SETTING UP OF SMEs STOCK EXCHANGE CRITICAL

The establishment of an SME Stock Exchange has been a subject of debate for a very long time. The policy makers, as usual, have paid little attention to it, rather preferring not to be seized by ‘small issues’.

Evaluating the path the economy has taken since 2009 provides a fresh understanding of why the Ministry for Small to Medium Enterprises and SME business associations such as ZNCC need to devote much attention towards creating market-based funding solutions for SMEs. And equally important would be the need for policy makers to understand that SMEs are not only the market stalls at Mupedzanhamo, Siyaso, grinding mills or other small groceries,  clothing and cellphone shops operating across the country. Yes, this segment is important as it captures the “S” part of the SMEs and provides employment and convenient service to the economy which the big corporates can never match. But the “M” segment equally needs an enabling platform to raise capital as this sector has capacity to generate exports and sustain vibrant labour force.

A closer look at the happenings on the Zimbabwe Stock Exchange, the capital raising market for the big guns in town, shows that indeed much more needs to be done for the SMEs in a market where even the big corporates are struggling. Raising fresh equity has been a nightmare for the ZSE listed companies. About 15% of the ZSE listed companies embarked on rights issues since dollarisation, and save for OK Zimbabwe’s and one or two others, most of them were not successful as anticipated. Some planned right issues for CFI and Steelnet for example, could not even take off as shareholders understood, albeit lately after having shown intention to do so, that they had no money to follow their rights. A poorly subscribed African Sun’s $10 million right issue left some underwriting bank in serious trouble as it found itself with a commitment it could not fund.

The answer behind the poor subscription of the rights issues is found in our history. Current local shareholders of companies in Zimbabwe had their savings and part of capital wiped out when the economy dollarised in 2009. One can surely not fault them for failing to inject fresh equity into most struggling companies. Amid the hyperinflation, it was almost impossible for corporates to have savings in foreign currency. The many exchange control regulations that existed then made it almost a criminal office to have savings in foreign currency. One’s holding of foreign currency could not escape criminal charges relating to externalisation, illegal possession, failure to acquit export earnings or simply accusations of economic sabotage. Hence all honest Zimbabwe businesses and shareholders lost significant portions of their capital to inflation. The need to recapitalise came immediately after dollarisation and expecting existing local shareholders to inject fresh capital into their struggling businesses is a very tough call. They simply do not have the money because the operating environment and dollarisation made it mathematically impossible to defend not only capital positions, but more importantly, cashflows.

The debt route became the most obvious way towards funding businesses and indeed today we see most companies struggling with debt acquired post dollarisation. At least the listed companies have distinct advantages over the unlisted ones in accessing credit. To some extent lenders accept the shares of listed companies as collateral and until lately, the basic belief, among lenders was that listed companies are blue chip and could even be lent money without collateral. Most of the credit in the market was therefore flowing towards listed companies at the expense of SMEs. Most SMEs therefore find themselves on the peripheries of the credit markets where high cost of debt, stringent collateral demands and very short tenors are the rules of the game that have been affecting their ability to grow businesses beyond hand-to-mouth.

Belatedly, the deteriorating balance sheets of listed companies that have resultantly exposed most lenders in the market has changed market perception about the bankability of the SME sector. Most lenders have burnt their fingers on lending to listed companies, more so when they held the shares as collateral.  CAPs, Steelnet, Rio Zim among others, are clear examples of listed companies that have taught lenders the basics of lending. These lessons have opened up opportunities for SMEs as most banks are now focusing on SMEs as a more attractive and manageable asset segment.

Notwithstanding the shift in focus from the lenders to target more of SMEs, the debt route is not the most optimal funding solution for SMEs. Equally important to note is that the stringent collateral requirements imposed by the lenders means that some SMEs with good business models will fail to take off as they fail to access credit. For example, raising $100,000 is extremely difficult for a small or medium sized company in Zimbabwe. With lenders on average requiring collateral twice as much as the value of the loan, this level of borrowing requires immovable assets in excess of $200,000. This figure is not small for what would be called SMEs in Zimbabwe and therefore most of the SMEs, no matter how good their business models are, still fail to access credit in the market. For the few lucky ones having the collateral, the loan tenor is usually shorter than desirable as most credit facilities are at best 6 months.

The working capital cycles therefore become seriously compromised and most SMEs in manufacturing and sourcing inputs from as far as China will find it almost impossible to repay their loans on time. It is therefore not surprising that, notwithstanding the lenders seeking stable asset classes in lending to SMEs, foreclosures rates on SMEs are increasing at an disturbing rate. Almost every other day one reads from the local newspapers sizeable numbers of properties going under the hammer as the Deputy Sheriff auctions properties for those who would have failed to repay their loans with lenders.

The SME model is therefore under threat. A platform in the form of an SME Stock Exchange has to be created where strong SME models can tap into the market and raise capital. From a logical perspective, investors with surplus cash would most likely create value when investing in smaller and efficiently run companies than most of the ZSE listed companies that have big inefficient and rigid operational structures that are no longer relevant in this environment. The market has sufficient capacity and depth to support an SME Stock Exchange, with the big pension funds such as NSSA needing rather to focus on supporting IPOs of small efficient companies than keep sinking money in right issues of dead listed companies that will not resurrect.  Some few honest listed companies have been honourable enough to say the truth about how difficult the operating environment has become and discontinuing operations. 

Chemco, notwithstanding the parent company having reasonable access to funding, is closing some of its manufacturing business units because they cannot produce at competitive prices. It will instead start ‘trading’, buying from low cost producers abroad and selling locally. Apex has shed some of its foundries amid viability concerns. Other stubborn listed companies unwilling to face reality and cut losses short much earlier struggle on until the day they will most likely collapse, but in spectacular fashion. When listed companies with relatively easy access to debt are finding it tough, the writing is therefore clearer on the wall that the SMEs are likely to struggle much more.

The policy makers, for being what they are, will never champion the formation of the SME stock Exchange. Such associations as the ZNCC have to seize call and lobby aggressively with the relevant ministries to ensure that the setting up of a secondary bourse comes to being a reality. Of course it remains fact that merely raising fresh capital from the stock market is not what will make SMEs vibrant. A host of all other challenges such as poor public infrastructure, weak domestic market, power challenges and inefficient supply chains, among others, will continue to pose challenges on the competitiveness of the SME models. But nevertheless, an efficient platform has to be in place for SMEs with viable models to tap in to the capital markets and expand their businesses. And it is the creation of a secondary bourse will achieve that for a sector that feels neglected.