The begining of a new era for small businesses?
A proposed exchange for small and medium enterprises could boost these vital businesses
In today’s strong business environment, almost everyone is familiar with some business fundamentals such as accounting or marketing, or at the very least understands some basic information technology (IT) skills. Knowledge, Lebanon’s most important resource, has changed society’s needs as well as the structure and purpose of small and medium enterprises (SME). It has led to the demand for digital technology related jobs highly exceeding supply, hence introducing a tech-savvy entrepreneurship trend.
However, startups and SMEs, which make up the bulk of all free markets, are unable to operate at their full potential due to serious difficulties regarding financing. With hard assets being a rare commodity for technology-based companies, the huge amount of collateral required by banks for securing loans has been an important funding barrier. Market regulators are more aware than ever that a lack of SMEs’ growth would hurt an economy, let alone increase a country’s unemployment, and are taking steps toward encouraging a culture favoring SMEs’ development and success. In the Lebanese knowledge-based economy, a series of actions has been directed toward facilitating SME funding and growth.
OVERCOMING CHALLENGES
To overcome one of SMEs’ biggest challenges, the Central Bank is encouraging equity financing. One of its recent steps is the introduction of Circular 331, aiming at creating more synergies between corporate Lebanon and startups. “Market capitalization to GDP ratio for developed markets should be close to 100 percent while, for the developing economy, it should be close to 80 percent,” says D.K. Aggarwal, from SMC Investments and Advisors Ltd., tells the Economic Times. As per the World Bank Group’s (WBG) statistics, this ratio for Lebanon is below 30 percent. This situation is problematic since equity capital is key to a country’s socio-economic development. The reason for this weak statistic is the lack of large companies listed on the Beirut Stock Exchange (BSE) and the inability of SMEs to do so, due to the platform’s harsh and expensive listing requirements.
At the “Startup Lebanon” conference last May in New York, Central Bank Governor Riad Salameh suggested that creating an SME electronic exchange was the most efficient way to solve this issue. He also assured that the platform would be set up by the end of the year. Executive contacted the Capital Markets Authority (CMA) and the Central Bank to find out more about this new exchange, but was told it was too early for them to share any information regarding its rules and regulations. Although stakeholders were thrilled by the project’s announcement, they are still in complete ignorance concerning its development. With four months to go, as promised, many are trying to evaluate the exchange’s feasibility and success and have raised concerns over the SME exchange’s listing requirements, laws and regulations to its ownership structure.
At first glance, one would wonder why this project was proposed. It is true that, within a country, many exchanges can exist. However, why create a new exchange rather than alleviate the requirements of the existing junior exchange, which is incorporated in the Beirut Stock Exchange (BSE)? Why not focus on making the existing stock exchange a success? How will the listing requirements differ from the existing ones and what will change in order to attract startups and SMEs? With a lack of knowledge regarding minimum required paid up capital, company net worth, record of profitability and publication of financial results, no company can evaluate its listing ability, no venture capitalist can determine the readiness to list of companies from its portfolio, and no citizen can consider new investment opportunities.
A successful SME exchange would most likely boost competition and encourage job creation. For its concretization, it should be organized, efficient, well regulated, reliable and monitored by independent third party agencies. It is important that