Re-Modulating the Growth Enterprise Market Segment to Drive the Growth of SMEs in Kenya through Securities Market Financing

Abstract

Abstract Small and Medium Sized Enterprises (SMEs) are important in driving economic growth in emerging economies, vital in creating dynamic market-oriented growth, and spurring innovations and employment opportunities for a growing population. To do this, they need access to growth finance as well as knowledge and expertise. Access to finance is the main barrier to their growth and competitiveness. However, Kenyan SMEs face limited access to financing from banks due to relatively higher risks associated with them. Securities markets have an imperative role in bridging this financing gap through the provision of alternative funding sources for SMEs as their needs evolve over different phases of their life cycle. In a bid to aid SMEs in their financial growth, the Growth Enterprise Market Segment (GEMS) was created at the Nairobi Securities Market to provide a funding platform, diversification of ownership structure and unlocking value through more favourable listing requirements, while benefiting from increased profile and liquidity within a regulated environment. It targets SMEs with limited track record but with positive growth prospects. Nine years following its introduction, however, the number of SMEs seeking listing has been relatively low. Only six firms have listed on GEMS with five trading with poor stock liquidity and one already delisted. Guided by the Stages Model as well as Efficient Markets theory, and using a multi-scenario document analysis methodology, this paper analyses the literature and examines the reasons behind GEMS’ struggle with attraction of SMEs. It argues that besides regulatory burdens, a range of other business environmental factors conspire and limit SMEs attraction to GEMS. The lack of competent SMEs financing experts, internal organization characteristics, lack of awareness of securities market and understanding of GEMS listing requirements among entrepreneurs in a more sophisticated securities markets financing options, and the urge to raise business profile over and above raising growth capital could have conspired to slow the growth in the number of SMEs listing on GEMS. The paper provides important recommendations on how to re-modulate the GEMS platform to attract more SMEs listing in Kenya.

Keywords: Business incubation and acceleration; growth enterprise market segment; Nairobi Securities Exchange; Ibuka platform; small and medium sized enterprises JEL Codes: D53, G32, M13, O16.