Small and Medium-Sized Enterprises (SMEs) prefer banks, private equity firms, or venture capitalists when seeking cash to finance their operations.
Despite the existence of cheaper, long-term funds that can be accessed through the capital markets, SMEs have kept off this option.
Financial illiteracy, more competitive offerings from banks and other lenders, costly and stringent disclosure requirements, are some of the reasons these mostly family-owned small and medium-sized enterprises have pushed listing at the Nairobi Securities Exchange (NSE) to the back burners.
Matters have been made worse for these capital-starved enterprises because many of them are still informal and therefore unregistered, despite the vast balance sheet in their possession.
Capital Markets SMEs Forum
These sentiments were expressed during the recent webinar dubbed the “National Capital Markets SME Forum“, organized by the Capital Markets Authority (CMA) with participation from NSE, stockbrokers and investment banks, and representatives from the business community and financial sector.
The theme of the virtual stakeholders’ engagement was ‘Unlocking Finance for SMEs through the Capital Markets’.
The CMA admitted that while the Growth and Enterprise Market Segment (GEMS) is designed specifically for SMEs, little progress has been these firms to list here.
“We are looking at collecting views from the public as we seek to review the legal framework that will allow SMEs to raise funds through the capital market,” said Wycliffe Shamiah- CMA Chief Executive Officer.
He pointed to the lack of a robust corporate governance structure among these small firms as some of the reasons some of them are avoiding the scrutiny and rigorous that a listed firm must fulfill.
“There is need for an aggressive marketing campaign and incentives such as reducing the threshold of issued share capital to encourage to encourage a private firm willing to list, without diluting the ownership of its owners,” said Paul Mwai, Chairman of the Kenya Association of Stockbrokers and Investment Banks (KASIB).
For a firm to list at the NSE, the issued share capital in the Main Investment Market Segment (MIMS), Alternative Investment Market Segment (AIMS), and Growth and Enterprises Market Segment (GEMS) is at 25%, 20%, and 15% respectively.
He said the capital market is competing with banks and private equity firms, and venture capitalists and must thus remain alive to the fact.
“The number of PE funds actively investing in the region have actively increased from an estimated 36 in 2013 to about 130 in 2019….. Between 2017 and 2019, PE & VC firms have invested over $2 Billion in the market,” said Ms Esther Ndeti, an Executive Director of the East Africa Private Equity & Venture Capital Association (EAVCA) while speaking on how the PE & VC industry can partner with Capital Markets to enhance startup and Sustained SME Growth in Kenya.
There was consensus on the need to sensitize the SME sector on the benefits of listing, especially those seeking long term funds that can only be accessed through the capital markets.
“Getting formal involves a cost thus friendlier terms are needed to support the listing of SMEs. Driving awareness of opportunities available to these firms at the NSE is therefore critical,” said Ms Patricia Ithau, Director in charge of Micro, Small and Medium Enterprises(MSMEs) at the Kenya Private Sector Alliance (KEPSA) lobby group.
Her sentiments were shared by the Kenya Association of Manufacturers (KAM).
“There is need for these SMEs to be assisted by appointed financial advisors, to assist them to navigate the costly and stringent listing process,” said Mrs Phyllis Wakiaga, Chief Executive of Kenya Association of Manufacturers (KAM).
An SME is defined as any firm with an asset base of between KSh 500,000 and KSh 10 Million with a varying number of employees depending on its business nature.
Equity Group, one of the most profitable lenders in Kenya, is one the listing success stories. Listed in 2006, Equity Group’s Market capitalization is now more than KSh 130 Billion.
“The market will respond to any good company. This is why we have established the Ibuka program to give SMEs and startups visibility and media branding that is appealing to local and foreign investors. The accelerator and incubator platform gives these firms an opportunity to understand the market and eventually list,” said Geoffrey Odundo, CEO of the NSE.
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