Unlocking An Important Financial Constraint in The

GambiaAccess to Equity Capital for Small – Medium - Large

Companies has aSignificant Impact on how The Gambia’s achieved their SDGs

Paper for: Financing for Development: Unlocking Investment Opportunities, World Bank CourseDate: 1 April 2017By: James (Jim) Chester - http://www.linkedin.com/in/jimchestercmc jamesmchester@gmail.com

Target AudiencePrimary• Public Sector Policy with financial sector regulators • Government leaders considering how to fund achievement if SDGs

• Business leaders (large, medium and small business) • MDB – IDA , Bilateral Agencies • Expertise and resources to assist achieving the SDGs

Secondary• Investors, public

SGDs this Solution Will Impact Primary Impact by facilitating access to additional equity capital sources Goal 8 Promote sustained, inclusive and sustainable economic growth, full and productive

employment and decent work for all.Goal 9 Build resilient infrastructure, promote inclusive and sustainable industrialization and foster

innovationGoal 11 Make cities and human settlements inclusive, safe, resilient and sustainable

Secondary Impact – Providing access to equity capital facilitates additional employment / employee benefits / facilitates private sector to provide additional products and services that will impact these SDGs as well as others.

• Goal 3 Ensure healthy lives and promote well-being for all at all ages• Goal 6 Ensure availability and sustainable management of water and sanitation for all• Goal 7 Ensure access to affordable, reliable, sustainable and modern energy for all

Business Need Equity Capital to Grow• Definition: Equity Capital is:

• sale of ownership in the form of shares + profits retained in the business

Should I fund my business though bank loans or through sale of equity ownership? • Taking out a loan - When a company borrows the company has to repay both the interest on the

loan + repay the balance of the loan. This often cause serious cash flow challenges for many companies.

• Selling shares - Once an investor buys shares from the company’s treasury, the company never has to repay these shares. Companies only share a portion of their profits in the form of dividends to the owners (shareholders) of the company. If the company make no profits, dividends are not paid.

• In high interest rate economies such as Gambia, companies with no debt have a distinct competitive cost advantage.

Two common strategies countries use to help find equity investors

• Foreign Direct Investment vs Portfolio Investment1. FDI – Foreign Direct Investment

a) Typically 2/3 – ¾ of foreign investment is FDI. FDI is the dominate source.b) A major concern for an FDI’s investor is ‘What’s my exit strategy?’ A stock exchange is an important exit strategy in a

country’s financial architecture. c) Gambia has an investment centre focusing on attracting FDI. No stock exchange.

2. Portfolio Investment a) This source of equity investment us usually restricted to countries with a regulated stock exchange to protect interest

of public portfolio investors. Stock exchanges provide an way to price assets and exit strategy to sell their shares as needed.

b) Typically portfolio investment is ¼ to 1/3 in many smaller countries. In developed markets portfolio capital is larger. c) GDP / stock market capitalization is an important gauge of the countries financial efficiency. Larger the ratio, the

higher the GDP per capita. Many economic studies on the importance of this relationship. Gambia’s GDP to Market capitalization ratio is close to / at zero.

Structure of Gambia Equity MarketsEquity Suppliers (Investors)

In-Gambia Equity InvestorsIndividualsBusinessesInstitutional (Pensions, Insc.)

International Equity InvestorsDiaspora IndividualsInstitutions

OthersIFIs – MDBs Foundations

Seeking Equity Capital in Gambia

IndividualsMicroMSMEsSEMsLarger BusinessesManufacturingRetailingService SectorUtilities

Initial Public OfferingsFor larger companies (Banks, Utilities etc.)

Venture Capital Funds (very limited)

Investment brokerage services + Share trading (very limited) + Some structure private deals

Grants (1) offered by IFIs – MDGs +Very Limited

Equity Investment Alternative in Gambia

(1) Grants are considered a form of equity investment by accounting reporting standards

Private arrangements lawyers and accountants etc.

‘Financial intermediation costs’ High - economic measure No formal market to price equity, no regulators, transaction costs and risks are considered high.

Stock ExchangeNot available

Investors Problem in The GambiaIf I buy ownership (equity / shares) in a business, how do I get my money back and when?

Investor Buying shares ‘the Money‘ Company

Shares

Dividends (distribution of profits)to owners

Investor’s Qs before they investHow do I sell these shares ?Who will buys my shares?How long until I get my money from the sale?What happens if the buyer doesn’t pay?What’s this going to cost me?Who regulates (supervises) this to protect me?

Share of the Profits

The Missing Piece – How to sell my shares?

Pool Investors Investor

Original investor who bought shares from the company)

Company

Company does not buy / repay the original investor

InvestorAnother investor, seeks to buy shares ownership) in the business

Investor

Shares

Proceeds of Sale

Shares

Purchase Shares

Investor

Access to a liquid investor pool.• This is the missing piece found in

countries with more developed capital markets

• Without this piece investors will go to markets that provide this critical component of ‘the exit strategy’

Accessing equity is a catalysts to borrowing to grow the

business How much should / can a business borrow?Depends on the business and assurance of payment / profits • Services / small businesses, lower debt to

equity (1-2)• Larger established businesses, (1-1) • Utilities, higher debt to equity (10-1)

A Key - companies access to permanent equity

Bank loans Bonds

Components of a System for Share Trading

Stock Exchange – Trading Facility

Clearing and SettlingActivity of Payment and transfer of ownership

Depository(Custodian of all Shares)

RegulatorCentral Bank of The Gambia (CBG)

Investor A Investor BInvestment Brokerage

Firm A

Investment Brokerage

Firm B

This structure is common is common in capital markets

Sustainability? The Big Question

• How can a Gambia capital market be sustainable? • Who is going to pay buy the systems? Facilities? Overheads? • Gambia is one of the smallest countries in Africa. Significant IssueLets look at these issues

Who will use The Gambia Stock Exchange? Large Companies • There are a few public companies now in the Gambia. • Companies law requires ‘pre-emptive right of shareholders’. • This is legal requirement is common in many countries and does serve an important purpose. Developed countries had this

same law but it has since been waived to permit companies to sell additional stares out of the company’s treasury to the public

• Existing shareholders are given ‘rights’ to buy new shares from treasury in proportion to their ownership. Gambia public companies have a similar experience to Ghanaian public companies before opening of the GSE in January 1991, Around 15% of shareholders ‘subscribed’ bought new shares. This low ‘subscription’ significantly impedes the company’s ability to fund future growth. Most often the company’s foreign parent firm or largest shareholders subscribe to meet the call to shareholders for additional equity.. This leads to further corporate concentration of ownership. Most often foreign ownership.

• What happened in the Ghana experience with the opening of the GSE? Shareholders who did not have the funds to ‘subscribe’ – buy, shares from the company could now sell these ‘rights’ to other investors though the GSE. The value of the sale of the rights was about the value of company dividend. A meaningful amount to an investor. Within a month or two, rights take up through the new GSE jumped to around 90+% take-up and continues so since this time. It was exciting turn of events for both the listed company go get access to additional equity and to the shareholder how had a choice to subscribe or sell their rights.

Who will use Gambia Stock Exchange? continued

Medium Sized Companies. Could Start-Ups use it? • Gambia’s two main economic activities and employment are centered in the

agriculture and tourism industries. • To fund growth they need access to equity capital • Trend in exchanges offerings is opening up a facility that provides cost-effective

access to matching equity funding needs smaller sized companies. • Gambia needs to offer a low-cost, equity market access facility to serve this

important growth and employment sector.• There are a number of very interesting models centered on how best to address

this challenge. The Regulator’s acceptance will be key in it’s mandate to protect interests of investors.

Why Not List on Other Stock Exchanges? Larger Companies• Listing on other Stock Exchanges is the best strategy for largest of Gambia companies

• Trust Bank is listed on Ghana Stock Exchange• Over time companies need access to larger pools of capital• Most exchanges have a two tiered stricture

• Primary or First for larger companies – requires high listing standards • SME – venture exchanges is a new area – easier listing requirements

• Few Gambia companies would qualify for first list on Ghana, Nigeria or BRVM Exchanges

SMEs and MicroThe largest area of business activity and employment in the GambiaNeed to develop a Gambia solution that will facilitate SME companies access equity investors.

Addressing Constraints Regulatory Framework • CBK is mandated to regulate the Gambia financial markets and are presently doing

so. BKB has financial sector supervision experience. They need regulatory training available though IMF, US Treasury, IOSCO committees

No need to purchase new IT systems • No need for Gambia to purchase expensive trading, clearing, settlement, depository

systems. There are a number of alternatives to use the IT systems from other exchanges (Nigeria, Ghana, BRVM) etc. This a common operating model for small country exchanges. Internet access has significantly change the need to purchase systems

Addressing Constraints Many components now in place • Existing banking systems provide assurance of settlement of funds from transactions.• Many banks now operating in Gambia have experience providing these services within their

corporate network. Banks in Gambia can open investment services to meet client’s investment needs known as ‘wealth management’. A profitable banking service This new service can include trading in equities for their clients.

• Training for market participants easily available. Ghana Stock Exchange program is one the best in Africa. No need to re-design training for regulatory licensing and public information sessions for companies seeking financing

• A wealth of information and experience is readily available through African Securities Exchanges Association membership

• Gambia’s Professional Account firms are auditing to international standards (IFRS) • Gambia legal professionals can easily obtain access to further training and or joint ventures with

other law firms with more technical experience.

Solutions to some of the issuesOffice Facilities for the Stock Exchange • A stock exchange does not have to have premises / facilities. Nice to have but many exchanges

stared / operated for years without premises. NYSE famously stared trading under a tree, Amsterdam trade shares in coffee houses, Nairobi stock exchange rented the Stanley's Hotel bar in the mornings before the bar opened at noon. Harare Stock Exchange met at an accountant’s office three mornings a week. The competitively tendered contract was to provide a meeting place for brokers and provide regulator oversight services.

• Given the need to address long-term sustainability, the design of the exchange needs to keep costs to a minimum especially in the early years so as to provide a cost-effective solution.

• Utilizing advances in web based / mobile phone delivery now provides broad and cost-effective to access to information such as market prices, trading information, information on listed companies, regulation and protection of investors rights.

How to move forward?Formation of a Public – Private Sector Task Force

Representing • Public Sector: MOF (policy) + CBG (regulator) • Business leaders: eg. Chamber of Commerce, top executive(s) representing small /

medium / large companies and banks• Professions: Law Society + Accounting Society• Public: Often the Minister of Fin will appoint this person

Task • Elect a chairperson. Often member of this committee will become the first board of

the new stock exchange.• Define TORs for an updated study (to include 2000 & 2005 World Bank Studies

addresses need for a Stock Exchange) • Reach a consensus on the way forward

Update study on moving forward?MOF request of the IDA grant funding for:

• Consulting firm (will be a small team of experts: regulatory, IT, Implementation) • Update of the 2000 and 2005 World Bank feasibility (business) plan studies.• Deliverable to include detailed costed implementation plan with alternatives• Public – Private Sector Board (previous slide) administers this IDA grant for MOF• To obtain the most out of the IDA grant, the Board should provide through funding in this IDA

grant, a full-time dedicated national who will work with / beside the consulting team for the full term of the assignment. Knowledge, discussions and justification behind alternatives presented will make this national person strategic in the follow-on implementation phase. This national person could be the project manager and a key leader in the new stock exchange.

• Many times an appointed national was not part of the design team resulting in a significant loss in the impact of the IDA grant funding could have had for developing a capital market.

• The study will present alternatives for the committee to decide on the function and structure of the Gambia equity market.

Areas of decision makingRegulation • What will be Gambia’s trade-off between ‘investor protection measures’ vs ‘disclosure’ …. A

key policy issue?• High investor protection limits SMEs access to tradable equity• ‘Disclosure’ facilitates funding of start-ups and SEMs

• Explore best-practices, innovative ways that promote SME venture exchanges• Regulation will define what's permitted in Gambia.• Need for Technical Assistance to help the regulator decide what’s best for Gambia. Example: Capital Pools - Investors create a listed companies with a business plan and fund it

with an initial small pool of equity capital. Management seeks SMEs to buy to become an operating company within 2 years. Successful program http://tsx.com/listings/listing-with-us/listing-guides/ways-to-list/capital-pool-company-cpc-program

Summary - The Missing LinkIndustries seeking Equity to expand and develop

Agriculture

Tourism

Manufacturing

Utilities

Medical Facility

Communications / Technology

Others

Significant Impact on

Access to Equity

Key factorsRegulationCost-Effective structures

Bank Loans