providing impetus to the spirit of entrepreneurship. In addition, this sector is linked to large industries; provide support to rural economies by promoting income generating activities which in turn leads to increased growth of per capita income, achieves balance in income distribution and improved economic stability. It also increases the competitiveness of a countrys industry vis-a- vis those of other countries. The contribution of SMEs to the economies may be borne out by the fact that in 2009, SMEs contributed to an average of nearly 50% of national GDP globally (Clifford and Baumback, 2012). Due to these advantages and benefits, the development of the SME industry is particularly pertinent to the countries of Sub Saharan Africa. The economies of most of these countries are either stagnant or experiencing negative growth rates, with economic growth lagging behind population increase (Expert Group, 2010). In addition to an explosion in population, these countries are ridden by poverty due to poor economic management, civil strife, environmental hazards, low foreign direct investment, the pressures of globalization and poor infrastructure (Expert Group, 2010). Under these conditions SMEs can play a significant role in enabling marginalized and vulnerable groups to help themselves to generate revenue and meet their basic needs. These include

unemployed youth, females of working age and the disabled in both urban and rural areas. In this scenario, Botswana is a shining example of what can be achieved by SMEs. When the country gained independence in 1966, it was one of the poorest in the world. However within three decades the country has performed an economic miracle transforming itself into a middle income developing nation with an economic growth rate of over 9.5% (Ongori, 2009). This can largely be attributed to the prudent management of the countrys mineral resources including copper / nickel and diamonds as well as to large beef exports to western countries. However, as early as 1982, the Government of Botswana embarked on a policy of economic diversification in order to reduce too much dependence on primary industries of minerals (capital intensive) and beef (land intensive). Both these industries could provide only limited employment and opportunity to the vast majority of employable persons in the country (Nuge, 2012) One of the important ways recognized by the government of Botswana to achieve economic diversification and hence income redistribution, employment and social justice to meet its national development goals and vision for a healthy, just and productive society is through fostering development of SMEs. In 1998, the definition of an SME was formulated by the Government of Botswana. These definitions across micro, small enterprise and medium enterprises are summarized in the table 1.1.

Item
1

Enterprise category
Micro Enterprise Medium Enterprise Small Enterprise

Employme nt levels
Less than 6 Workers Less than 25 Workers Less than 100 Workers

Annual turnover in Botswana Pula)

Less than P60 000 Between P60 000 and P 1 5000 000 Between P 1 500 000 and P 5 000 000

In US$ Dollar (Equivalent)

US$ 10 000 Between US$ 10 000 and US$25 000 Between US$ 250 000 and US$833 333 33

Medium Enterprise

Table 1.1. Classification of SMEs in Botswana (Nuge, 2012) As far as this research is concerned, an SME may be defined as a business that is (1) actively managed by its owners, (2) highly personalized, (3) largely local in its area of operations, and (4) largely dependent on internal sources of capital to finance its growth (Murphy, 2009). The contribution of SMEs to the socio economic fabric of Botswana since 1982 has been immense. They have been able to nurture the spirit of entrepreneurship, characteristic of the people of Botswana. There are currently 6,000 small enterprises and 50,000 micro enterprises (Expert Group, 2010). SMEs employ 32% of the total workforce and contribute to 20% of national output (Jefferis, 2012). 75% of them are owned by women (Jefferis, 2012). According to Lisenda (2007), they have played a significant role in lifting the majority of people above the poverty line and transiting the economy of Botswana from being agriculture based to industrial / manufacturing based. They have resulted in a more equitable spread of income and contributed to stability of family income. They are spread across a wide range of sectors including services, manufacturing, retailing, transport, distribution, construction and agriculture. In light of this, it may be inferred that every effort must be encourage and strengthen the SME base in Botswana. This is particularly pertinent in light of the manifold challenges being faced by SMEs today. According to Mwobobia (2012), the main problem is access to finance. The difficulties in accessing finance or ignorance of government policy with regards to credit is today seen as a major deterrent for SMEs with growth potential from expanding. Another challenge is that of competition. SMEs in Botswana compete

with each other at the domestic level and at the international level as well (Ongori, 2009). Lack of adequate training, education and management skills and the consequent inability to strategize and plan are considered to be other reasons impacting the performance of SMEs (Ongori, 2009). An inability to properly market SMEs is also seen to be another limiting factor. Other critical reasons include lack of adequate support for development of entrepreneurship, an enabling business environment, promotion of exports and sectoral development. That these challenges are significantly impacting the SME sector in Botswana can be gauged from the fact that the failure rate for SMEs in Botswana is over 80 percent, with over 70 percent of start-up firms failing in their first 18 months and only less than 2 percent of them successfully able to expand their businesses (Mwobobia, 2012). These alarming statistics call for all efforts in all directions to reverse the failure trend. The efforts of the Government of Botswana at addressing the challenges faced by SMEs have been very systematic, focused and holistic. The Citizen Entrepreneurial Development Agency (CEDA) was established by the Government of the Republic of Botswana to provide financial and technical support for business development with a view to the promotion of viable and sustainable citizen owned business enterprises(Government of Botswana, 1999). This Agency is established to address the need for coherent and holistic support for the development of small, medium and large scale enterprises through the soft window and package offered through the subsidiaries. Botswana Institute for Development Policy Analysis (BIDPA) is a co-ordinated and focused one-stop shop Authority that provides development and support services to the local industry needs of SMMEs, encompassing training, mentoring, business plan finalization, market access facilitation, and facilitation of technology adaptation and adoption. In addition to provide a legal and regulatory framework to these initiatives, a new policy targeted for SMEs was developed in 1998. The new policy resulted from the recommendations of the SMME Task Force, appointed by the Minister of Commerce and Industry but comprising mostly private sector representatives who had submitted their reportings earlier in the year. According to the Government of Botswana (1999), the

SME Company Act is a follow-up to the 1996 Industrial Development Policy. The main components of the new Company Act include (i) a new legal and institutional framework for SMME support (Small Business Act, Small Business Council, and Small Business Promotion Agency); (ii) new sources of finance for SMEs (a micro-credit scheme, and a credit guarantee scheme to operate through the banks); (iii) regulatory changes, including reform of the Companies Act, sales tax regulations, licensing laws and reserved activities policy; (iv) improving business education and training, both through the school system and subsidized short courses for entrepreneurs and managers.
The

specific objectives that the company act hopes to achieve are to foster citizen

entrepreneurship and empowerment; achieve economic diversification; promote exports; encourage the development of a competitive and sustainable SME community; create sustainable employment opportunities; promote linkages between SMEs and primary industries in agriculture, mining and tourism, and improve efficiency in the delivery of services to businesses. Since the government has provided so many incentives for the development of SMEs in Botswana as enunciated in the provisions of the company act, it is desirable that SMEs in the country are first made aware of these provisions and then comply with them in order to avail of the manifold benefits that can accrue to them. Moreover, non compliance can result in heavy penalty and interest charge payments to the Registrar of Companies, which can further hamper their competitiveness. This research will study the levels of awareness amongst SMEs of the new company act, gauge levels of compliance and identify challenges they face in complying with the stipulations of the company act. 1.2. Aim of the study The aim of the study is to understand and evaluate the level of awareness of SMEs in Gaborone, Botswana of the provisions of the companies Act and what challenges they face in complying with the provision of the act. 1.3. Objectives of the study The main objectives of the study are formulated below:

To investigate the awareness of SMEs to the provisions of the Companies Act of Botswana. To investigate whether non awareness of the provisions of the Companies Act affects the operations of SMEs. To make recommendations to assist SMEs to comply with the provisions of the Companies Act of Botswana

1.4. Methodology This research is quantitative using both deductive and inductive methods. The deductive methods uses secondary literature to analyze SMEs in Botswana, their contribution and their importance to the economy of the country, the various measures instituted by the government to encourage SMEs, the provisions of the company act and why SMEs must abide by these provisions. The inductive method will be used to validate the findings of the deductive study. The primary research instrument here is a questionnaire administered online to 100 SMEs operating in the Gaborone region of Botswana. Gaborone is chosen for this study because it is both the government as well as the business capital of Botswana and where most businesses are concentrated. It is the largest city of Botswana with a population of 231,626 which is about 10% of the total population of Botswana (Clifford and Baumback, 2012). The city is one of the fastest-growing cities in the world and is headquarters to numerous companies and the Botswana Stock Exchange. Gaborone is also home to the Southern African Development Community (SADC) a supranational organization, hoping to increase economic unity. The main purpose of the questionnaire is to ascertain awareness amongst SMEs of the Company act, their levels of compliance, their awareness of the consequences of non compliance and the difficulties they face in complying with its stipulations. The data will be collected in excel and then analyzed using the descriptive statistics tool of excel. This tool summarizes the data in terms of statistical parameters of mean, mode and frequency percentage. Using this statistical analysis, the findings of the literature review will be validated.

1.5. Structure This research is structured as follows: Chapter 1 Introduction This chapter will introduce the topic of SMEs in Botswana, the research question, the aims and objectives of the research and the case a brief about the methodology that will be used in this research. Chapter 2 Literature Review This chapter will review extant literature on SMEs in Botswana, their importance to the economy of the country, the challenges they face, the provisions of the company act and why it is necessary for SMEs to comply with these provisions. Chapter 3 Methodology This chapter will present the deductive and inductive methods that will be used in this research. It will explain the statistical tools that will be employed to analyze the data collected through the questionnaire. Chapter 4 Presentation of findings This chapter will present the findings of the statistical analysis conducted on the data collected through the questionnaire. Chapter 5 Discussion and analysis This chapter will discuss and analyze the findings of the statistical reports and tie these findings with the literature review. Whether or not the findings of the literature review have been validated through statistical research will be ascertained. Chapter 6 Conclusion and Future Scope

This chapter will examine whether or not the objectives of the thesis have been achieved and if the research question has been answered. It will identify gaps in the research for future scope of study.

References BIDPA and Citizen Entrepreneurial Development Agency (CEDA) (2007) Performance and Competitiveness of Small and Medium Sized Manufacturing Enterprises in Botswana. Gaborone, Printing & Publishing Company Botswana. Bowler A, D., Page, S. (2007) Entrepreneurship and Small business Management. Pretoria, Juta and Co. Ltd. Burns, P. (2010) Entrepreneurship and small business. UK, Ashford Colour Press Ltd. Clifford M., Baumback, Z. (2012) How to organize and operate a small business. New Jersey, Prentice-hall International. Expert Group (2010) Development of Industrial SMEs in Africa Botswanas Case. Creating an enabling Environment for Growth and Development, Gaborone, Kigali Publications. Government of Botswana (1999) Policy on Small, Medium and Micro Enterprises in Botswana, Government White Paper No. 1, Government Printing Press, Gaborone. Hillary, R. (2010) Small and Medium Sized Enterprises and the Environment: Business Imperatives. Sheffield, UK, Greenleaf Publishing Limited. Jefferis, K. (2012) The New Policy on Small, Medium and Micro enterprises. Botswana, Media Communications (Pty) Ltd - Botswana Lisenda, L. (2007) Small and Medium-Scale Enterprises in Botswana: Their Characteristics, Sources of Finance and Problems. Working Paper No. 14, BIDPA. Mwobobia, F.M. (2012) Empowering of SMEs in Botswana. Journal of Business and Management Research, Vol. 1, pp. 1 11. Murphy, M. (2009) SMEs Management. Athens,Kleidarithmos Publications

Nuge, N. (2012) Role of SMEs in Botswana. American International Journal of Contemporary Research, Vol. 2, pp. 1-9. Ongori, H. (2009). Role of information communication technologies adoption in SMES: evidence from Botswana. Research Journal of Information Technology,Vol 1 No.2,pp. 79-85.

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