Small and Medium sized businesses (SMEs) are immense contributors to any nation’s economic growth and development. It is now even more imperative for Nigeria to maximize the potential of SMEs to spur economic development; particularly with the country’s urgent need to diversify its economy. There are about 41.5 million micro, small and medium enterprises which contribute about 47.8% to the nation’s Gross Domestic Product (GDP). SMEs will be further enabled to increase their contribution to economic development when the administrative, financial, legal and regulatory frameworks within which they operate are stable and efficient. An efficient financial framework is extremely important as it determines the level of access to finance for SMEs. Many SMEs have been put out of business due to inability to access funds, either for daily business operations or expansion. SMEs most commonly access finance through personal savings and donations from family and friends. The next most common routes are bank loans and venture capital.
Bank loans are often difficult to obtain as they usually require some collateral as security; which may not be readily available to most SMEs. Banks are also quite skeptical of the accounting practices and credit worthiness of small and medium scale businesses. Although venture capital companies (VC) provide a veritable source of financing for SMEs, the challenge here is that they usually only invest in SMEs with demonstrably high potential for profitability.
SMEs accessing the capital market
A vitally important but perhaps less explored channel of finance for SMEs, especially those with the potential for high growth in other jurisdictions, is the public capital market. This financial market segment deals with financial instruments which are long term securities. Participants in the Nigerian financial market include: the Nigerian Stock Exchange (NSE), Discount Houses, Development Banks, Investment Banks, Building Societies, Stock-broking Firms, Insurance and Pension Organizations, Quoted Companies, the Government, Individuals, and the Nigerian Securities and Exchange Commission. The Nigerian Stock Exchange is the most prominent actor in the sale of securities through its Alternative Securities Market (ASem), Main Board and Premium Board.
On the 30th of April 1985, a Securities Market was established for SMEs to assist them in raising long term capital on the NSE. Many indigenous companies were not listed due to, amongst other things, the rigorous regulatory requirements. Additionally, many SMEs lacked the desire to go public; being more often than not, family owned businesses under the dominant control of one individual.
Historically, the laborious and expensive listing process; especially with regard to capital requirements, has also acted as a disincentive to SMEs wishing to access capital market financing.
The Growth Board initiative of the Nigerian Stock Exchange
In 2018, the Nigerian Stock Exchange made public its intention to launch a Growth Board which would enable SMEs with high growth potential get listed on the NSE. The Growth Board was also intended to serve a wider range of functions. It would provide an avenue to enhance access to finance/liquidity for smaller companies, increase the capitalization of the market, increase opportunities for investors to participate in start-ups with high growth potentials, create, broaden and diversify investor base, and serve as an exit option for private equity & core investors. These functions were intended to further conform the operations of the NSE with global trends, thereby attracting international investors. At the centre of the Growth Board initiative is SMEs and assisting entrepreneurs to scale their businesses and enhance their corporate visibility.
On the 29th of January 2020, the NSE finally launched the Growth Board at the Exchange. As unveiled, a key feature is its Value-Added Services program. The NSE has partnered with a number of professional advisors to offer value added services to SMEs who indicate an interest in being listed on the NSE. The function of the service providers is to support the SMEs in complying with the prelisting requirements for the purpose of being qualified for entry into the capital market.
Prelisting requirements for NSE’s Growth Board
Any new company which seeks to be listed on the growth board must first convert into a public company limited by shares. The following conditions must also be met: presence of a core investor or technical partner with at least a 2 year operating track record, a high net worth Individual who is a majority shareholder (an individual whose aggregate net-worth of investment assets exceeds N100Million), a minimum of 25 shareholders, market capitalization of 50 million Naira, 10% of its shares must be available to be issued to the public/investors, and the Directors must retain a minimum of 50% of their shares in the company for a minimum period of 12 months from the date of listing.
These conditions seem to indicate an interest in applications from medium scale businesses with established operations and revenue base.
The Growth Board initiative is commendable and is likely to enable capital flow from areas of surplus to deficit, thus enhancing a sustainable economy. The reputation of the stock exchange is founded and sustained by trust and credibility and such initiatives as the Growth Board initiative must demonstrate its continual efforts at deepening investor confidence in the capital market. This makes the successful implementation of the initiative of critical importance. The NSE in executing the Growth Board initiative must take into consideration the typical characteristics of SMEs in Nigeria in order to set in place appropriate mechanisms to mitigate the risk of SMEs negatively impacting, albeit inadvertently, or eroding investors’ confidence upon their listing.
It has been pointed out that many SMEs in Nigeria are family businesses. It is not uncommon for the continuity of such businesses to center around succession planning based on familiar relationships rather than skills and competence. According to research by the Family Firm Institute (a global professional association for professionals who serve family enterprises based in the USA), 30% of family businesses survive to the second generation, 12% make it to the third generation while only 3% survive to the fourth generation.
Though SMEs may be family centered, they would do well to focus on creating a sustainable succession plan that will ensure the business operates as a true institution. At the core of creating a sustainable family business is implementing proper corporate governance principles. Many household names such as Walmart, Ford, Dell, Volkswagen, and many others, started out as family businesses but have operated differently in fundamental areas of corporate governance in order to create shareholder value and sustainable returns.
The NSE by its Growth Board initiative is capable of similarly positioning Nigerian family businesses on a global pedestal, providing them with access to long tenured capital and enhancing their visibility to investors and consumers.
Corporate governance and boosting investors’ confidence in the capital market
In qualifying new businesses for listing on the stock exchange, it is pertinent for the NSE to consider not just their potential for growth and profitability, but it must provide and enforce a structure that will guarantee their sustainability. One of the ways to ensure this continuity is to institutionalize corporate governance principles. Investors place strong emphasis on corporate governance principles which ensure protection of minority shareholders, good financial management, risk management, transparency and disclosure. The standard must therefore not only be that the businesses are by their accounting books or their disclosures assessed to be compliant with the prelisting or post listing requirements, there must be a mechanism that will forestall where possible, and check where necessary, any incidences of mismanagement of funds or corporate structural inefficiencies.
The listing requirements currently provide that every issuer shall comply with the commission’s code of corporate governance or such applicable codes of corporate governance in force. There is also a post listing continuing obligation of obtaining an annual certification on adherence to corporate governance rules.
Whilst these are good corporate governance standards, there is a further need to include specific requirements which are directly in accordance with corporate governance principles. For example – the appointment of independent non-executive directors; preferably of a strong professional background who can bring an objective and informed perspective to business decision making. Other key principles include the establishment of risk management and internal control policies, such as a whistle blowing structure.
Although the stakes are high, the road ahead need not be paved with stones. The NSE may simply need to merge its Growth Board initiative with its Corporate Governance Rating System (CGRS) in order to institutionalize corporate governance for SMEs. This will create a sustainable foundation for this all-important segment to drive and maintain the next stage of the nation’s economic growth.
Tomilola Tobun and Busola Pitan
Perchstone & Graeys
