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Remarks by Mrs. Stella Kilonzo, Chief Executive, Capital Markets Authority, During the Stakeholders’ Consultative Forum on the Proposed Market for Small And Medium Sized Companies, 24th August 2011, Norfolk Hotel, Nairobi. 

 Board Members of the Capital Markets Authority present;

The Chief Executive of the Nairobi Stock Exchange, Mr Peter Mwangi;

Directors and Chief Executives present;

Distinguished Guests;

Ladies and Gentlemen;

All protocols observed:

It gives me great pleasure to be here this morning to welcome you to this forum to discuss the proposed Market for Small and Medium Size Companies. There is no doubt in my mind that this workshop is a major milestone in the growth and development of the capital markets in Kenya. 

Ladies and Gentlemen; the Authority is keen to ensure that the capital market industry plays its rightful role in economic development. To this end, we are undertaking the necessary reforms to deepen and broaden the market. It is for this reason that the Authority in collaboration with the Nairobi Stock Exchange, the Central Depository and Settlement Corporation, and other stakeholders, has been working together towards the establishment of a market for Small and Medium sized Enterprises (SMEs).

SMEs are the main source of economic growth in developed and developing countries alike. In the US for example, the SME sector is said to provide 67% employment and 61% manufacturing sector output, respectively. In Korea, there are over 30 million SMEs constituting about 99.9% of the enterprises and employing over 88.1% of the labour force. Similarly, in Kenya SMEs are responsible for about 80% of employment and contributes about 40% to GDP. These examples demonstrate that SMEs are an integral part of the economy critical in spurring socioeconomic development. 

Despite the important contribution to economic growth by SMEs they continue to face numerous challenges including; inadequate infrastructural facilities, challenges with attracting skilled manpower, high rate of enterprise mortality, lack of a facilitative operating environment, restricted market access, and onerous regulatory requirements. However, one of the main areas of concern is access to funding. 

Ladies and Gentlemen; SMEs require adequate financing to meet needs at each stage of their life cycle, from creation through operation, development, expansion, and beyond. Financing is necessary to help them set up and enhance their operations, develop new products, and invest in new staff or production facilities. 

Many small businesses start out as an idea from one or two people, who invest their own money and probably turn to family and friends for financial help in return for a share in the business. But if they are successful, there comes a time for all developing SMEs when they need new investments to expand or innovate further. Access to funding and the high cost of finance through the traditional channels have been major constraints to SMEs hence the need to explore alternatives.

Ladies and Gentlemen; at the same time, a common concern across stock exchanges of developing countries is that there are few investment products and limited investor demand. The number of new stock market listings has also not grown significantly in recent years. The principal growth in listings has come from privatization, which is dependent on public sector divestiture programmes. It is the ambition to address these concerns that makes a strong case for an SME market in Kenya. It has also been noted that SMEs will continue being the key pillars of economic growth in Africa going forward. Not only is the growth of SMEs a vital element to a nation's economy, but also today's SMEs will become tomorrow's main market listings. 

The establishment of an SME market is therefore not only expected to unlock access to capital for the sector but also raise the level of savings and investments within the capital markets through additional listings. Indeed the introduction of an SME Market is in line with the Government focus on the SME sector as one of the key drivers of the Vision 2030 Economic Blueprint, destined to play an effective role as an engine for economic growth, poverty eradication, and employment creation.

It is expected that it will augment various initiatives by both the Government and the private sector to deal with the challenges facing SMEs and to create an enabling business environment to encourage growth, with strong backward and forward linkages with major industries in the economy. The establishment of the Ksh3.8 billion MSE revolving fund for financial inclusion of the informal sector by the Deputy Prime Minister and Minister for Finance during the 2010/2011 budget speech and the proposed MSE Bill are examples of such noble initiatives.

Ladies and Gentlemen; our proposition is an exclusive market for SMEs that seeks to respond to the challenges faced by the sector when attempting to tap into the capital markets. In modeling this market, various markets including: the JSE Ltd. Altx; TSX Venture Exchange – Canada; Novo Mercado; a special segment of the São Paulo Stock Exchange [BOVESPA]; Bursa Malaysia ACE Market; Stock Exchange of Mauritius Development & Enterprise Market; Egyptian Exchange Nilex Market TSX Venture Market Canada, and the and AIMs of the London Stock Exchange have been considered. 

The objective is to have an SME Market in Kenya within this calendar year, which will offer several benefits including; access to long term capital; broaden the shareholder base of these firms, offer existing shareholders an exit mechanism; and enable market valuation of the businesses through price discovery. Some of the features I invite you to give your views on include the following: 

The regulatory environment: Amendments to the regulatory framework to give medium and small cap companies a chance to raise capital within a regulatory environment designed specifically to meet their needs;

The listing requirements: Amendments to provide more flexible listing rules compared to the main market segment, with respect to: the minimum capital; number of shareholders; number of shares to be offered to the public; the minimum free float; as well as the company's financial track record;

The listing requirements: Amendments to provide more flexible listing rules compared to the main market segment, with respect to: the minimum capital; number of shareholders; number of shares to be offered to the public; the minimum free float; as well as the company's financial track record;

Lower listing and trading fees: considerations to be made on the extent to which the annual listing and other fees levied on medium and small enterprises will need to be reduced;

Consideration on creation of a streamlined process for graduation of SMEs market listed firms to the main market segment;

Issues on whether to attract both individual and institutional investors to the market, with a view to seeking the best way of achieving greater diversification of shareholders and greater liquidity after listing, or to restrict it to institutional investors due to risk concerns and; Recommendation on whether it should be a separate market or a segment of an established market. 

Ladies and Gentlemen; during this workshop, we shall be considering the draft framework that we have put together to establish the SME market in Kenya. I therefore urge you all to participate and share yourviews as we have an opportunity to amend our laws to align them to international best practice and support further development of the capital market. 

With these remarks, it is now my pleasure to officially open the workshop and wish you fruitful deliberations.

Thank you

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