Reforms unlock financing door for small businesses

Mobile-based loans and other sources of financing are now available for small business owners. FILE PHOTO | NMG 

By CATHY MPUTHIA
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A large percentage of Kenyan businesses can be categorised as micro, small and medium-sized enterprises (MSMEs).

One of the challenges the businesses face is a lack of finance and capital for growth, among other challenges.

Statistics show that 46 per cent of SMEs collapse within one year of operations. One of the major reasons this is so is because of the financing challenge that most of them face.

Traditionally small businesses have had two sources of capital — equity and debt. However, there are now other more conventional sources of capital available to SMEs.

The government and the financial sector is undertaking a lot of policy reforms to support SMEs access financing, for example, the recent Stawi loan initiative, which is a mobile loan product.

The Stawi loan, according to a press statement, is set to improve credit access to SMEs, which have been locked out of the formal credit market due to a lack of security.

The loan offered is between Sh30,000-Sh250,000 with an annual interest of nine per cent. The applicants do not need bank accounts to benefit. This is another attractive feature of this product as many small business traders do not operate bank accounts.

It is possible for SMEs to seek other sources of financing due to regulatory reforms.

Assume you have a company that you incorporated two years ago with a few other friends. Through various sources, your company has raised Sh10 million in the capital. It is now possible for your company to list on the Nairobi Securities Exchange (NSE) through the Growth Enterprises Market Segment (GEMS), which allows SMEs to access financing through a listing. Prior to the passing of the GEMS regulations, it was very difficult for SMEs to access capital from the stock market as the minimum requirements were out of reach for most. For example, a company required a minimum of Sh50 million in capital to list on the NSE. There are several reasons why a qualifying SME should consider listing.

First, listing enables the SME to access capital from a wider pool. There is a proposal to limit the listing fees at between Sh50,000-Sh250,000.

This means that an SME is able to access large amounts of capital at a reasonable cost.

The listing cost is even cheaper than the expenses associated with debt capital.

Second, a listing is a public affair and therefore raises an SME’s profile. The SMEs get a public image and reputation boost when they list on the stock market.

Some investors prefer to invest in a listed company to an unlisted one. The deem listed companies as having better governance than the unlisted ones. Listed firms are also expected to observe mandatory good governance practices. This attracts some institutional investors.

A firm must have operated for at least one year and registered as a public limited company with five directors before listing on the GEMS. Therefore, you may need to conduct a conversion exercise if the company is private or a partnership. The firm must also appoint a licensed professional known as nominated adviser, to give advisory services for the listing.

Going forward there are attractive proposals for companies seeking to list on GEMS such as tax amnesties.