Plans are being considered to create a second-tier stock market in the UAE to help small and medium-sized enterprises (SME) gain access to finance as traditional funding avenues remain blocked. The Mohammed Bin Rashid Establishment (MBRE) for SME Development, based in Dubai, is conducting research into the exchange, which could be based on similar international bourses for companies with small capitalisation.
The proposals have been given the support of the IMF and Dr Nasser Saidi, the chief economist of the Dubai International Financial Centre (DIFC). "We should be setting up a second-tier market, an alternative investment market geared and directed towards the SME sector, helping Emirati and expatriate companies within the free zones," said Dr Saidi. "It would encourage young entrepreneurs by providing them with a source of long-term funding and help to diversify the economy."
Any exchange established should be open to companies with a market capitalisation of between Dh15 million (US$4m) and Dh50m, Dr Saidi said. The SME sector is considered the lifeblood of the economy, accounting for about 90 per cent of the country's private companies. Since the global financial crisis, small and medium firms have struggled to obtain finance needed to stabilise and expand their businesses.
Risk-averse banks have been pushing up the cost of corporate finance or refusing credit altogether. Despite a marginal improvement in credit growth in recent months, it is still far short of the double-digit highs of 2008. "An SME stock exchange could help gain capital for small businesses looking to expand in an organic way to become bigger, better companies," said Alexandar Williams, the director of strategy and policy division at MBRE.
"This would also help attract foreign capital to local markets looking to invest in firms with the potential to grow to the next stage." MBRE is researching intellectual property rights of the exchange based on international models in countries including Taiwan and Singapore, which could be launched in the next two or three years. Stock exchanges for small companies are already operational in a number of countries. Launched as a sub-market of the London Stock Exchange 15 years ago, the Alternative Investment Market (AIM) allows SMEs to float shares under a more flexible regulatory regime than is stipulated by the main market.
With no requirements for capitalisation or number of shares issued, and tax advantages for investors, the AIM has drawn a number of companies from the main exchange. Taiwan established the GreTai Securities Market (GTSM) in 1994 to improve access to capital for the country's fast-emerging high-tech companies, which have been significant drivers of economic growth in recent years. Before a similar exchange could be established in the UAE, the culture of corporate reporting and disclosure had to improve not only among larger corporates but smaller firms, said Masood Ahmed, the IMF's director for the Middle East and central Asia.
"This is a medium-term issue but as a direction of travel it makes a lot of sense to us," Mr Ahmed said. "It will take a bit longer to develop as in some cases we don't even have the larger corporates yet relying on local capital markets enough as they don't have the local and regional markets to draw upon." tarnold@thenational.ae
