Boosting SMEs via capital market financing

The development of small and medium scale enterprises (SMEs) industries is germane to job creation and boosting the economy. Chris Ugwu writes on the need to bridge the financial gap of the sector through the capital market.

According to reports, SMEs account for over 80 per cent of enterprises in the world and are responsible for 50 to 60 per cent of employment. Developing countries such as Nigeria have a lot to gain by helping the SME culture to thrive.

This is because the country can only develop better and survive economically under a thriving SME culture. Despite the widely acknowledged role of small and medium scale enterprises in fostering economic growth and development, the SMEs in Nigeria have continued to face a variety of constraints.

Challenges

Some of the challenges they face are inadequate infrastructural facilities, shortage of skilled manpower, high rate of enterprise mortality, low level of entrepreneurial skills, lack of a conducive operating environment, restricted market access and cumbersome regulatory requirements.

However, a key problem for SMEs is the issue of access to finance. SMEs, especially in developing countries, suffer from lack of access to appropriate funds from both the money and capital markets. This is due in part to the perception of high risks resulting in high mortality rate of the business, poorly prepared project proposals, inadequate collateral, absence of verifiable history of past credits and lack of adequate historical records of the company’s transactions.

SMEs need adequate financing to meet needs at each stage of their life cycle, from creation through operation, development, restructuring, recovery and beyond. But presently, the interest rates from the nation’s commercial banks are either unaffordable or inaccessible to average Nigerian living in both rural and urban areas. This has indeed help to increase the level of unemployment.

Market watchers believe that if Nigerians have access to credit at below one per cent as it is in Japan and some developed countries currently, they would have closed the infrastructure gap in power, transportation, financial inclusion, among others.

However, since we have a situation in Nigeria quite different from that of the developed countries, it has become imperative that bank financing is not enough reliable source of financing SMEs, especially now that the economy is in periods of systemic recession, which has led some owners of SMEs to embark on suicide mission for inability to fulfill obligations.

Moreover, the regulatory measures taken after the financial crisis, such as strengthened rules on minimum capital requirements, created additional challenges on the financing of SMEs through bank loans. Consequently, the need for diversified funding sources for SMEs is growing.

Capital market financing

Currently, the share of SMEs financing through capital markets is rather below average in Nigeria, although capital markets offer an alternative long term financing  source. Governments and regulators have made efforts to promote the financing of SMEs through the equity markets.

In different parts of the world, SME markets have been established under the main exchange or as separate exchanges, where listing criteria and disclosure requirements are eased. Some of these models failed, whereas some successful models were introduced, in developed nations and emerging market countries.

The development of capital markets that SMEs can tap into is one of the policy challenges under the pillar of diversified financing modalities, which requires more sophisticated and innovative institutional arrangements in order to respond effectively to their real needs.

Regrettably, Nigeria’s dwindling economy is not helping most of the SME operators to optimise their potentials. Whereas, SMEs grow at almost twice the rate of Gross Domestic Product (GDP) in most markets across Asia, Africa and Middle East, Nigeria’s case is very different.

This is because a cursory look at trading activities at the (ASeM) equity market showed that it has either remained flat or recorded marginal upswing or downswing both on market capitalisation or index. According to 2016 market review, the NSE ASeM Index recorded marginal loss of 1.57 per cent from 1,208.65 Index points in 2015 to 1,189.69 in 2016.

Regulatory efforts

Since SMEs are vital for economic growth and job creation, they need adequate financing to meet needs at each stage of their life cycle, from creation through operation, development, restructuring, recovery and beyond.

That is why the NSE, as part of efforts to revive SMEs investment market, launched the (ASeM) -a specialised board to accommodate small and mid-sized companies with high growth potential seeking to access the capital market.

ASeM provides the opportunity for these companies to raise long term capital at relatively low cost from the capital market, while creating opportunities for growth and institutionalisation of companies listed on the board.

The board, which was specifically designed for emerging businesses, was expected to serve as a veritable platform for them to access the capital market for long term funding.

Also, the board seeks to address major challenges of emerging businesses in Nigeria, such as difficulty in accessing long term capital due to high cost of funds as a result of perceived high risk, informal nature of operations and inadequate accounting standards, controls and management of resources.

Chief Executive Officer, Nigerian Stock Exchange (NSE), Mr. Oscar Onyema said ASeM seeks to address major challenges of emerging businesses in Nigeria, such as difficulty in accessing long term capital due to high cost of fund as a result of perceived high risk, informal nature of operations and inadequate accounting standards, controls and management of resources.

However, the efforts of the regulators to revive the sector have yielded little or no fruits as a few companies listed on the sector have remained in abyss. The NSE-ASeM index, the barometer that measures the activities of the sector, has remained flat at 1,193.52 basis points since February, 2017 to date due to lack of patronage by investors, reflecting the depressive nature of the primary market, which serves as the SME’S window to the global investing community.

Foreign investors blamed

The slow growth of SMEs has given room to a situation where foreign investors still held sway in the nation’s local bourse. Market watchers are worried that if the domestic investors are not expanded the local bourse might face similar situation it witnessed during the global financial meltdown of 2007 and 2008.

Worried by the dominance of foreign investors in Africa’s capital markets, market operators have stressed the need for expansion of local institutional investment capacity to attract more retail participation and spur activities in the primary market segment. They noted that it is important for stock exchanges in the continent to encourage SMEs, which forms the bulk of local investors to help boost liquidity in the system.

They linked the current state of depression in the equity market to sell down by foreign investors who account for over 58 per cent of market transactions. The Chief Executive Officer, Compass Securities Limited, Mr. Emeka Maduibike, said that the population of Africans that invest in the continent are very low compared to developed countries.

Also, the Chief Executive Officer of United Capital, Mrs. Toyin Sanni, urged the African stock exchanges to support Collective Investment Scheme to thrive in the market.

“I don’t know why it has not been getting support. We need sponsors to succeed,” she added. The Chartered Institute of Stockbrokers had said that the Nigerian capital market was in need of entrepreneurs to boost activities and reposition the market for global competitiveness.

The institute noted that no capital market could thrive without the participation of entrepreneurs who have the capacity to bring their companies for listing on the stock exchanges.

Speaking on the roles of entrepreneurs, the Managing Director, Fortress Capital, Mr. Yomi Adeyemi explained that Africa has many entrepreneurs that could compete globally. According to him, there is so much that Africans could do on their own.

“We need to promote our entrepreneurs. As the present administration tries to tackle social problems including unemployment, the roles of entrepreneurs become more glaring. We must encourage our entrepreneurs to come and create more businesses and employ people,” he said.

Conclusion

SMEs need adequate financing to meet needs at each stage of their life cycle, from creation through operation, development, restructured during recovery and beyond.

However, efforts should be step up by NSE, banks and other market regulators to create enabling environments that would reduce to minimum level the challenges faced by this segment of the economy.

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