The country’s Small and Medium Enterprises (SMEs) like their counterparts in other emerging economies are perceived as a high risk segment of the market for banks when it comes to lending. Unstable macroeconomic policies further make banks to be conservative about exposure to them because of their higher failure rate.
Although there are provisions for short-term loans but they are usually made available to larger enterprises perceived to be credit worthy.
Available reports indicate that even the previous public-sponsored financing programmes failed to make the desired impact due largely to high default rates. Few domestic equity sources for SMEs exist due to their inability to meet listing requirements.
Despite the widely acknowledged role of small and medium scale enterprises 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 a conducive operating environment, restricted market access and cumbersome regulatory requirements.
However, a key problem for SMEs is the issue of access to finance. SMEs, especially in developing countries, suffer from lack of access to appropriate funds from both the money and capital markets. This is due in part to the perception of high risks resulting in high mortality rate of the business, poorly prepared project proposals, inadequate collateral, absence of verifiable history of past credits and lack of adequate historical records of the company’s transaction.
SMEs are vital for economic growth and development in both industrialised and developing countries because they play a key role in creating new jobs. They need adequate financing to meet needs at each stage of their life cycle, from creation through operation, development, restructuring, recovery and beyond.
Speaking on the need to finance SMEs through capital market, the Director-General, Securities and Exchange Commission, Ms. Arunma Oteh expressed the commission’s determination to deepen the asset base of the equities market to create avenues for the small enterprises to access funds.
Oteh noted that the commission will during the current year, expand the Collective Investment Schemes (CIS), such as ethical and Islamic funds and Real Estate Investment Trusts (REITs), among others and also support the efforts the Nigerian Stock Exchange's plans to introduce five new products within five years.
She noted that the capital market could lower the cost of mobilising savings and thereby facilitate investment in the most productive technologies.
“It links 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,” Oteh said.
She adds that a well functioning, liquid and broad capital market is crucial to the operation of any emerging economy; the use of the capital market is one of such alternatives.
Oteh noted that the capital markets foster entrepreneurship and innovation which in turn, creates job opportunities.
She affirmed that SMEs have a major role to play in the economic development of a nation, thus the capital markets should ensure a viable way of increasing financing options to SMEs and ultimately serve to develop them.
Her words: “The ability of companies in their early stages of development to raise funds in the capital markets is beneficial because it allows the companies to grow very quickly. This growth in turn speeds up the dissemination of new technologies throughout the economy. Furthermore, by raising the returns available from pursuing new ideas, technologies, or ways of doing business, the capital markets facilitate entrepreneurial activities.”
Financing through capital market is germaine to help SMEs set up and expand their operations, develop new products, and invest in new staff and production facilities which will ultimately lead to massive employment but market watchers are worried due to the liquidity squeeze in the market which had made it difficult for the market to thrive.