Columnists

Ease listing to bridge African SMEs Sh33trn financing gap

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Nairobi Securities Exchange trading floor. PHOTO | NMG

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Summary

  • There is no denying that SMEs play a vital role in the growth of an economy both, as a job creator and a contributor to the national income.
  • But it’s well known that SMEs seldom raise funds in capital markets.
  • Nonetheless, efforts to ease SME listing such as a less costly and SME friendly regulatory regime should be made to bridge the existing funding gap.

Small and Medium-Sized (SMEs) companies are the backbone of Africa’s economy, accounting for approximately 90 per cent of all companies and providing nearly 80 per cent of the region’s employment.

In Kenya, SMEs comprise 98 per cent of the country’s businesses, according to a 2017 National Economic Survey report by the Central Bank of Kenya (CBK) creating 30 per cent of the jobs annually as well as contribute three per cent of the Gross Domestic Product (GDP).

Despite their crucial role in driving the continent’s economic development, evidence suggests that SMEs in Africa experience a severe shortfall in financing, which has historically hindered their growth. The International Finance Corporation (IFC) estimates that Africa's finance gap for SMEs stands at Sh33 trillion. Ultimately, the ratio of credit to the economy is very low in Africa, averaging less than 30 per cent of gross domestic product, compared with over 135 per cent in regions such as East Asia and the Pacific region.

Looked at differently, the low level of credit towards SMEs in Africa is a testament of limited services offered by today’s stock exchanges. Even markets with dedicated SME boards such as Kenya’s Nairobi Stock Exchange Growth Enterprise Market Segment (GEMs), Ghana’s Ghana Securities Exchange (GAX), Nigeria’s Nigerian Stock Exchange Alternative Securities Market (ASeM), Rwanda’s Rwanda Stock Exchange SME segment and South Africa’s Johannesburg Stock Exchange AltX, remain mostly underdeveloped, with small market capitalisations, few listed companies and suffer from illiquidity.

As a result, stock exchanges’ objective of funding SMEs has not been realised. Partly, unfamiliarity by SMEs of these platforms and fear of loss of control are also other factors contributing to low levels of domestic participation. Overall, this has resulted in the lack of depth and liquidity within domestic capital markets.

Why is it important for SMEs to familiarise and take advantage of these platforms? Several benefits. One; from a financing perspective, given the access to a wider potential investor base, the cost of equity capital can be lower than other forms of finance. Moreover, once listed, follow-on or secondary offerings are easier to make. Two; SMEs benefit by greater credibility and visibility. As a listed entity, SMEs have a real platform to enhance their public awareness due to media coverage and publicly available information.

This could positively impact their commercial arrangements. Three; a major reform is in good governance which is a long-term draw for investors into the stock. On this point, benefits accrue at the time of listing as SMEs prepare themselves for this event and also throughout the life of the company.

There is no denying that SMEs play a vital role in the growth of an economy both, as a job creator and a contributor to the national income. But it’s well known that SMEs seldom raise funds in capital markets.

Nonetheless, efforts to ease SME listing such as a less costly and SME friendly regulatory regime should be made to bridge the existing funding gap. Capital markets are a practical way for SMEs to access much needed long-term finance to grow their businesses.

Mr Mwanyasi is the managing director at Canaan Capital