Improved access: Plans to open a new equity market for smaller businesses

While small and medium-sized enterprises (SMEs) in many ways constitute the backbone of the economy, they continue to face challenges, one of the largest of which is access to finance. Alongside initiatives to improve the availability of bank credit (see Banking chapter), the authorities are moving to create an equity market for SMEs with reduced listing requirements.

RAISING FINANCE: SMEs are thought to account for around 92% of businesses in Ghana and 70% of GDP. However, the development of the segment is constrained by a number of factors, one of the most important of which is the difficulty accessing financing. The Association of Ghana Industries’ “Business Barometer” report for the first quarter of 2012 found that access to credit was the second-largest challenge for SMEs, after high levels of taxation, and the fourth-largest challenge to Ghanaian companies overall. While some banks are increasingly targeting the segment, raising finance can still prove difficult.

This may require extra help for SMEs to list. Carol Annang, the CEO of New World Renaissance Securities, told OBG, “We need to identify SMEs with demonstrated potential, nurture them, assist them with the process and bring them on to the stock exchange.”

INCENTIVES: In order to increase the availability and diversity of financing options for SMEs, as well as to increase trading activity on the low-liquidity stock market, the Ghana Stock Exchange (GSE) is moving to open a new SME-focused window, to be known as the Ghana Alternative Market (GAM). The GSE is launching the exchange in partnership with the Ghana Venture Capital Trust Fund, which was established by the government in 2004 in order to provide low-cost credit and equity financing to SMEs. The two entities signed a memorandum of understanding regarding the initiative in April 2012. In February 2012 Ekow Afedzi, the general manager of the GSE, said that the market would begin operations in June 2012, though as of early July this did not appear to have occurred, and recent statements have pointed to the second half of the year.

Measures are being taken to make it easier for SMEs to list and encourage them to do so. Minimum capital requirements for firms listing on the exchange will be reduced from GHS1m ($592,900) on the main exchange to GHS250,000 ($148,225). The required minimum number of shareholders – 100 on the main exchange – will be cut down to 20 for companies listing on the alternative market. SMEs listing on the market will also only be required to report earnings twice a year.

A fund is being established in order to pay for expenses involved in listing in the exchange such as legal fees. The Venture Capital Trust Fund is giving $500,000 to the fund and the GSE will also contribute. Talks have also been held with the African Development Bank and other institutions regarding support for the fund. Application and listing fees will also be reduced, waived or be postponed until after the listing.

QUESTION OF INVOLVEMENT: Opening the SME market offers the hope of vastly improving access to finance. “The exchange is promising as we have seen companies wanting to list in the past but failing to meet the existing requirements,” Sulemana Mohammed, a research analyst at Ecobank Capital, said. The launch of the SME exchange should help boost transparency by requiring improved management and accounting standards. However, not all observers are convinced the launch of the SME exchange will significantly boost trading activity. “The SME exchange makes sense as it will enable small companies to raise capital and expand. However, there are already some small companies listed on the GSE and they don’t trade a lot, especially as some are struggling and making losses,” Mohammed told OBG. “The success of SMEs on the exchange will depend on whether or not they are profitable.”

While the market authorities are backing the GAM, it is questionable to what extent private sector players will be willing to become involved. The alternative exchange could indeed be promising, but the challenge is that its smaller listings may not be large enough to attract investment banks to sponsor the offerings.