By Moremi Marwa
Since its launch in 2013, the Enterprise Growth Market (EGM) segment of the Dar es Salaam Stock Exchange (DSE) has attracted companies that previously could not plan or strategise to access public money via selling of shares. Admittedly, though, the EGM — since its inception has been struggling with perception challenges: illiquidity, operational underperformance by EGM listed companies, investor expectations and for some, minimal capacity by these SMEs to pursue clear business models, leading to enduring challenges.
However, for a market that has just celebrated its third anniversary — with five listings already, attracting 250,000 new investors, capital raising of Tsh.50 billion, and current market capitalisation of Tsh.121 billion — there is hope for wide acceptance of the platform by the business community in the days ahead.
With such a wide base of business enterprises to tap from — small and medium enterprises (SMEs) are estimated at five million in Tanzania, contributing about 40 percent to Tanzania’s Gross Domestic Product (GDP) and being one of the largest generator of employment (approximately 5-7 million depending on the debate of formal and informal of existing labour force). This and the fact that Tanzania’s economy will continue its growth trajectory, at about 7 per cent per annum and the fact that the size of our economy is closer to crossing the $50 billion mark, the need to pay more attention to SMEs, whose contribution to the GDP and employment is growing by the day, cannot be over-emphasised, and thus its capital-raising mechanisms.
Certainly, despite the challenges, the EGM segment cannot be easily written off or underplayed; rather a thoughtful strategic mind can actually attribute this as a gift for the country’s vibrant SME sector — this is why:
First, the trend for declining bank credit towards the private sector especially in the recent months is a good place to start. Latest Bank of Tanzania’s Monthly Economic Review indicates that private sector credit growth has declined by almost 50 percent. According to the Report, I quote: “Credit to private sector increased by TZS 1,744.0 billion to TZS 16,622.8 billion, representing an annual growth of 11.7 percent compared with an increase of TZS 2,935.8 billion to TZS 14,878.8 billion in the year ending September 2015— annual growth of 24.6 percent. It is worth noting that credit growth has remained positive in all major economic activities, with the exception of agriculture and manufacturing activities”. So, a growth of 12 percent down from 25 percent over a similar period in the previous year, 2015, indicates that SMEs, like other sectors need to rethink their financing strategies. In my view, SMEs need to start thinking long term, especially in times where credit to agriculture and manufacturing sectors (largely falling under the SME categorisation) are declining.
Furthermore, this trend may just continue especially at a time when the spread between lending rates and yields in government securities (treasury bills and bonds), narrows down following liquidity challenges in the banking sector — this [liquidity] challenge means there may continue to be less credit for SMEs’ growth. We observe many banks reducing their lending, especially to SMEs that are also considered by many as risky. For SMEs, therefore, if they can carefully understand the challenges they face and if they can try hard enough to put their houses in order, the EGM segment could potentially fill their financing gap. With less stringent capital raising requirements, EGM can provide to SMEs a lower-cost alternative for their growth and expansion.
Secondly, EGMs’ listing is fairly easy compared to the main investment market (MIM) segment. For instance, to list on the main market, a company needs to be in operations for at least three years, two of which should be of profitability. A company will also be required to indicate a clear future dividend policy, be with issued and paid up capital of at least Tsh. 1 billion and must have audited financial statements for the course of its duration. There are no such requirements in the EGM. In addition, companies listing into the EGM are only required to float at least 10 percent of the shares with at least 100 shareholders as opposed to 25 percent with 1,000 shareholders for the main segment. Furthermore, as it is in the main market, IPO related transaction costs i.e. legal and other incidental costs are corporate tax deductible. There are several other tax incentives provided for all companies that list their shares in the DSE, both in the main board and the EGM.
Lastly, with the EGM segment, SMEs have an opportunity to widen further their funding sources. In addition to the potential for follow up capital raising using instruments such as rights shares issuance to their already wide base on investors, or via issuance of corporate bonds, SMEs listed in the EGM can help ease the relationships between SMEs and banks. A listed SME is perceived less risky by banks — for a fact that lending interest rates are a factor of cost of raising capital by banks plus risk premium by the borrower, then the perceived reduced risk by SMEs makes for less borrowing interest rates provided by banks.
Let me finish by saying that platforms that facilitate listings for SMEs, providing less affordable capital raising, low listing eligibility conditions, as well as minimal listing requirements, corporate governance norms and disclosure standards are not our invention. It is a phenomena worldwide. Worldwide, government and capital markets recognise the role of SMEs in economic growth and employment, that is why even developed markets have platforms or exchanges for SMEs; case in point are the LSE-AIM, in U.K; GEM, in Hong Kong; MOTHERS, in JAPAN; Catalist, in Singapore; TSX, in Canada; Chinex, in China; etc. Even the Nasdaq Stock Market and Shenzhen Stock Exchange were established in response to SMEs’ capital raising needs. Mostly, these exchanges/platforms, while targeting for more inclusiveness, operate on the philosophy of “buyers beware” and “let the market decide” system, based on a mix of both merit and disclosure regime.
Some countries in Africa have also provided for a separate trading platform to facilitate listing of securities of growth SMEs. Some of them are: the JSE-Altx, in South Africa; the GEMs, in Kenya; GAX, in Ghana; NILEX, in Egypt; SEMDEM, in Mauritius. Other such platform are in Morocco, Uganda, Zambia, and Zimbabwe. All these relate to efforts by the capital markets’ need of becoming more responsive and part agents for SMEs’ growth and the wider economic empowerment and financial inclusion agenda.
For the DSE’s EGM, the experience so far: five listed companies on the platform, economic and financial inclusion for at least 250,000 Tanzanians; capital raising of about Tsh. 50 billion via IPOs. The multiplier effect emanating from these companies, as most of the funds raised were for on-lending to other SMEs [noting that 80% of EGM listed companies are financial institutions that have raised capital to lend to SMEs’ businesses) and a market capitalisation of Tsh. 121 billion, there is no doubt that the EGM has a bright future.
For investors, although risks abound — the rewards for tapping into a vibrant, robust and growing SMEs sector are significant. For forward thinking SMEs, EGM offers a long lasting and effective solution to some of their key challenges.