How to Make Capital Markets Work for SMEs in Africa

A RUNMA Oteh who has been the Vice President of the African Development Bank Group (AfDB) since 2006 and newly appointed Director General of the Securities and Exchange Commission (SEC) in Nigeria, recently x-rayed why African capital market regulatory authorities need to create enabling environment to attract Small and Medium-sized Enterprises (SMEs) to source funds from the market.

She also spoke on demutualization of the stock exchanges in Africa and other issues that affect the capital market activities.

What are the reasons why financing SMEs is important?

SMEs are vital for economic growth and development in both industrialised and developing countries, as they play key role in creating new jobs. Small and medium-sized enterprises need adequate financing to meet needs at each stage of their life cycle, from creation through operation, development, restructuring, recovery and beyond.

Financing is necessary to help them set up and expand their operations, develop new products, and invest in new staff or production facilities. Many small businesses start out as an idea from one or two people, who invest their own money and probably turn to family and friends for financial help in return for a share in the business.

But if they are successful, there comes a time for all developing SMEs when they need new investment to expand or innovate further. That is where they often run into problems, because they find it much harder than larger businesses to obtain financing from banks, capital markets or other suppliers of credit. Many African countries have to deal with this chasm between the role of micro credit institutions and that of larger financial institutions. This is the space where SMEs operate and referred to in the Africa Commission’s Report as ‘the missing middle’.

This ‘missing middle’ or ‘financing gap’ is all the more important in a fast-changing knowledge-based economy because of the speed of innovation. Innovative SMEs with high growth potential, many of them in high-technology sectors, have played a pivotal role in raising productivity and maintaining competitiveness in recent years. Nonetheless, innovative products and services need investment to flourish, however great their potential might be. If SMEs cannot find the financing they need, brilliant ideas may fall by the wayside and this represents a loss in potential growth for the economy.

Why are you so interested in the growth of SMEs?

The 21st century is being touted as Africa’s century.

This is because since the beginning of this decade, African growth rates have finally exceeded those of the world in general -- a very welcome and positive development. The SMEs played a pivotal role in the development of most advanced economies, hence the need for African countries to help develop this sector by making policies and creating the enabling environment that will support the real sector.

Our growth story needs to continue and this can be facilitated through the diversification of our economy. An excellent channel is through the development of our financial systems. Our financial systems are currently dominated by the banking system which means there is an urgent need to develop our capital markets to serve as alternative and cheaper source of capital for SMEs.

What are the constraints faced by SMEs in Africa?

Notwithstanding the widely acknowledged role of SMEs in fostering economic growth and development, they have continued to face a variety of constraints.

Some of the challenges they face are inadequate infrastructural facilities, shortage of skilled manpower, high rate of enterprise mortality, low level of entrepreneurial skills, lack of conducive operating environment, restricted market access and cumbersome regulatory requirements. One of the major difficulties SMEs come across, however, is the issue of access to finance. SMEs, especially in developing countries, suffer from lack of access to appropriate (term and cost) funds from both the money and capital markets.

This is due in part to the perception of higher risks resulting in high mortality rate of the business, information asymmetry, poorly prepared project proposals, inadequate collateral, absence of, or unverifiable history of past credit(s) obtained and lack of adequate historical records of the company’s transaction. In some cases, there is a virtual absence of capital market facilities and instruments that SMEs can access.

For instance, the financial systems in most African countries are underdeveloped and provide few financial instruments. Capital markets are still evolving while other conventional sources have no confidence in the credit worthiness of the SMEs.

How can the regulatory authorities in Africa help to encourage and develop the SMEs?

The regulatory bodies in Africa need to create rules that will help the SMEs source funds from the capital market at lower cost.

Financial deepening especially helps those industries more dependent on external finance and also helps to reduce financing constraints, particularly for smaller firms. SMEs are the backbone of an economy and therefore one of the key roles the capital markets can play is in the provision of finance to SMEs.


Financial deepening especially helps those industries more dependent on external finance and also helps to reduce financing constraints, particularly for smaller firms.

What have you to say on demutualisation of African Stock Exchanges?

Demutualisation of the stock exchanges in African is quite necessary because the world is a global village. It is the main thing all over the world. African stock exchanges need to be integrated.

We need to have common practices that are in tune to international and acceptable practices. I and my team from Nigeria have learnt from the regulators in Kenya how they are pursuing the demutualization of the Nairobi Stock Exchange.

With what I have heard from the regulators I am really impressed. Though, we are not there yet. African capital market is still evolving. With time we will get there when there are good policies in place to attract industries to the market.

Is there any role that the regulatory authority has to play in demutualisation of stock exchange in Africa?

Yes of course, the capital market regulator has a role to play in the demutualization of stock exchange.

The regulator has to ensure that the exercise is fair and transparent to accommodate all stakeholders. We in Africa are learning.

The capital market is about information and confidence. When confidence is eroded the market will be affected.

How do you rate African capital market?

African capital market is still evolving. We are not there yet. There is still a lot to do for the capital market to take its rightful place in developing the economies of Africa. African capital market has not created b enough products that will attract companies to the market. We still have low equities listed in our market when compared to advanced economies. We need to educate our people about the prospects of the market.

The SMEs are vital to the development of any economy hence the need for African capital market to create infrastructure that will develop our markets. In some cases, there is virtually absence of capital market facilities. For instance, the financial systems in most African countries are underdeveloped and provide few financial instruments. Capital markets are still evolving while other conventional sources have no confidence in the credit worthiness of the SMEs.

What is the role of capital markets to economic development?

The capital market is a crucial component of a good working financial system and a critical vehicle for a nation’s development. The development of a strong capital market is imperative because theoretical and empirical literature have shown that there is a strong, positive correlation between capital market development and economic growth.

Stock markets can lower the cost of mobilizing savings and thereby facilitate investment in the most productive technologies. They link those who have the resources to invest with those who could use this capital to turn new ideas into businesses, generating jobs, improving living standards and contributing to the economy. The impact on economic activity also occurs through the creation of liquidity. A well functioning, liquid and broad capital market is crucial to the operation of any emerging economy.PF