How Do African SMEs Use Capital Markets to Grow?
A small to mid-size enterprise (SME) is a business with revenues, assets, or number of employees below a certain level. They create the vast majority of jobs in African countries. Stock exchanges therefore recognise the importance of financing SMEs – they are key to a country’s economic growth.
SMEs require financing to grow, and stock exchanges would seem to be a natural source of funding. This has not yet proved to be the case, despite many African exchanges setting up boards specifically for the listing of SMEs.
South Africa’s Johannesburg Stock Exchange launched AltX in 2003, an alternative public equity exchange for small and medium-sized companies in South Africa. Nigeria’s Nigerian Stock Exchange launched ASeM in 2013, which is the Alternative Securities Market. It provides a platform for small and mid-sized fast growth companies to raise critical long-term capital at relatively low cost, in order to realise their business potential.
Kenya’s Nairobi Stock Exchange launched GEMS in 2013, which is known as the Growth Enterprise Market Segment. It aims to provide more options for SME finance, especially long-term funding. Lastly, Ghana’s Ghana Securities Exchange launched GAX in 2013, which is the Ghana Alternative Market. It is a parallel market operated by the Ghana Stock Exchange and focuses on businesses with potential for growth.
Despite the launches of these small boards, the stock exchanges’ objective of funding SMEs has not been realised. SME financing on public markets remains the missing funding opportunity in the capital market’s ecosystem. This is largely because of regulatory and compliance costs that SMEs generally don’t understand and don’t want to pay for. The tension created with these compliance issues is that although SMEs need funding, investors also need to be protected. In order for this to happen there needs to be transparency in the form of information sharing, governance, reporting and compliance. Although stock exchanges have tried to provide a lower cost platform, they are still too expensive for SMEs who wish to tap public markets for capital.
A solution is that crowdfunding should be included in the capital market ecosystem in a transparent, regulated and cost-efficient manner. The requirements of issuing companies, investors and regulators all need to be taken care of, but the use of technology may help reduce the costs and complexity of those processes. The African Crowdfunding Association (ACfA) has created the ACfA Label Framework, a regulatory framework based on sound principles and a team with the ability to assist in supervising crowdfunding in their own jurisdictions. The team understands the crowdfunding environment in countries on the African continent, and can provide expert technical assistance. Through collaborating with regulators to create an enabling SME funding environment, ACfA intends to catalyse economic growth and job creation.
