The Board of the International Organization of Securities Commissions (IOSCO) on July 9 published its report on SME Financing through Capital Markets , which provides recommendations for regulators to facilitate capital raising by small and medium sized enterprises (SMEs) in emerging markets.
The report identifies the challenges facing SMEs in accessing market-based financing, and examines some of the successful measures implemented by regulators and other policymakers to assist SMEs in tapping capital markets. The findings are based on survey responses and best practice by member jurisdictions. The Financial Services Board of South Africa was the penholder for the report.
SMEs are a major contributor to long-term economic growth and employment. However, they often struggle to find financing due, in part, to the relatively high investment risk they represent. The SME financing challenge has increased in the aftermath of the global financial crisis as banks face tougher liquidity requirements and leverage constraints. Capital markets therefore have a role in bridging this financing gap for SMEs by providing alternative funding sources.
In May 2012, IOSCO’s then Emerging Markets Committee –now known as the Growth and Emerging Markets Committee– set up a Task Force on Financing of SMEs through the Capital Markets. The Task Force conducted a fact-finding survey among IOSCO members to gain insight into the challenges and best practices of SME financing. Forty-five jurisdictions responded to the survey, of which 31 respondents were emerging market members.
The results of the survey indicated that bank loans are the primary source of financing for both publicly and privately held SMEs in most jurisdictions, followed by equity finance, venture capital and other related governmental and international funds. Capital markets also offered other funding alternatives, including equity financing via listing on alternative exchange boards, issuance of debt securities, crowd funding, Sukuk funds, securitisation and government initiatives that encourage private investment.
In many jurisdictions, SMEs continue to face impediments that discourage them from raising financing on capital markets, such as fear of losing ownership and relatively high regulatory costs. In response, most of the jurisdictions surveyed have been reviewing their respective regulatory frameworks and taking specific initiatives to facilitate SME access to capital markets.
Successful measures include establishing separate equity and fixed income markets with regulatory requirements tailored to SMEs, establishing market advisor and market-making systems, and introducing alternative methods of financing such as private equity, venture capital and securitisation.
In recognition of the importance of this issue, the IOSCO Board will have a roundtable on the issue of SME access to market based finance at its next meeting in Toronto in October 2015.