- It is undeniable that SMEs play a vital role in the growth of an economy both as a creator of jobs and a contributor to national income.
- But it is well known that SMEs rarely raise funds in the financial markets.
- Nevertheless, efforts to facilitate the registration of SMEs, such as a less costly and SME-friendly regulatory regime, should be made to close the existing funding gap.
Small and medium-sized enterprises (SMEs) are the backbone of the African economy, accounting for around 90 percent of all businesses and providing nearly 80 percent of the region’s jobs.
In Kenya, SMEs make up 98% of the country’s businesses, according to a 2017 National Economic Survey report from the Central Bank of Kenya (CBK), creating 30% of jobs per year and contributing 3% to gross domestic product. (GDP).
Despite their crucial role in driving the continent’s economic development, evidence suggests that SMEs in Africa face a severe financing gap, which has historically hampered their growth. The International Finance Corporation (IFC) estimates Africa’s financing gap for SMEs at 33 trillion shillings. Ultimately, the credit-to-economy ratio is very low in Africa, averaging less than 30% of gross domestic product, compared to over 135% in regions such as East Asia and the Pacific region. .
Viewed differently, the low level of credit to SMEs in Africa reflects the limited services offered by today’s stock exchanges. Even markets with dedicated boards of directors for SMEs such as the growth business segment of the Nairobi Stock Exchange in Kenya (GEM), the Ghana Stock Exchange (GAX), the Alternative Securities Market of the Nigeria (ASeM), the SME segment of the Rwanda Stock Exchange in Rwanda and the Johannesburg Stock in South Africa Exchange AltX, remains largely underdeveloped, with small market caps, few listed companies, and suffers from illiquidity.
As a result, the objective of SME funding grants was not achieved. Partly, the ignorance of these platforms by SMEs and the fear of loss of control are also other factors contributing to low levels of national participation. Overall, this has resulted in a lack of depth and liquidity in domestic capital markets.
Why is it important for SMEs to familiarize themselves with and take advantage of these platforms? Several advantages. A; From a financing perspective, given access to a larger potential investor base, the cost of equity may be lower than that of other forms of financing. In addition, once listed, additional or secondary offers are easier to make. Of them; SMEs benefit from increased credibility and visibility. As a listed entity, SMEs have a real platform to increase their public awareness through media coverage and publicly available information.
This could have a positive impact on their trade agreements. Three; a major reform concerns good governance, which is a long-term attraction for investors in the stock. On this point, the benefits accumulate at the time of listing as SMEs prepare for this event and also throughout the life of the company.
It is undeniable that SMEs play a vital role in the growth of an economy both as a creator of jobs and a contributor to national income. But it is well known that SMEs rarely raise funds in the financial markets.
Nevertheless, efforts to facilitate the registration of SMEs, such as a less costly and SME-friendly regulatory regime, should be made to close the existing funding gap. Financial markets are a convenient way for SMEs to access the long-term financing they need so badly to grow their businesses.
Mr. Mwanyasi is the Managing Director of Canaan Capital