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Financial Regulation of SMEs. PRESENTATION AT IFAC Small and Medium Practices (SMP) Forum 2008 13 th October 2008 Abuja, Nigeria BY JAPHETH KATTO CEO, CAPITAL MARKETS AUTHORITY-UGANDA. Outline. Definition of SMEs Importance SMEs & Capital Markets Regulatory challenges

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Financial regulation of smes

Financial Regulation of SMEs

PRESENTATION

AT

IFAC Small and Medium Practices (SMP) Forum 2008

13th October 2008

Abuja, Nigeria

BY

JAPHETH KATTO

CEO, CAPITAL MARKETS AUTHORITY-UGANDA


Outline
Outline

  • Definition of SMEs

  • Importance

  • SMEs & Capital Markets

  • Regulatory challenges

  • Way Forward


Definition of smes
Definition of SMEs

  • There is no universally agreed definition of Small & Medium Enterprises . Definitions range from those based on the number of employees to those based on business turnover and assets.

  • Definitions vary from country to country depending on the size of the economy.


Definition of smes1
Definition of SMEs

  • World Bank’s Definition since 1976

    SMEs are firms with fixed assets (excluding land) less than US$ 250,000 in value

  • UNIDO’s Definition for Developing Countries

    Large :firms with 100+ workers

    Medium :firms with 20 - 99 workers

    Small :firms with 5 - 19 workers

    Micro :firms with < 5 workers

  • UNIDO’s Definition for Industrialized Countries:

    Large :firms with 500+ workers

    Medium :firms with 100 – 499 workers

    Small :firms with ≤ 99 workers


Importance of smes
Importance of SMEs

  • SMEs make up over 90% of business units in the world and account for between 50% - 60% of total employment

  • Innovations that have transformed this world were not born in the posh offices on Wall Street or the square mile (City of London) but in garages, and back offices of little known towns. E.g. GoogleInc.


Smes capital markets
SMEs & Capital Markets

  • Regulation in the capital markets has traditionally focused on large and well established companies.

  • In the last decade regulation has tried to accommodate SMEs through the Alternative/Growth Markets.

  • However many of these markets are dodged by low levels of liquidity with the exception of Asia which has been the bastion of private equity investments in the last three years


Regulatory challenges
Regulatory challenges

Source: World Federation of Exchanges


Regulatory challenges1
Regulatory Challenges

  • Compliance with accounting standards – too complex: Few entrepreneurs have adhered to international accounting standards, expensive to hire qualified staff.

  • Only 38% of the small companies in Uganda employing less than 20 employees had their financial statements audited by an external auditor.

  • This number substantially increased to 72% when it came to the medium enterprises which employ more than 20 but less than 100 employees.

    Source: World Bank Productivity & Investment Climate Survey 2006


Regulatory challenges2
Regulatory challenges

  • Poor corporate governance practices. There is some unwillingness by owners, directors and managers of SMEs to subject themselves to a high degree of accountability to outsiders.

  • In most companies there is no separation between ownership and management.

  • A recent unpublished (2008) CMA survey of 100 private Companies in Uganda, revealed the following;

  • Principal owners were also the Managing Directors in 46 of the 65 (71% ) of the companies which responded.

  • The Managing Director was also chairman of the Boardof Directors in 40 out of the 92 (43%) of the Companies that responded.


Regulatory challenges3
Regulatory challenges

  • Under developed capital markets-Venture and Private Equity funds are limited especially in developing and emerging markets

  • Cost benefit analysis-Compliance with regulations is costly.

  • A majority of SMEs end up sourcing financing not from capital markets but from family, microfinance, short-term bank loans and retained earnings


Sources of investment finance for small firms 1 19 employees
Sources of Investment Finance for Small Firms (1-19 Employees)-%

Investment Finance refers to funds devoted to the Purchase of fixed assets, & other long-term investments.


Sources of investment finance for small firms 20 100 employees
Sources of Investment Finance for Small Firms (20-100 Employees)-%

Investment Finance refers to funds devoted to the Purchase of fixed assets, & other long-term investments.


Way forward
Way Forward

  • SME accounting standards

  • SME audit:An alternative assurance service to the traditional audit. However it has to be relevant and cost effective.

  • Corporate governance reforms.

  • Legal & regulatory reforms.

  • Mentoring: A notable example is the UK AIMS market where they have nominated advisors for SMEs wishing to raise funds in the capital markets

  • SME Forums that would build networks and foster synergies between the different stakeholders with an interest in SME development


Quote
Quote

“Timing is what is fundamental here, at a young stage, the Small Medium Enterprises

( SMEs) collect funds from relatives and friends. As they grow , the angel investors come on board and eventually as they mature, venture capital and even initial public offers crown their financing”

Shri V.K. Chopra , Chairman & Managing Director ,Small Industries Development bank of India.


References
References

  • Kennedy & Hobohm,1999,Capacity Building for Private sector Development in Africa .Working paper 3,Vienna

  • Peter Quartey 2001. Regulation, Competition and small and Medium Enterprises in developing Countries ,Centre of regulation and Competition IDPM University of Manchester Working paper 10.

  • Lutwama et al. (2008)Private Sector Opinions on Listing



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