The Nairobi Securities Exchange has finally opened doors for small and  medium enterprises(SMEs) to raise additional capital to fund their growth and development.

The Growth and Enterprise Market Segment (GEMS) was launched today, ending over two years of anticipation dating back to early 2011, for the capital-deficient SMEs to start  tapping into the 58-year old Exchange.

The new segment is expected to ease financial woes faced by about 50,000 formally registered SMEs in accessing credit.

The window is open to at least one-year old publicly registered companies under Companies Act(Kenya)with capital base of between at least Sh10 million (about $0.11  million).

They should have at least 100,000 issued shares to be subsequently be immobilised. 15 percent of these shares must be available for public trading and held by at least 25 independent shareholders within three months of listing, the regulator, the Capital Markets Authority, cited in its listing rules.

A third of directors should, however, have undergone a corporate governance course with the remaining allowed a grace period of six months from the listing date to follow suit.

The guidelines stipulates that a prospective company will have to appoint a duly vetted and approved nominated advisor from a list of eight that have successfully applied for licenses.

The advisor will be responsible for overseeing compliance of the firm with all the listing rules at all times including the corporate governance through the so-called director’s Induction Programme.

CMA acting chief executive officer Paul Muthaura said at the launch the requirement for nominated advisors is aimed at reducing costs associated with building up of internal capacity for listing before a company is accepted onto the bourse.

The above prerequisite, Muthaura added, will gradually increase the participation of SMEs at the bourse owing to lower costs involved.

However, firms will not need to submit their profitability record.

GEMS becomes the fourth trading segment on the Nairobi bourse after the Main Investments Market Segment (Mims), the Alternative Investments Market Segment (Aims) and the Fixed Income Securities Market Segment (FISMS).

Listing through GEMs is expected to encourage more listing at 62-member NSE because the country is dominated by SMEs that have failed to comply with prevailing stringent listing rules last reviewed in 2002.

For  example, listing at Mims requires at least Sh50 million($1 = Sh86.9792) in authorised and paid up capital and Sh 100 million in net assets ,  while being quoted on  Aims costs a minimum paid up capital of Sh20 million and net assets of similar amount ( Sh20 million).

Head of market and product development at NSE Donald Ouma said he expected  majority of GEMs’ prospective firms to come from annual Top 100 mid-sized companies-an initiative co-sponsored by the Exchange and Nation Media Group’s owned Business Daily Newspaper.

“Our target is realistic and we don’t think the timing close to elections is an issue as we have been holding sensitisation sessions with  most of these firms,” Ouma said after the launch at Sarova Stanley in the centre of the capital. “Elections is just but a risk that is taken care of through an insurance cover.”

The SME market is intended to offer issuers benefits by permitting them for listing by introduction at  the stock market. This means they will list without raising capital through the public, effectively avoiding the requirement for underwriting fees and will do less advertising.

“The SME segment is aimed at seeing enterprises broaden their shareholder base and gain access to open market valuation through market price discovery, ” Muthaura explained.

Director of vision 2030 secretariat -the country’s 30-year development blueprint to year 2030- Mugo Kibati challenged the NSE and CMA  to be aggressive in product innovation and development.

“We want a mature market whose contribution to economic development is tremendous just like it is  in developed economies,” Kibati said. “The more the products, the more the growth and the better the opportunities for financing business growth and development.”

The SMEs remain the most dominant sector in Eastern Africa’s largest economy, but face huge financial gaps that limit their steady  growth with majority  not able to access credit due to inadequate collateral.

A preliminary study in November 2011, for example, put the financial gap for Micro, Small and Medium Enterprises(MSMEs) at close to Sh500 billion ($5.75 billion-1$=Sh86.9792) even as commercial banks were found to  have  excess liquidity readily available to advance.

The study commissioned by presidential-led National Economic and Social Council to establish the viability of Credit Guarantee Schemes(CGSs) in enhancing growth of credit to SMEs, found the sector is grossly under-funded.

Banks interviewed by the study’s consultants cited risk perception of specific sectors and capacity constraints in developing new innovative products for SMEs as the major bottlenecks to financing the SMEs.

A few banks further pointed out policy challenges where the Central Bank regulations require lending based on collateral. The micro enterprises are exposed to Sh60 billion ($688 million) in formal lending against a demand of Sh225 billion ($2.5 billion) – a sh165 billion ($2 billion) gap or 275 percent.

The estimated 33,000 small enterprises in formal business with a capital base of between Sh10 million ($114,679) and Sh100 million ($1.1 million) are also feeling the pinch of limited access to formal finance to facilitate their expansion.

These businesses are facing a gap of Sh112 billion ($1.3 billion) as their demand is Sh248 billion ($2.8 billion) against a supply of Sh36 billion ($413 million) – a 311 percent shortfall in financing, thee research established,

The estimated 5,000 medium firms, on the other hand, only access an average of Sh13 billion ($149 million) well below their demand of Sh94 billion ($1 billion). And although many banks have been making forays into this segment, they target small businesses up the SMEs’ pyramid and medium enterprises.

“The micro businesses have been left to government guarantee schemes including the Youth and Women Enterprise Development Funds,” said Mary Miller,the study’s lead consultant.  “These two funds have a very small capacity of between Sh20 billion and Sh30 billion in coverage for both direct and onward lending through financial institutions.”

However, the study watered down the existing government-run schemes as ineffective in promoting the growth of the SME secto, citing the below market interest rates charged.

“A below market rate may surprise these businesses when they transform while publicizing them creates a notion of free money thus increase the default rate,” Miller said, as  she rooted for a rate equal to the market rate.

With the new GEMs segment, SMEs may sigh with relief. However, close to 300,000 micro enterprises (less than Sh10 million paid up capital) remain sidelined with their estimated finance gaps at a staggering Sh225 billion ($2.5 billion), according to the NESC study.