Capital markets offer alternative funding to SMEs

An investor at the NSE. FILE PHOTO | NMG

What you need to know:

  • There is a need to educate SMEs on using the securities exchange to access capital.

There have been recent developments in the capital markets prompted by the introduction of innovative financial products such as the derivatives. There is a saying that the capital market is the gift that keeps giving, albeit intrinsically an unstable market but with a better reward when you watch that grass grow.

Interestingly, in an economy such as Kenya’s where the capital market is directly connected to the economy, not much focus is made on public education and awareness.

A recent report by Cytonn highlighted the importance of capital markets in the economy. But why does the capital markets need to be improved?

Kenya’s capital market is categorised into two major parts: the primary market and the secondary market. Primary markets refer to the listing of securities or financial instruments for the first time on the financial market, while the secondary market refers to the trading of pre-existing financial instruments.

There are about 67 listed companies. This number could potentially improve if the Nairobi Securities Exchange’s (NSE) Ibuka Programme exponentially grows and attracts more companies.

Most privately-owned companies are a tad bit cautious of listing for unfounded fears.

That aside, I think it’s high time companies started accessing financial products in the capital market as an avenue to raise more capital.

This is because, admittedly, banks have been the primary sources of business funding while the capital market has performed decimally. This is largely attributed to inadequate education on using the capital market as an alternative form of business finance.

SMEs that contribute immensely to growth need to know alternative sources of funding other than the banks.

Of course, SME financing differs depending on stage of growth.

However, some of the noticeable obstacles is that our capital market is not well developed in terms of depth and liquidity.

Another challenge would be the rigorous and time-consuming process of registration and eventual accessing of the market. Although much has been done, including coming up with listing tiers and different market segments, most companies still prefer other sources of financing such as the venture capital firms over capital market financing.

Therefore, to attract more companies, both the NSE and the Capital Markets Authority (CMA) need to innovate and pursue investor education and awareness.

It’s also imperative for the government to offer more favourable tax treatments as incentives to capital providers to encourage them to invest in the capital markets.

The Cytonn report indicates that the capital markets provide a combined five percent while banks provide 95 percent of funding in Kenya.

Therefore, there is a need to educate SMEs on using the securities exchange to access capital.

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