An SME Stock Exchange in Zimbabwe is a non-starter

I find a recent suggestion to establish an SME Stock Exchange in Zimbabwe to be quite premature. The main reason for the Zimbabwean authorities for such an arrangement to occur is for SMEs to raise funds for themselves. Well the companies should seek other options because there isn't liquidity in the capital markets of Zimbabwe. The main Stock Market isn't performing quite well with the active trades only occurring in a few blue chip companies. At the moment companies are not profitable enough to compensate for the risks and uncertainties associated with themselves.

 One of the key issues affecting profitability is competiveness of Zimbabwean companies in the local and international markets. Here at home, local companies are playing second fiddle to foreign ones (mainly South African) because our economy is now more open than before the decade long downturn which affected the economy. Local companies are finding it difficult to adjust to the new reality after many years in the wilderness. The cycle comes back to our initial problem, that is, of lack of capital funding for our local companies. But trying to solve this via the establishment of a Stock Market is wrong. To solve the problem, understanding the risks and uncertainties affecting SMEs should be assessed and understood.

 The institutional structure of a stock exchange introduces requirements which demands discipline and consistency on the part of companies, be it in financial reporting, disclosures and management behavior. All this is to build confidence of the investor because investment via the stock market is mostly dealing in ordinary shares. The price stability of ordinary shares is maintained if the company does its business as a going concern. This means that it is assumed to last "forever." But with most of small businesses and SMEs, their lifespan is quite short. In sub-Saharan Africa, about 90% of the SMEs don't have a lifespan of 5 years. So there isn't logic in listing such a company through a stock exchange. Other options of looking for capital should be sought after. Listing via the stock exchange means that the company is expected to last for a very very long time. So it's inappropriate for SMEs.

There is also the issue of the definition of an SME. The distinction between a small to a medium sized company is thin. If you mention the word small business, those in North America will get a different picture than what I'm talking about in relation to SMEs. This is because the word small business is common in North America while SME is common is sub-Saharan Africa. What is considered a small company in North America could be a large one in sub-Saharan Africa. There are rough estimates as to what constitute an SME. Generally a company employing 10-50 people and having sales of$1 million should be an SME. Where am I going? The size of SMEs in sub-Saharan Africa is quite small compared to what can be considered small businesses in other parts of the world. This adds to the impetus of not listing these SMEs on a stock exchange.

So other than lifespan risk, SMEs face credit risks which isn't reduced by listing on a stock exchange. The stock exchange will expose the company in such a way that investors will demand more return than when not listed because listing makes the ordinary shareholders the last investors to get their investments in the event of the dissolution of the company. Therefore listing will add a drag on the company's earnings.

In Zimbabwe some of the problems facing SMEs are systemic, that is, affecting the whole economy hence structural changes and recovery of the economy first has to take place to even consider an SME stock exchange. With the current pace of the recovery, it appears that it's going to take a while.