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NSE opens floor to small businesses

FINANCIAL STANDARD
By | August 23rd 2011

By James Anyanzwa

The Capital Markets Authority has intensified efforts to attract Small and Medium Enterprises (SMEs) to the stock market, amid growing concerns over subdued activity on the bourse.

CMA reckons that unlocking the potential of SMEs, which constitute about 40 per cent of gross domestic product (GDP) in Kenya and about 80 per cent of the labour force, is key to propelling the country to double-digit growth as envisaged in the Vision 2030 Economic Blueprint.

But even as CMA strives to create avenues for SMEs to raise capital, the persistent drop in volume of activities at the bourse has provoked worries. But the authority is betting on the privatisation of state-owned enterprises and creation of county governments to boost business on the 57-year-old exchange.

“We are going through a depression on the NSE because of lack of business. However, we are in the process of establishing what we call county governments. We shall migrate professionals to take charge of these counties and they would be a major source of revenues,” Kung’u Gatabaki, CMA’s chairman said last week, adding that capital markets would play a critical role in raising funds for various projects in the counties.

According to NSE’s chief Executive, Peter Mwangi, the bear run at the bourse could be explained by various factors, including drought and rising inflation, volatility of local currencies and weaker growth projections. Other factors include institutional investors concern over reports of world stock markets losing $2.5trillion in just one week, concerns over excessively indebted European economies, and the unstable American economy.

“The more globally connected capital markets are, the more likely they have been affected,” said Mwangi.

Reap rewards

“Although it is difficult to tell how long market weakness will persist, we believe that long term investors stand to reap rewards if they take advantage of prevailing attractive valuations to take positions in the market,” said weekly report compiled by African Alliance Securities research department.

Cash starved SMEs are expected to start using the NSE as a cheaper and convenient avenue of raising new capital, and in the process help attract more business and boost economic activities.

“We are establishing a platform on NSE where SMEs can come to raise capital. We are at an advanced stage working with the Nairobi Stock Exchange (NSE) and Central Depository and Settlement Corporation to finalise the listing and eligibility requirements for this platform,” said Gatabaki

“This has reached an advanced stage and in a few months, we will announce we have these facilities on our capital markets.”

The NSE is currently made up of the Alternative Investment Market Segment, and the Main Investment Market Segment,  whose stringent listing requirements have locked out small businesses from tapping into the capital markets.

It is argued that the SMEs have been unable to meet the minimum listing requirements such as having an asset base of between Sh20 million and Sh100 million, and having a shareholder roll of between 100 and 1,000 .

SMEs are currently deprived of affordable credit from commercial banks, which still view them as risky borrowers, and often place tight lending requirements before advancing credit.

Difficulties in accessing financing have held back small enterprises from achieving their full potential, despite entrepreneurs in the sector emerging as an engine for growth and employment creation in corporate Kenya.

New pool of funds

Creating a counter for SMEs is expected to enable them to tap into a new pool of funds, which has seen largely meant for corporate bodies and the Government.

NSE also reckons that a special market division for the SMEs will help them gain access to manageable and affordable capital for growth and expansion and provide an exit strategy for family owned business enterprises through separation of ownership and management.

The SMEs market is also expected to provide a graduation platform to the main market segment of the stock exchange, and provide a wider range of investment opportunities to investors (both institutional and retail).

High standards

Listing on the NSE will require firms to have high accounting standards and make full disclosures of their operations.

Firms are also expected to be profitable for three years in a row before listing.

But the NSE is also sweetening the obligations and requirements, tax and policy incentives so as to attract SMEs to the bourse. 

Tax incentives are in the pipeline for the SMEs. SMEs in the infrastructure business can benefit from the scrapping of stamp duty on infrastructure bonds.

This acts as a sweetener for investors making it easier to raise capital through the bonds market.

Corporate tax was also reduced from 30 per cent to 20 per cent for a five-year period, for firms that cede at least 40 per cent of their ownership to the public.

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