SAUDI SECONDARY MARKET FOR SMES ON TRACK

Saudi Arabia 2016 | ECONOMY | FOCUS: SAUDI CAPITAL MARKETS

Draft rules on a secondary market for SMEs is ready and out for review according to Mohammed Elkuwaiz, Vice Chairman of the Capital Market Authority.

Speaking at the IFN Forum Saudi Arabia 2016 on November 28, Capital Market Authority (CMA) Vice Chairman Mohammed Elkuwaiz announced that plans to launch a secondary market in 2017 were on track, an initiative that is part of Saudi Arabia's reform agenda to diversify its oil-dependent economy.

Elkuwaiz, who acts as de facto chairman after Mohammed Al-Jadaan was recently appointed Minister of Finance, pointed out that the CMA is working to modernize and relax its regulation to create a secondary market that will enlist SMEs, an instrument that will strengthen the financial muscle of smaller companies, which are fundamental for the country to realize its Vision 2030.

SMEs make up nearly 90% of the companies in Saudi Arabia and contribute around SAR600 billion to the country's GDP. Most SMEs in the country are family owned, thus the CMA wants to encourage these firms to go public to improve corporate governance and enhance access to capital. The creation of this secondary market for small-cap firms is part of the CMA's strategy to double the size of the stock market, which according to Bloomberg is among the most closed in the world.

The draft regulation on the SME market restricts investment to qualified investors, and requires firms to have minimum capital of SAR10 million, whereas around SAR100 million is currently needed to go public on the Saudi Stock Exchange. Additionally, companies willing to enlist must have been functioning for at least a year and have a minimum of 50 shareholders. Overall, the requirements will be lower and looser to motivate SMEs to join the market, as Elkuwaiz mentioned at the IFN Forum, held in Jeddah.

On the other hand, the Vice Chairman of the CMA, an institution in charge of regulating the country's stock markets, announced they are also reviewing rules on real estate investment funds (REITs) to make the real estate market “more liquid and investable," specifically for Islamic finance instruments.

In mid-November, 50 million trading units of the Riyad REIT fund were listed on the Tadawul in what became the first REIT to list on the Saudi capital markets. With capital of SAR500 million, Riyad REIT is a sharia-compliant fund that focuses on generating a portfolio of income-generating real estate assets.

“Income-generating real estate trusts will give investors a unique opportunity to share the ownership of real estate that not only has stable financial performance, but also regularly distributes dividends," said the CEO of Riyadh Capital Ali Al-Guwaiz the day after the listing. The CMA plans to continue adding new trusts to the market in the coming months, as REITs will provide investors with new investment tools that will help to diversify assets on the stok exchange.

REITs listing and the launching of the secondary market for SMEs represent two significant steps in the gradual liberalization of Saudi's capital markets, which are currently worth USD400 billion. Increasing the market cap of the exchange and further diversification will be paramount to achieving some of the country's key Vision 2030 targets.