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Economic Review 

By Kennedy Abang

CameroonPostline.com
— Consensus exist amongst economic stakeholders that improving access to capital for small enterprises is a pre-requisite for growth and a major policy deliverable within the context of Vision 2035.

There is ample empirical evidence to the effect that efficiency in the public markets, especially the capital market, enhances corporate growth and job creation. One of the greatest benefits of a well-functioning public market is its ability to generate new jobs.

According a study undertaken for the New York Stock Exchange, 92 percent of job growth in a company occurs post IPO-Initial Public Offering. Access to the public market, not just private capital, provides the most significant opportunity for permanent access to capital and the deepest pool of liquidity in the world. It provides a currency for mergers and acquisition enhances liquidity for employees and investors within a framework of transparency, visibility and proper valuation of companies through price discovery.

As I have stated before, an emerging economy depends on being able to build world-class companies which are leaders in the increasingly competitive regional and global marketplace. Young, innovative companies are the engines of job creation and, access to capital through IPO, is key to allowing these innovative companies to grow and hire new employees.

The private markets have an appropriate role in addressing liquidity and capital needs for certain issuers.However, issues of transparency, disclosure and liquidity in these markets must be addressed as these markets expand to a larger set of investors. The recent case of Barclays’ 453 million pounds fine by the Financial Services Authority-UK for interest rate manipulation in the interbank market is an example of the shortcomings of private capital.

Interest rates in Cameroon are amongst the highest on the continent (btw15-16 percent). This, against a repo rate of around six percent represents an interest rate spread of btw 9-10 percent) points to the excessive profit concerns of private capital. The interest rate setting framework in itself is obscure. Private capital is benefiting from information asymmetry to spike the cost of capital. This is a systemic problem and is militating against initiatives aimed at improving access to capital for Micro, Small and Medium enterprises, MSME.

A number of challenges are killing the capital formation cycle and shutting public investors from the top companies of tomorrow. After almost a decade of existence, the Cameroonian stock market still lags behind its peers with same longevity. (Zambia – 26 listed securities, Botswana 20, Malawi 15, Cameroon 5).

One of the biggest barriers to the underdeveloped state of the stock exchange is our socio-cultural heritage. In Cameroon, we are a deeply mistrustful people. We don’t trust our Government, we don’t trust our business partners, we don’t trust our leaders, we don’t trust society.

This is exemplified by the abysmal failure rate of partnerships and any form of joint stock business. The economy is void of a corporate culture. Look at all major private corporations in Cameroon today. Aside the cooperatives, there is none with a truly diversified shareholding structure outside families, tribes, clan or fraternity.

Most medium size businesses are family owned with a patriarchal management structure based on family lineage, tribal, cultural or other social affinities. These entities are void of a corporate culture and have deeply entrenched patronage that seeks to preserve the cult-like status around their founders. These groups of entrepreneurs are not ready to leverage their absolute decision-making powers against the diluting influence of public capital.

REMOVING BARRIERS TO LISTING   

We need to provide greater incentive for medium sized companies to go public. Regulators and industry participants should focus on fixing our public markets as one of the greatest engines for job creation. Both demand and supply side initiatives needs to be undertaken to encourage the listing of companies.

I suggest the setting up of a “listing/IPO taskforce” comprising investment bankers, private equity firms, investors, entrepreneurs, regulators and academics to garner industry insights and lay a framework on how to restore effective access to capital for emerging companies, including public capital through the IPO market.

Detailed, specific and actionable recommendations should be crafted to keep our market vibrant, accessible and transparent, so that we can create an environment of innovation and job growth which is the hallmark of an emerging economy.

Measures that will reduce regulatory burdens for issuers, particularly small companies should be put in place. The listing requirements of the secondary board of the Douala Stock Exchange does not address the specific financing needs of a majority of Cameroonian SME’s, especially with regards to profit history and minimum capital base.

There is need to further reduce the listing benchmark by creating a transitional category for emerging growth companies pursuing an IPO which have less than FCFA 200 million in turnover. Concerns also focus around a lack of quality data and sufficient analyst coverage about smaller companies to attract long-term investors.

Every efficient and well functioning stock market thrives on information. Improving the availability and flow of information pertaining to listed companies before and after an IPO is essential in this regard. This would increase visibility for emerging growth companies while maintaining existing regulatory restrictions appropriately designed to curb abuses.

The stock market should adopt a governance code that places continuous and ongoing reporting and communication requirements on listed companies in order to enhance visibility, transparency and the way listed companies engage the investing public. The market dislikes secrecy and uncertainty. It should place the onus on listed companies to voluntarily divulge information to the investing public. It is a dynamic process involving continuous monitoring, disclosure and reporting which ensures responsiveness to the ever changing information needs of investors, regulators and the general public.

Listed companies on the Douala stock Exchange should be seen as exemplars of corporate governance, risk management and operational efficiency inorder for them to spread upstream and downstream ripples that will ultimately encourage new listings and market growth.

Issuer Education is another area of intervention. Improving education and involvement for management and board members in the choice of investment banking syndicate, timing,benefits and the allocation of its shares to appropriate long-term investors in its stock will help emerging growth companies become better consumers of investment banking services, as well as reconnect buyers and sellers of emerging company stocks more efficiently. Education and sensitisation will help debunked the myths around the stock market, while also overcoming socio-cultural bias associated with the way companies are financed and managed in Cameroon.

In a presentation to students of Masters in banking and finance at IRIC in 2009, Mathurin Ndoumbe-Epie (First Managing Director of the Douala Stock Exchange) told the story of a multi-millionaire business man who approached him on the occasion of the inauguration of the Douala Stock Exchange and offered to provide him with warehouses. Because, according to him, the stock exchange deals with stocks (as in inventories and merchandise). This example illustrates the knowledge deficit that exists in the wider business community about the role and benefits of the stock market.

Efforts should be championed by investment banks, the Exchange, investment services providers-PSI and regulators  for companies to “test the waters” with investors to consider the probability of an IPO’s success as well as improve the availability and flow of research coverage to improve investor awareness and understanding of these emerging growth companies.

An initiative will include a “business profiling” of potential new entrants and startups. This will involve a detailed analysis and research on MSME’s with potential for market listing. With over 90 percent of jobs growth post-listing, the stock exchange is an engine worth tuning.

First published in The Post print edition no. 01355
 

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