Credit first, capital next – the government of Qatar has taken a vigorously proactive approach to supporting small businesses.

In late 2010, the Qatar Development Bank (QDB) launched a programme of indirect lending for small to medium-sized enterprises (SMEs) through loan guarantee support for commercial banks, funding a sector that commands increasing recognition as a key engine of economic growth and employment, particularly for nationals. This was complemented with export financing and promotion services.

The flow of credit was soon making itself felt, with $150m lent to small industrial companies. Now that the credit scheme is well established, Qatari authorities are focusing on facilitating SME efforts to raise extra capital through the creation of a junior market on the stock exchange, for firms that are not ready to enter the main bourse, the Qatar Exchange.

Cautious approach

Initial plans for the new secondary market were announced in January 2011, just months after the launch of Al-Dhameen, the small business financing scheme. In May 2011, the Supreme Council for Economic Affairs and Investment gave the green light and, in January this year, the Qatar Exchange announced the framework of the new market had been established.

Discussions with businesses that might be interested in listing began. But from the outset, Qatar Exchange stressed that it would take the process step by step over a period of months. Chief executive Andre Went explained that the market would only be launched once five to 10 viable candidates had been enlisted.

This gradual pace of development is to be expected for a pioneering project believed to be the first such secondary official stock market in the Middle East and North Africa (Mena) region.

For many locally owned SMEs, listing on a public market would represent a major cultural shift for family businesses that have hitherto had to account only to themselves for their performance. Compliance with standard legal requirements for company registration and the reporting of private company accounts is far short of the transparent release of detailed financial data and strategic business thinking that is expected of a listed company.

QE Venture Market – as the new small business bourse is known – is opening a path for Qatar SMEs to take a step that none of their counterparts in the Gulf have yet undertaken. There is no existing Arabian model to show what is entailed in being a small company listed on a secondary market.

Some conclusions may be drawn from the experience of smaller firms listed on the stock exchange in Kuwait, the GCC’s oldest bourse. But even there, the stock exchange has not yet taken the step of creating a market whose requirements are tailored to the capacities of smaller firms.

Given that Qatar is the first to offer this opportunity, it is understandable that potential listing candidates have been mulling over their options before pressing ahead. Practical preparations are also required to ensure that listed businesses can provide the financial data needed and are geared up to keep investors informed of their performance and future strategy.

A family firm has to decide if it wants to modernise its practices to meet the requirements of a public financial market and then implement the necessary changes, which takes time.

“If you’re looking to corporatise, some of the best practices that you see in large corporates have to be brought into your family organisation, which demands a big shift in the way you operate,” says Rajesh Menon, a partner at KPMG in Doha.

“The launch of the junior market in Qatar is an excellent initiative in that direction because it provides an opportunity for family organisations to take the business to the public, get it listed and get the public involved. But it also raises the question of better governance and transparency … listing rules would actually force you to consider these issues; otherwise you wouldn’t get listed on the stock exchange.”

Less stringent regulations

Rules governing the new secondary market are based on the core regulations drawn up in 2010 by the Qatar Financial Markets Authority (QFMA) for the trading of securities on the main Qatar Exchange. However, they are less demanding. SMEs seeking to list must have operated for at least one year and have subscribed capital of at least QR5m ($1.37m), half of which must be paid up. This compares with the three-year track record and minimum capital of QR40m (also 50 per cent paid up) required of companies seeking to list on the primary market.

They must also have at least 20 shareholders and be prepared to list a minimum of 10 per cent of their stock, compared with the main market’s requirements for listing companies to have at least 100 shareholders and to float at least 20 per cent of their equity.

There is no minimum capitalisation required to enter the secondary market, but companies have to provide statements showing that they have adequate working capital. Moreover, shareholders’ equity must account for at least 75 per cent of the paid up capital – all members of the company board must hold a certain proportion of their shares while they remain in office – thus demonstrating the owners’ commitment to the business.

Firms listing on the secondary bourse pay a flat fee that is much lower than that paid to enter the main Qatar Exchange market, and requirements for the disclosure of data and reporting of financial results are less onerous.

Even so, accounts must be presented in accordance with IAS (International Accounting Standard) and IFRS (International Financial Reporting Standards). There is also a requirement to disclose all information that could impact on share price, provide 15 days’ notice of annual and extraordinary general meetings, and the dates of board meetings that discuss half-year and annual results.

Quarterly results must be released within 30 days of each quarter and audited annual reports within the first three months of the following financial year.

Moreover, because SMEs can be more fragile and pose greater challenges in terms of corporate governance, in some respects the QE Venture Market regulatory requirements are actually tougher than they would be for companies listed on the main bourse. For example, firms must have listing advisers signed up.

Development opportunities for SMEs in Qatar

Qatar hopes the new market will foster the development of Doha as a regional centre for investment in the SME sector. Non-Qatari companies are entitled to list, and in particular this could be an option for smaller firms from other Gulf Cooperation Council or Mena economies.

The prime target of the initiative, however, is the Qatari business community, whose development is a major priority for the government.

In 2010, the Ministry of Industry and Trade launched Enterprise Qatar, a $550m project to support entrepreneurial SMEs, notably through finance and training. QDB is one of the key partners in Enterprise Qatar.

In fostering small business growth, the government aims to enhance the role played by Qataris in the private sector economy, as envisioned in its Qatar 2030 development strategy.

The creation of the secondary bourse is part of this jigsaw. The market offers family companies another avenue for raising capital by tapping into the deeper pool of investment available in what has become one of the world’s most affluent societies. Local retail investors account for about two-thirds of the trading on the main Qatar Exchange and up to a quarter of the shareholding, measured by value. Once the new Venture Market has established a track record of performance, it could attract the interest of local investors.

While the new market will offer a source of capital funding for Qatari family businesses, it will also impose conditions and encourage these firms to strengthen their own financial management and business strategies. In order to access the investment available through the secondary bourse, SMEs will have to produce detailed quarterly accounts and reveal significant information about their plans and the business context in which they are operating.

“If you have to attract funds, whether it’s in the form of capital or debt, you have to be transparent and that demands that you have better governance standards and better reporting standards,” says Menon. “You have to have better efficiency and make every dollar count.

“There is a lot of work [going on], especially in improving governance at board level, with initiatives such as independence of boards, bringing in independent directors and separation of ownership and management, which is a key thing because in family organisations, both the decision-making at the management level and family level tends to get a bit mixed up.”

Affordable business loans

The drive to provide greater access to credit remains a key element of Doha’s strategy to support SMEs, including those that are not yet in a position to contemplate a stockmarket listing.

Under the Al-Dhameen scheme, QDB guarantees up to 85 per cent of the principal of a commercial bank loan to small firms that have been operating for less than three years; loans with principal up to QR10m are provided. For firms that have been operating for more than three years, QDB will guarantee up to 75 per cent of the principal, for loans up to QR8m.

The aim is to make funds available to SMEs at affordable interest rates and – because they are able to borrow – help them establish a credit history. With a good borrowing track record they will eventually become better placed to secure normal bank credit on purely commercial terms.

The indirect credit products on offer under Al-Dhameen include both term loans for tenors up to five years and one-year revolving credit facilities.

But a large number of sectors – including agriculture, fisheries, mining, finance, real estate, wholesale and retail trade and personal and household services – are excluded from access to the scheme.