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Nigeria: Stock Exchange Listing and SMEs

Timi Olubiyi writes that the stock exchange is one of the most appropriate forms of acquiring long-term financing for structured SMEs

According to the World Bank, formal Small and Medium Enterprises (SMEs) contribute up to 60% of total employment, and up to 40% of national income (GDP) in emerging economies. A common outcome of research and discussions on Small and Medium Enterprises (SMEs) is that this form of business play a crucial role in promoting economic development, especially on the African continent where SMEs have remained critical contributors to employment and economic activities. However, these SMEs face a financing gap and the challenge of access to capital, which restricts their economic prosperity. From context observation, these SMEs largely ponder with questions such as “should we take a bank loan, or should we consider other alternatives for funding and credits?”.

World over, SME operators primarily depend on bank loans or government schemes for financing. More so, SMEs have a heavy dependence on debt rather than equity in their business operations. Therefore, the need to bring awareness to the diversification of funding sources is necessary. The capital market is critical to a country’s economic development and a distinct alternative to traditional bank lending and financing. If accessed it can provide a cost-effective medium-to long-term finance for SMEs including large corporations and multinationals. Though many non-bank financing alternatives such as financial leasing, private equity (including angel investing and venture capital), and crowd-funding are all other forms of financing which businesses may use at various stages of their life cycle, however they are not as easily accessible as the stock market.

Importantly, SME listing on Stock Exchanges will add significantly to the creation and distribution of wealth in any economy. However, firms may list on a Stock Exchange for a variety of financial and non-financial reasons. Evidently, the recent crisis with the novel coronavirus pandemic and the recession has revealed that bank financing is not a reliable source of long-term financing. Agreeably, long-term financing is an essential element for supporting investment and growth at this time for any business. Hence, the stock market is the best way to have access to a meaningful impact. Bank loans might either be too expensive or not even an option for most SMEs at this time because of bank stringent measures which often require assets to back the loans. Access to long-term financing enables SMEs to solve their financing needs over the long term and this has a positive effect on economic growth and employment generation. The stock market can provide this and have always played a role in bringing together those with savings to invest and those who need capital thereby supporting economic growth. The Stock Exchange can be the most appropriate form of acquiring long-term financing for structured SMEs and the cost of equity capital can be lower than other forms of finance particularly bank loans.

The stock market’s capital allocation role, which means that the exchange provides channels for financial intermediation between investors and issuer (listed companies), which creates an opportunity for SMEs. Businesses do not need to be a conglomerate or multinational to be listed on the Stock Exchange. In fact, there are trading platforms tailored to the needs and capabilities of SMEs. Many countries in the world allow SMEs to raise funds from the capital market and have SME platforms such as the Alternative Investment Market in the UK for instance. In Africa, SME board also exist on some Exchanges on the continent; namely Botswana (BSE); Casablanca, Morocco (CSE); Douala, Cameroon (DSX); Egypt (ESX); Johannesburg, South Africa (JSE); Nairobi, Kenya (NSE); Lusaka, Zambia (LuSE); Mauritius (SEM); Mozambique (BVM); Alternative Securities Market (ASeM) board in Nigeria (NSE); Seychelles (Trop-X) and Swaziland (SSX) amongst others. One key difference on these platforms is the requirements for listing which vary across the Exchanges. Significantly, listing requirements for SME boards are usually more relaxed compared to the main trading boards, this is done with the aim of cutting barriers and encouraging SMEs to list.

The SME board is a segment of the Stock Exchange, dedicated to trading the shares/ securities of SMEs, who otherwise find it difficult to get listed on the main board of the Exchange due to stringent listing requirements. In Nigeria, the Alternative Securities Market (ASeM) trading platform helps small and growing companies to raise funds and it is different from the premium and main platform of the Stock Exchange. The platform is strictly for SMEs and the platform is characterized by lower attractive listing requirements and reduced listing costs than the mainboard. Simply put, it can be adjudged a second-tier listing alternative which provides the opportunity for SMEs to raise long-term capital at relatively low cost from the capital market.

Businesses can raise funds directly on the stock market when they list. In Nigeria for instance there are no limits to the amount of capital companies can raise on ASeM trading platform of the Nigerian Stock Exchange, as long as it is in line with other regulatory requirements, such as those of the Corporate Affairs Commission (CAC) and the Securities and Exchange Commission (SEC). Whether or not they raise funds upon listing, listed firms may also be able to tap other sources of finance more easily than similar, unlisted firms. This is because the process of listing requires firms to meet strict financial reporting and corporate governance requirements. Therefore, meeting these standards improve accounting practices and financial management, thereby increasing firms’ transparency and potentially improving their creditworthiness out there.

It is important to state that a Stock Exchange listing offers the following benefits to SMEs: firstly, it will provide a clear price for the shares and a valuation of the business once listed; it gives businesses access to a wider potential investor base and access to long term capital for growth and expansion. Recall, one of the most important reasons firms list is to increase their access to finance.

Moreover, listing does encourage good corporate governance culture from the listed companies. It can also raise the company’s public profile with customers, suppliers, investors, financial institutions and it can majorly help SMEs with international business conducts, particularly with the company perception and prestige. Like all businesses, SMEs need capital to start up and keep going until they become profitable, once listed SMEs can have access to fund raising as required.

In order to make listings more attractive, however government, regulators, and policymakers should consider policy responses to encourage more listing, further lowering listing requirements to encourage more participation in the capital market. Furthermore, regulators can reduce transaction and listing costs so that more SMEs will be attracted to the market and make the space wider. Also, to deepening market participation, it is recommended government agencies that regulate the market, should organize promotional campaigns, public seminars, and conferences to increasing public awareness and to address potential drawbacks of SMEs from listing. The point of note is that, to improve responsiveness of SMEs to listing and its ample benefits, government intervention is necessary. Therefore, the post-COVID-19 regulatory regime should involve consistent and coordinated policy responses and pronouncement to assist and encourage SMEs to list on the Stock Exchange, this will, in turn, improve foreign market participation, boost the economy, and also advance market confidence.

SMEs can only grow and contribute positively to economic growth and development if they are well supported by government and regulatory institutions. Therefore, attention should be given to this significant sector of the economy that is increasingly faced with the problem of high cost of production, lack of access to funding and threat to business survival. More businesses will strive and more jobs will be created with policies and regulations that can drive and aid access to capital and SME growth in the country.

Globally, SME’s are substantially the major employer of labor, avenue for wealth creation, and sustainable economic development. Therefore, for many businesses seeking funding to remain viable is crucial, consequently alternative source of funding can be accessed through listing on the Stock Exchange, even though is likely to be a long-term objective. It should be seriously considered as part of the company’s strategy post-COVID-19, particularly as it relates to business funding and credits. More so the survival of small and medium-scale enterprises with access to capital is key at this time.

It is very convenient to list on the Stock Exchange but many SMEs have difficulty in arranging the listing requirements, meet legal and regulatory frameworks, and so on. Getting or finding advisors to prepare these requirements for listing on an Exchange might just be reasonable.

Dr. Olubiyi is an Entrepreneurship and Small Business Management expert