Dubai is planning to launch a second-tier market towards the end of 2011 to enable small and medium-sized enterprises (SMEs) to access growth capital, according to a leading industry insider.

“It’s a work-in-progress,” says Nasser Saidi, head of external affairs at the Dubai International Financial Centre Authority (DIFCA) and chief economist of the DIFC.

“We are in talks with regulators and Nasdaq Dubai, and they are progressing fairly actively. But these things take time – we are having to make several changes to the regulatory structure – so if we can launch it by late next year, then that would be good.”

Middle East SME activity 
Market share of all businesses  90%
Market share of employment 70%
Contribution to GDP 30%
GDP=gross domestic product; SME=small and medium enterprises. Sources: Union of Arab Banks; World Bank; Abraaj Capital

The plan is aimed at establishing a market similar to London’s Alternative Investment Market (AIM), which caters to growth companies looking to list at a smaller market capitalisation than on the main exchange.

Saidi says the DIFCA, which develops policies and oversees the development of the DIFC, began exploring the idea of launching a secondary market at the start of the summer, and that there is already “clear interest” from both the demand and supply side of the market.

UAE markets’ performance
  Jan to Nov 2010 2008-2010
Dubai Financial Market (DFM) -10% -74%
Abu Dhabi Securities Exchange (ADX) -5% -49%
Source: Union of Arab Banks, World Bank, Abraaj Capital 

“We are in talks with a whole host of organisations, including government organisations, which are interested in promoting SMEs, from Dubai, as well as the UAE and the region more generally,” he says.

“The nature of this exchange is very much a regional one.”  

Organisations expressing an interest include family-owned enterprises, as well as the Mohammed bin-Rashid Establishment for SME Development.

“They’ve got 100 companies, which they have canvassed and assessed as being promising growth companies suitable for listing,” says Saidi.

“But we are also seeing enthusiasm from organisations providing SME finance such as private equity firms.”

A second-tier market would lower the regulatory hurdles that currently prevent small businesses from launching initial public offerings (IPO) on local markets where companies currently have to float 55 per cent of their shares at a price dictated by the authorities.       

On 18 October, the Arab Development Fund announced the launch of a $2bn fund aimed at addressing the funding challenges facing SMEs, which account for 90 per cent of all businesses in the Middle East but generate less than 30 per cent of its gross domestic product (GDP), according to research from UAE private equity firm Abraaj Capital.  

By comparison, SMEs employ roughly 50 per cent of the total domestic workforce in the US, and account for approximately half of its GDP.

Along with plans for a second-tier market, the UAE is also looking to merge the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX) to create a deeper pool of liquidity and attract much-needed foreign institutional money.

“Goldman Sachs has been tasked with producing a plan for the merger and I understand they are well-advanced in their work,” says Saidi.

Upon completion, the US-headquartered investment bank will present its report to Emirates Investment Company, which is supervising the proposed merger, following months of top-level talks between the two exchanges.   

UAE trading volumes have tumbled to their lowest level in four years. Dubai and Abu Dhabi’s benchmark stock indexes have slumped 17 per cent and 8.5 per cent respectively so far in 2010. That compares with a gain of 2.8 per cent in MSCI’s emerging markets index.