Can Stock Exchanges Support the Growth of Small and Medium-Sized Enterprises? Lessons from India, South Africa and Jamaica

Published on July 25, 2017

This report, by means of a survey, examines the impact and potential of public-equity financing on SMEs in three case study countries, India,  South Africa and Jamaica.

By virtue of the listing process, firms tend to develop more sound financial reporting and corporate governance structures
Whether or not they raise funds upon listing, listed firms may also be able to tap other sources of finance more easily than similar, unlisted firms
SME-dedicated market segments appear to do a better job mitigating some of the pressures of going public
stock market

Despite their importance in creating private-sector jobs and diversifying economies, micro, small and medium-sized enterprises (MSMEs) often struggle to access adequate finance. This problem has only become worse since the global financial crisis, due to bank deleveraging and possibly the adoption of stricter prudential regulations. This more challenging financial environment has spurred policymakers, international donors, civil society organizations, and the private sector to seek out and encourage alternatives to traditional bank financing for MSMEs, including public equity financing through dedicated MSME market segments.

Today, there are around 30 SME-dedicated market segments on stock exchanges in emerging-market and developing economies, the majority of which have been established in the past 15 years. While public-equity financing is not a broad solution to MSME financing challenges, especially in emerging-market and developing economies, it may be a solution for a particular subset of MSMEs—specifically, those MSMEs that have strong growth prospects and that are sufficiently institutionalized to handle the necessary reporting and corporate governance requirements.

Through a survey instrument that the Milken Institute Centre for Financial Markets created jointly with the World Federation of Exchanges (WFE), the institute carried out evidence-based research to compare how approaches to MSME boards have varied across countries. They surveyed listed MSMEs on the MSME boards and main markets of three focus countries—India, Jamaica, and South Africa—to compare why these firms list, whether they have had better access to finance since going public, and whether their post-listing experience has met their expectations. They looked at whether, and to what extent, SME platforms are “graduating” MSMEs—that is, incubating them for later listings on the main board.

“Most surveyed firms accessed additional medium- to long-term financing subsequent to their initial public offering (IPO).”