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Stakeholders rue Capital Market financing for SMEs

By on July 20, 2015

Following the International Securities Commission (IOSCO’s) report on alternative financing for SMEs through the capital market, stakeholders examine issues around capital market financing for local SMEs, reports Olaseni Durojaiye

In appreciation of the critical role that Small and Medium Scale Enterprises (SMEs) play as a growth driver in the economy of any nation, the International Organisation of Securities Commission (IOSCO) has harped on the need for Capital Markets to support Small and Medium Enterprises to address financial challenges faced by the sector by providing the sector with alternative funding through the capital markets. The report on SME financing through the capital market, released in early July, recommended channels through which capital markets can fund SMEs to include venture capital, external capital, debt financing, trade credit, bank funding and securities market among others.
Besides identifying the challenges that SMEs faces in accessing market-based financing, the report  also examined some of the successful measures that have been adopted by regulators and other policy makers to assist SMEs access financing through the capital markets. The report also noted that challenge of SMEs financing has increased in the aftermath of the global financial crises banks also faced tougher liquidity requirements and leverage constraints.
“SMEs are a major contributor to long term employment. However they often struggle to find financing due, in part, to the relatively high investment risks involved.
“Capital markets therefore have a role in bridging this financing gap for SMEs by providing alternative funding sources,” the report stated.
Reactions have however trailed the report with economists insisting that some of the funding channels proffered in the report exist in the country and blamed the inability of SMEs in the country to access it on lack of awareness and the fact that many of the local SMEs were not ready to meet the ‘full disclosure’ clause required of them to access financing through the bourse.
Speaking to THISDAY, an economist and Head of Research and Intelligence, BGL Securities, Femi Ademola, noted that although the multinational companies and the large corporations are the most popular in the country, he however agreed that the strength of any country’s economy is in its SMEs.  According to him, “That is why most countries create platforms for financing and providing incentives to the SMEs. In Nigeria, the CBN established the SMEIS Fund where banks are expected to set aside 10 per cent of their retained earnings for SME funding either through loans or equity. The problems however is that most SMEs are usually in the introduction or growth phase of their lifecycle and hence do not generate cash flow that will allow them to meet the conditions, including high interest rate – where applicable -for lending and or investing by banks. They need cheap, patient capital that could probably only be obtained through the capital market and or venture capital. With a very good funding and risk management arrangement, an economy driven by strong SMEs will eliminate the problem of unemployment in a very short time,” he argued.
Reacting to the IOSCO report, Ademola argued that the SEC and the Nigerian capital market has already demonstrated that it is prepared to take that approach. By licensing the NASD and FMDQ as alternative trading platforms for over the counter (OTC) trades in equities and debts, the SEC has already opened the door for capital market funding of SMEs.  He added that, the creation of an alternative securities exchange market (ASEM), hitherto called Second-tier market on the NSE shows that the market is receptive to dynamic use of the capital market for funding SMEs adding that given proper structure, the SEC will support any platform that will add value to capital market activities in the country.
Director General, Lagos Chamber of Commerce and Industry (LCCI) Muda Yusuf in a response to THISDAY enquiries explained that investor confidence in SMEs is low reason being that some SMEs that have gone to the capital markets to source funding in the past appeared to have disappointed. He added that some SMEs have continued to stay away from the capital market due to inability to satisfy certain conditions and because they are unaware of the opportunities available to them in the capital market.
“Most SMEs lack the structure and corporate governance standards to access funds from the capital market.  Many are also averse to disclosures of their businesses which raising funds require. There is also the issue of awareness about the opportunities that exist in the capital market.  Although the track record of SMEs that have raised funds in the past are not very impressive.  Investors experience was not so good.  Therefore there are also issues on the demand side as well,” Yusuf stated in a response to THISDAY enquiry.
However, another economist and Chief Executive Officer of Global Analytics Derivatives contended that the Nigeria Capital Market was not accustomed to providing financing for SMEs at the present and argued that this may be due to issues bordering on sharp practices on the part of some of the listed corporation and companies in the bourse.
Fasua argued that , “At present, our Capital Market is not very much attuned to helping SMEs raise money, chiefly because we have issues with the big companies already listed and if we should concentrate on SMEs raising money at the stock exchange, things could get pretty messy. There are strict rules, and global best practices that must be adhered to for a company to raise money in the capital market. What we have seen is a situation where even the large companies cut corners, present fake accounts, and perpetrate a lot of schemes and scams such as has reduced confidence in capital markets. The SEC, NSE and other regulatory agencies have had an uphill battle on their hands trying to get even the large companies to do the right thing. The Financial Reporting Council has stepped in with the International Financial Reporting Standards, (IFRS), which entails very strict rules, regulations, standards and best practices for the presentation of accounts by these companies. As at today, very few companies – a few banks and conglomerates – have been able to keep up. Many stockbrokers are unable to measure up to standards. This being the case, where is the opportunity to throw the floodgates open for SMEs to list on the exchange?” He wondered.
Speaking further, Fasua stressed thus: “I understand there is a second-tier level of the Nigerian Stock Market, but liquidity in that market is not very high for the reasons adduced above. We cannot encourage the SEC and NSE to totally water down standards just because we want them to allow SMEs raise money. The simple issue is that many people will love to ‘raise money’ from the public, and once they have the money, they do whatever they like with it. The fact is that in Nigeria today, many people complain about lack of access to funds as the biggest impediment to them doing business but that in itself needs to be interrogated.

Are we sure these business people are good managers of resources? What is the proportion of bank loans that go bad? What is the proportion of companies on the exchange that have raised money but are now comatose? How many companies have raised money through what is called ‘Private Placements’ in the past, with the promise that they will soon list on the stock exchange, only for them to have scammed the public and left us all high and dry?,” he concluded rhetorically.
Interestingly, THISDAY respondents held that the situation can still be remedied. They posited that SME financing through the capital market can still be achieved, though they differ in the route to achieving same.
According to Ademola “An easy way to work around the challenges is through the reduction in cost and the capital market access requirements. Another is to approve smaller platforms where the use of crowd funding could be allowed but with proper governance, including Know Your Customer (KYC) of participants on the part of the platform operators. Part of the governance requirement could be the prohibition of cash investment but that investment should be true the use of bank transfers and debit/credit cards; thereby relying on the KYC process of the banks,” insisted
Yusuf appeared to agree with Ademola. He told THISDAY that “In order to get the SMEs on board therefore, it is important to raise the level of awareness and sensitization to the opportunities that the capital market offers. It is important as well to review the associated costs and other requirements to improve access without jeopardizing the interest of investors,” he concluded.
Fasua, however, held that “I will suggest that we keep focused on the gradual cleanup of the capital market for now. If we get a hang of the big companies already listed, then we can focus on the second-tier market, then we can open up to SMEs. I have advised capital market regulators in the past, that until we go back to really placating individual investors, those who invested for the long term while we were growing up, until we can bring back that era where parents bought shares for their growing children and locked down money for decades, the market vibrancy may never return.  Financial market players and hot-money purveyors from abroad, can never help restore confidence in our markets. Theirs is to move in en masse, make serious money and move out on the double,” he concluded.

 

[ThisDay]