Middle Eastern entrepreneurs will soon be given the chance to list their businesses in Dubai, under plans aimed at easing the capital shortages that have long plagued the region’s smaller businesses.
Nasdaq Dubai – the emirate’s second stock exchange – has set up an expert group to design a new market for small companies that would be launched later this year and draw on models from Europe and Asia.
Analysts say the region’s small businesses have long relied on local banks for financing and were among those most affected by the credit crunch as lending dried up.
“Access to capital is an issue,” says Ben Constance, a corporate partner at law firm Taylor Wessing, who is advising on the plans for small businesses. “This initiative is addressing these concerns.”
As bank lending slowed, the fledgling but fast growing regional private equity and venture capital industry also dried up in the region, restricting the growth potential for small businesses. International banks became more wary about lending to their smaller clients as loan rules tightened in the wake of the crisis.
But Dubai’s move comes as share sale activity has lifted across the Middle East and North Africa after the financial crisis damped markets across the region, limiting access to equity capital.
Last year, the region raised $2bn, up 134 per cent from $843.9m in 2011, according to Ernst & Young’s data for the Middle East and North Africa.
And this year has already got off to a strong start with the long-awaited $1.24bn share sale of Asiacell, the telecoms company, in Iraq, the biggest share offer in the Middle East since 2008.
To help stimulate activity, the Dubai Financial Services Authority cut in June last year the minimum market capitalisation for an initial public offering from $50m to $10m, allowing smaller companies to take part.
The emirate is home to about 72,000 small businesses, which contribute over 40 per cent of Dubai’s gross domestic product.
Successful small companies are “vital to the expansion of the UAE’s economy, but many are starved of the capital they need to grow”, says Hamed Ali, acting chief executive of Nasdaq Dubai. “An IPO on Nasdaq Dubai will enable them to raise the funds they need.”
The process would also force better governance at smaller companies. Audited accounts as well as the need for board members and independent directors would be encouraged as a result, says Taylor Wessing’s Mr Constance.
Dubai’s efforts follow Qatar, which last year announced that it was launching the QE Venture Market, a new exchange for small and medium-sized businesses. Doha has already set requirements to list, such as a minimum subscribed capital of QR5m ($1.4m) and a minimum of 20 shareholders.
But an SME market is no quick fix to solving the financing needs of small businesses, says Farouk Soussa, chief regional economist at Citigroup in Dubai.
“There’s a host of other issues from the bankruptcy laws to jail for bouncing cheques to residency laws in the UAE – all these act to inhibit SME growth,” says Mr Soussa. “I wouldn’t be too optimistic that creating an Aim equivalent in the UAE is going to stimulate the sector hugely.”
Mr Soussa also points out that the stock market option can only come after seed capital is invested in the business, which still requires bank lending or involvement from private equity houses or venture capitalists.