Small and medium enterprises (SMEs) have a vital role in economic growth and employment generation all over the world, especially in the emerging and developing countries. Even in developed countries, the SME sector plays a big role. For instance, in the European Union, SMEs represent over 99 per cent of total businesses. SMEs basically help economies to enhance entrepreneurial skills of people, improve inter-sectoral connections, and reduce trade imbalances through increased exports. Despite such roles, SMEs often face trouble to access finance, which could be marked as one of the core factors impeding SME development. Traditionally, SMEs collect funds from non-governmental organisations (NGOs), micro-credit institutions, bank, and financial institutions. But due to lack of collateral, limited operating history, and more risk-prone propensities, such institutions usually stay away from lending to SMEs.
The problem has recently deteriorated due to the global financial crisis. In reality, the banks and financial institutions have nothing to do but react to such crisis and take actions in order to diminish associated risks resulting in a credit crunch in the economy and seriously affecting SMEs access to finance.
To accelerate the development, adequate access to finance for SMEs has to be ensured, which has prompted policymakers and industry bodies to search for alternatives to traditional bank financing. Consequently, dedicated market segments for SMEs have been introduced by a number of stock exchanges in both emerging and developing countries in order to support SMEs to access to equity finance as an alternative source of financing. More than 30 dedicated SME boards have already been established across the world.
In Bangladesh, Dhaka Stock Exchange (DSE) has recently introduced SME Board where SMEs will be allowed to offload shares to facilitate raising capital from the market under certain terms and conditions. It was urgently needed to introduce such an alternative source of financing in addition to banking sector, since the banking sector of the country is currently passing through a serious liquidity crunch. For this reason, banks were instructed by the central bank not to finance risky projects. This will further lessen funds for SMEs as the majority of small businesses are venturesome attaching high risks. Therefore, the growth of SMEs will likely be impaired. To support the growth of SME businesses in Bangladesh, the SME Board is expected to play a significant role by facilitating access to equity funds.
Under this new platform, any small public limited company having post-issue paid-up capital of at least Tk 50 million to Tk 300 million can be listed with the DSE. If any SME wants to get listed upon raising fund through fixed price method, compliance of corporate governance code will not be mandatory, but in case of fund raising through book building method, the same will be mandatory.
The SME Boards in various countries of the world usually endeavour to attract listings in different ways. These include, offering a more streamlined and quicker listing process, reduced fees, and even tax incentives. However, DSE has already sought tax exemption on share transactions of SMEs from the National Board of Revenue (NBR). In addition, the other offers too require to be ensured by DSE SME Board. Otherwise the Board may fail to attract adequate number of SMEs and investors. Nonetheless, listing with the DSE through DSE SME Board can be of benefit by several ways.
BENEFITS OF LISTING: One of the most important reasons that motivate firms to list with stock exchange is to increase their access to equity finance. Most firms raise funds directly on the stock market when they list. Whether or not they raise funds upon listing, listed firms can also be able to tap other sources of finance more easily than similar unlisted firms. The DSE SME Board has relaxed the financial reporting and corporate governance compliances (e.g., submission of yearly audited financial statements). SMEs still have to maintain and comply with many requirements. Once SMEs can meet these standards, their financial management and accounting practices are likely to be improved thereby enhancing transparency and creditworthiness.
Therefore, the SME Board gives an opportunity for SMEs to learn more about market rules and obligations, such as disclosure and to develop corporate culture as a preparatory market before moving to the main market. Furthermore, SMEs can reduce their leverage ratios by raising equity capital, which may also make it easier for them to obtain credit on more favourable terms.
CHALLENGES FOR DSE SME BOARD: The SME Board will face several challenges. We can focus on some important ones as below:
• Regulatory requirements: A regulatory regime requires to be created in such a way that SMEs can rise up to the needs of the investors. The regulatory requirements include performance and disclosure requirements. These may be reduced, compared with the main market, to decrease costs to the issuer. In contrast, reducing regulatory requirements can lower investor protection and investor confidence. It's a big challenge to cause balance between these two.
• Costs of issuance: Given the small size of SME issues, a key challenge is to reduce the costs in time and money of issuance so that it can become economically viable for the SME. But the problem is that the service providers (e.g., underwriting banks, audit firms, legal advisers etc) are not incentivised to support small companies. Hence, they can't reduce their fee of assisting SMEs in offloading, which will drive the costs of issuance up.
• Demand creation: To create demand from the perspective of both investors and issuers is another big challenge. DSE, along with regulatory body and government, has to undertake various promotional and awareness programmes to make both SMEs and investors informed about this market. They have to motivate and persuade SMEs by telling the benefits of listing with stock exchange compared with other sources of finance. In addition, incentive can be given to the investors in the SME market so that they can be attracted to the market.
• Improving trading and liquidity: Investors require adequate liquidity to feel secure so that they can exit from SME market when needed. But many issuers show disinterest about the liquidity of their shares, once they have raised their capital from the exchange. It is the responsibility and interest of exchange to teach issuers about the importance of liquidity. Liquidity is needed if a firm either wishes to offer second issue or to graduate to a main board.
• Government support and incentives: The government can offer various types of incentives and support for both issuers and investors investing directly in the SME market. For instance, tax incentives may be provided to the investors on their trading in the SME market, while grants can be provided to issuers to cover their listing costs.
In addition, developing a national campaign can enhance public awareness about the importance of SME finance in national economic development plan and how the SME exchange can help provide that finance. The combined efforts of the government, regulatory body and exchange can be very effective in supporting the SME exchange in this regard.
The DSE SME Board may have to face various teething problems. The DSE has to cope with these issues efficiently and move carefully so that the purpose of this market is fulfilled. Once the SME market is consolidated, the development of SMEs will surely be accelerated.
Dr. Md. Bokhtiar Hasan is Assistant Professor, Department of Finance and Banking, Islamic University, Kushtia.