The Role of Specialized Markets in Facilitating SME Access to Finance

In addition to venture capital and private equity funding, and as both alternative and facilitator of such funding, setting up specialized SME stock markets would serve frontier and emerging market economies well.

Such specialized market segments enable Startups and SMEs to issue and list securities to raise growth capital, thus providing companies with an additional route to raise finance. These exchanges also provide additional exit options for investors, encouraging VC and PE funds to invest in SMEs.

SME stock markets differ from regular exchanges in important ways:

• SME stock markets are not so much about the trading of listed securities but rather the ability of SMEs to list securities to raise growth and expansion capital.

• SME stock markets tend to underemphasize traditional listing requirements typically required by standard exchanges, such as a large minimum capital for the listed company and a minimum track record of profitability, and instead focus on strict disclosure and corporate governance requirements for listed SMEs.

• SME stock markets play an important role in connecting and networking SMEs looking for expansion capital with VCs, PEs, Family Offices, and High Net Worth Individuals looking for seed, early stage, and expansion investment opportunities.

• SME stock markets function as stepping stones for SMEs to grow and eventually list on the Main Boards (standard exchanges), should they choose to.

• SME stock markets tend to be “uncorrelated” to the standard exchanges of their home countries and, as such, provide compelling investment opportunities to both retail and institutional investors for hedging purposes.

• Due to the sectors they tend to focus on (e.g. technology or technology enabled and new economy sectors), SME stock markets play an important role in attracting regional and international FDI and Portfolio Investments into Frontier and Emerging Markets.

An SME stock market could be set up as an additional segment to an existing stock exchange or as a standalone operation. It can be housed within a special economic zone or financial center, helping such centers and special zones realize their full potential by becoming vibrant hubs of business activity.

Setting up a specialized SME stock market should be undertaken in partnership with a recognized international exchange, with the latter contributing:

1) the technology

2) the business model, and

3) the brand.

It is worthwhile to note that SME stock markets have been launched in several Arab countries such as Egypt, Saudi Arabia, and Dubai. Superimposing a technological solution to connect these markets to create one regional or quasi regional Middle East SME market with multiple entry points and a harmonized set of listing, disclosure and corporate governance rules would increase the size of the liquidity pool available to Middle East SMEs to raise funds from and facilitate mergers and acquisitions across geographies and the creation of regional heroes.

With SMEs estimated to generate around 60% of the MENA region's GDP and account for some 70% of employment, SME access to finance is fast becoming a top priority for many governments and international financial institutions.