This document discusses unlocking an important financial constraint in The Gambia by providing access to equity capital for small, medium, and large companies. It notes that equity capital through share sales is preferable to bank loans as it does not require repayment of principal. However, The Gambia currently lacks a stock exchange, making it difficult for investors to exit their equity positions. The document proposes forming a task force to study establishing a stock exchange, with potential support from an IDA grant. Key decisions would include the regulatory framework and cost-effective structures to facilitate access to equity capital across different sized businesses.

1. Unlocking An Important Financial
Constraint in The Gambia
Access to Equity Capital for Small – Medium - Large
Companies has a
Significant Impact on how The Gambia’s achieved their SDGs
Paper for: Financing for Development: Unlocking Investment Opportunities, World Bank Course
Date: 1 April 2017
By: James (Jim) Chester - http://www.linkedin.com/in/jimchestercmc jamesmchester@gmail.com

2. Target Audience
Primary
• 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

3. 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 innovation
Goal 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

4. 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.

5. Two common strategies countries use to help find equity
investors
• Foreign Direct Investment vs Portfolio Investment
1. 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.

6. Structure of Gambia Equity Markets
Equity Suppliers (Investors)
In-Gambia Equity Investors
Individuals
Businesses
Institutional (Pensions, Insc.)
International Equity Investors
Diaspora
Individuals
Institutions
Others
IFIs – MDBs
Foundations
Seeking Equity Capital in
Gambia
Individuals
Micro
MSMEs
SEMs
Larger Businesses
Manufacturing
Retailing
Service Sector
Utilities
Initial Public Offerings
For 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 Exchange
Not available

7. Investors Problem in The Gambia
If 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 invest
How 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

8. The Missing Piece – How to sell my shares?
Pool
InvestorsInvestor
Original investor
who bought shares
from the company)
Company
Company does not buy /
repay the original
investor
Investor
Another investor, seeks to buy shares ownership) in the business
Investor
Shares
Proceeds of Sale
Shares
PurchaseShares
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’

9. 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

10. Components of a System for Share Trading
Stock Exchange – Trading Facility
Clearing and Settling
Activity of Payment and transfer of ownership
Depository
(Custodian of all Shares)
Regulator
Central Bank of The Gambia (CBG)
Investor A Investor B
Investment
Brokerage
Firm A
Investment
Brokerage
Firm B
This structure is common is common in capital markets

11. 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 Issue
Lets look at these issues

12. 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.

13. 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.

14. 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 Micro
The largest area of business activity and employment in the Gambia
Need to develop a Gambia solution that will facilitate SME companies access equity investors.

15. 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

16. 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.

17. Solutions to some of the issues
Office 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.

18. 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

19. 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.

20. Areas of decision making
Regulation
• 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

21. Summary - The Missing Link
Industries seeking Equity
to expand and develop
Agriculture
Tourism
Manufacturing
Utilities
Medical Facility
Communications / Technology
Others
Significant
Impact on
Access to Equity
Key factors
Regulation
Cost-Effective structures
Bank Loans