Can Stock Exchanges Support the Growth of Micro Small and Medium-Sized Enterprises?

Authors: The Milken Institute's, Jacqueline Irving, John Schellhase, and Jim Woodsome

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—IndiaJamaica, 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.

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