Capital markets to enhance SME financing

Leveraging capital markets is a means for small and medium enterprises to raise funds to finance their growth to drive the country’s economy.Robert Mathu, Executive Director, Capital Markets Authority, says that listing SMEs in the capital market will help address the challenge of inadequate equity which reduces access to finance.“Companies can raise long term funds by way of equities, that is selling shares to the public through the Rwanda Stock Exchange to capitalise their businesses or sell bonds,” he said. By listing their shares on the stock market, SMEs are able to raise venture capital to finance their businesses either as early, latter stage or turn-around financing to struggling companies with good prospects.“Venture capital is one avenue through which SMEs could raise equity,” Dr. John Matovu, a consultant said during the launch of a report titled “Leveraging Capital markets for SME financing in Rwanda”.A report by African Development Bank under the African Development Fund in collaboration with CMA aims at identifying obstacles to SMEs’ use of capital markets for long term financing and explores possibility if widening the available financial instruments for their benefit. The report highlights lack of robust SMEs information collection and sharing system that compounds the information asymmetry associated with the SMEs sub sector which contributes to the limited access to financing.“For equity and debt markets to be developed for SMEs, relevant and complete information about these enterprises has to be readily accessible,” the report reads.Moreover, the report indicates that only 30 percent of the SMEs have a business plan with less than 30 percent project cash inflows. Yet, only 40 percent of SMEs use retained earnings to finance their operations.It also indicates that 30 percent of SMEs use trade credit while only 25 percent of them borrow bank loans. Again, a negligible percentage of them reported use of debt securities or equity financing.But Matovu says that there is need for government to establish a basket fund to offer seed capital to SMEs by welcoming potential partners.“This will not only promote access to financing by SMEs but ensure that the venture capital market has access to a steady supply of funding even during economic slowdowns,” he adds.He also advocates for the set up of asset- backed securities, review of the current approach to provide business development services, maintenance of the current fiscal incentive structure, improvement of information collection sharing and promotion of private equity and venture capital.

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Capital markets to enhance SME financing