It Is Important To Step Up Efforts In Financing SMEs Through Capital Market To Enhance Nigeria’s Economic Growth.
Small and medium scale enterprises (SMEs) are a major contributor to long-term economic growth and employment. However, they often struggle to find financing due, in part, to the relatively high investment risk they represent.
The SME financing challenge had increased after the global financial crisis as banks face tougher liquidity requirements and leverage constraints. Capital markets therefore have a role in bridging this financing gap for SMEs by providing alternative funding sources. Also, in many jurisdictions, SMEs continue to face impediments that discourage them from raising financing on capital markets, such as fear of losing ownership and relatively high regulatory costs. In response, most of the jurisdictions surveyed carried out by the board of International Organization of Securities Commissions (IOSCO) have been reviewing their respective regulatory frameworks and taking specific initiatives to facilitate SME access to capital markets. The report identified various sources of funds for SMEs and stresses the role the capital market will have to play going forward.
It states: “SMEs have largely relied on bank loans for financing rather than capital markets. However, since the financial crisis, access to bank lending has become more challenging following a period of bank deleveraging, reduced lending and tighter lending criteria by banks as well as the introduction of more stringent capital requirements associated with Basel III. In this regard, and against the backdrop of a shift towards market-based financing, there is therefore a greater need for capital markets to play a stronger role as a source of financing for SMEs.”
Operational challenges in Nigeria:
In Nigeria, the SMEs like others in emerging markets are perceived as a high risk segment of the economy for banks when it comes to lending. Unstable macroeconomic policies further make banks conservative about exposure to them because of their higher failure rate. Although there are provisions for short-term loans but they are usually made available to larger enterprises perceived to be credit worthy.
According to reports, even the previous public-sponsored financing programmes failed to make the desired impact due largely to high default rates. Few domestic equity sources for SMEs exist due to their inability to meet listing requirements.
Despite the widely acknowledged role of small and medium scale enterprises in fostering economic growth and development, they have continued to face a variety of constraints such as 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 like Nigeria suffer from lack of access to appropriate funds from both the money and capital markets. This is due 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.
Efforts in the capital market:
However, the NSE in its efforts to deepen SMEs created the Alternative Securities Market (ASeM), a specialized board for emerging businesses – small and mid-sized companies with high growth potential. It gives such companies the opportunity to raise long-term capital from the capital market at relatively low cost, allowing them to grow and institutionalize while such companies need to meet the regulatory requirements of the NSE, the Corporate Affairs C omission (CAC) and the Securities and Exchange Commission (SEC) before they access the capital market for fresh capital.
Current state of ASeM:
ASeM board currently has nine equities listed and despite of regulatory efforts at reviving the alternative securities market (ASeM) of NSE, companies listed on this segment of the market are yet to attract the needed liquidity from local and foreign investors. ASeM, which was meant to provide the opportunity for small companies to raise long-term capital at relatively low cost from the capital market, appeared to be heading the same path as the Second Tier Securities Market (SSM) established in the 80s.
Currently, the share of SMEs financing through capital markets is far 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 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, as well as in emerging market countries.
Regrettably, Nigeria’s dwindling economy is not helping most of the SME operators to optimize their potential. Whereas, SMEs grow at almost twice the rate of GDP in most markets across Asia, Africa and Middle East, Nigeria’s case is a very different one. Despite that the stock market has seen unprecedented rally in current year, the NSE-ASeM index, the barometer that measures the activities of the sector instead of joining the rally has also dropped by 45.63 per cent year-to-date to close at 949.59 basis points last Friday from the opening figure of 1.746.68 as at the commencement of trading last January 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.
SEC To The Rescue
SEC in a report on Capital Market Financing for SMEs acknowledged that for the benefit of the market, regulators should introduce a market making system for liquidity of SME shares. This will guarantee SME securities have reliable price formation process and increase the number of shares held by the public. The reverse will be the case where there is inadequate liquidity.
“Regulators should promote accessibility to good investment research information.
Inducements that will promote independent research on and ratings of SMEs should be provided. Investors are generally not eager to pay for research on SMEs due to high cost. Potential investors should have access to research and rating information in order to reduce the information asymmetries associated with smaller companies. This can be improved through publishing periodic analysis and rating reports by relevant institutions on SME securities, the Commission said.
“In order for SMEs management to remain committed and that securities issued are appropriately valued, policy holders could consider introducing lock up provisions that would allow a SME to grant another company the option to buy its stock as a prelude to an acquisition, this will guarantee that a low number of outstanding shares and a narrow investor base can make it difficult to sell SME shares. Introducing a market-making system may help; and frequent investment research on SME securities by relevant institutions should be encouraged so that investors interested in SMEs could easily and cheaply access the analysis and rating information.”
The regulator also opined that policymakers should consider introducing provisions that would allow a SME to grant another company the choice to buy its stock as a prelude to an acquisition. This will protect the integrity of the SME market. Similar lock-up provision would ensure that management remains committed and that securities issued are appropriately valued.
Operators in the Nigerian capital market believe that the Nigerian capital market is in need of entrepreneurs to boost activities and reposition the market for global competitiveness. They 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, 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.
Managing Director, Crane Securities Limited, Mr. Mike Eze enjoined the regulators to step up awareness campaign to encourage financing of SMEs through the market.
“Regulators and policymakers should step up efforts in organising promotional campaigns, public seminars and conferences to increasing public awareness on the importance, benefits and the need for SME financing,” he said. “They should also conduct surveys to examine why SMEs fail to exploit the full advantage of the capital markets, to determine their willingness to access the capital market.”
Financing through the capital market is germane to help SMEs set up and expand their operations, develop new products and invest in new staff and production facilities, which will ultimately lead to massive employment.
Source: New Telegraph