Jamaica's Engine for Growth

JAMAICA TO LAUNCH Micro Stock Exchange

by GLEN MCLEISH

Access to funding is an ongoing challenge for Micro, Small and Medium-sized Enterprises (MSMEs) worldwide although according to the International Council for Small Business (ICSB), “formal and informal MSMEs make up over 90% of all firms and account on average for 60-70% of total employment and 50% of GDP.”

In Jamaica, the picture is the same. Access to funding remains a sore point for small entrepreneurs who employ over 80 percent of the labour force.

In the 2018/2019 Budget Debate, Minister of Finance Hon. Audley Shaw announced that plans are afoot to launch a microstock exchange to facilitate small enterprises. This is welcome news for the MSME sector, but what are the pre-conditions for a successful micro exchange and how can MSMEs ready themselves to take advantage of using the platform to capitalize their businesses and contribute to a strengthened economy?

Before we deep dive, let’s get some context.

A stock market is a place where shares of public listed companies are traded. The primary market is where companies float shares to the general public in an initial public offering (IPO) to raise capital for their businesses.

Like all markets, it puts individuals and businesses with funds to invest, in contact with entrepreneurs who need funds to build and expand their businesses. The shares are traded after they are listed on the exchange.

Jamaica has had a thriving stock market since its incorporation and start-up in 1968 and 1969 respectively. At present, the exchange has over one-hundred securities listed on its markets.

The pinnacle of its achievements may well be its recognition by Bloomberg News as the top performing exchange, stating that “…its stock market had a better year than any other across the globe.”

The Jamaica Stock Exchange (JSE) is not a single market but a collection of markets including the Junior Jamaica Stock Exchange, a Combined Market a, USD and a Bond Market among a few others.

WHAT ARE MICRO MARKETS?

Micro markets exist in developed countries including the USA where they are referred to as “micro cap” stocks, which trade on what is referred to as the Over-the-Counter (OTC) market, as opposed to say the NYSE or NASDAQ and in Canada on the TSX, where they are referred to as small cap stocks.

In the Jamaican context, a micro stock exchange would be for small and micro enterprises with capitalization of $5 million to $50 million.

This is because this market would fall in a hierarchy with the JSE followed by the Junior Market whose capitalization is $50 to $500 Million.

Jamaica’s Junior market has performed well since its launch, growing 2.7 times in the three years to April 2018, and has been as high as 3.14 times over the period, as at April 2017, with an index of 3,256. The big question is, can a micro market replicate or even surpass this performance?

Typically, micro stocks would have limited assets and operations, may be lower priced and trade in lower volumes relative to senior market stocks. However, the most far-reaching difference to the senior markets is that the companies on a Micro market are likely to have less public information available.

PRE-CONDITIONS FOR A SUCCESSFUL MICRO MARKET

As part of the process of listing on an exchange, including a micro exchange, businesses must develop and issue a prospectus. The JSE describes a prospectus as “a form of legal document that provides details about the investment offering. A prospectus normally contains the facts that an investor needs to make an informed investment decision.”

Entrepreneurs also need to know that such a document has to secure legal and regulatory approvals, and therefore, has to meet minimal standards before it can be issued as an invitation to the public.

In order to launch a viable micro exchange, however, there are many steps that need to be taken by all the stakeholders concerned, that is from the JSE at one end, to the entrepreneurs seeking funding at the other, and many other stakeholders in between including professionals like lawyers and accountants. The list of considerations discussed here is therefore not exhaustive.

Firstly, a structured look at the potential list of micro businesses that could be available for consideration would be needed to encourage and facilitate listing, as the development of a broad market is important to a successful launch and to the growth and sustainability of a micro exchange.

Perhaps one of the most critical changes small and micro businesses face in listing on an exchange, is the need to develop and sustain a reporting discipline, and with that, an understanding that the listing process effectively requires opening one’s business operations, its plan and results for the world to see. It therefore demands enhanced accountability and transparency in return for funding to expand business and enhance competitively its positioning.

MINIMUM STANDARDS

Micro-entities, like other market aspirants, would be required to meet minimum operating, share issue and reporting standards, which would be set by the JSE. In preparation for such an exchange and for their listings, micro enterprises have other internal standards to also meet, including among other things :

1. Clear understanding of their core businesses and knowing and understanding the market for their goods and services;

2. Good, but not expansive, internal organization so that functions such as purchases and sales, inventory, payables and receivables management and general administration (given size and resources) are appropriately established and sustained;

3. Cross training and succession planning so that the business is not single-person dependent, and operations can go on irrespective;

4. An accounting function that is well organized and that can produce the financial statements to the minimum acceptable standards for the market;

6. A sound reporting framework, which for the most part, may be assured once the above conditions have been met.

MENTORING SYSTEM

The creation of a formal channel, if it does not already exist, to provide mentoring and advisory services to Micro and Small and Medium-Sized Enterprises (SMEs) could perhaps be one of the most valuable constructs in an architecture designed to assist micro businesses and ultimately, market sustainability.

Similar to SME, the entrepreneur in a micro business, is at one and the same time, the general manager, human resources, finance, operations and marketing executive.

Mentors would act as a sounding board for the micro business entrepreneurs to outline their ideas, identify risks and concerns and to aid in holding the entrepreneur to plans that have been agreed or, if required, to make the tough decisions, where business outturn and outlook recommend what needs to be done.

Mentors can be the difference between success and failure of a business, particularly in highly competitive markets where operating margins are likely to be thin. Among other things, mentors provide guidance in relation to:

• Development of business plans and the associated financial projections

• Help to interpret the impact of economic and financial changes on the business

• Financial and administrative management

• Identifying and leveraging value drivers for the particular business

A mentoring system would not be loose but would be highly formalized, forming a foundation for a sound micro enterprise system as a base for sustainable market growth development.

THE BENEFITS OF A MICRO STOCK EXCHANGE

Like full blown markets, micro exchanges have their advantages and core contributions that they make to their economies.

At the macro level, micro businesses would be able to raise capital and contribute in a more formal way to the growth and development of the Jamaican economy. The existence of the exchanges and the fact that small business owners can aspire to listing, helps aspirants and their businesses to:

• Create incentives to organize their businesses for wider markets, greater efficiencies to boost profitability and create wealth.

• Be a positive force for employment creation.

• Afford smaller investors—who would otherwise be shut out of the bigger markets—an opportunity to invest, as more micro enterprises on the market delivers the opportunity for diversification at that level.

• Enhance interest in the markets generally and serve to boost investor education, as they bring in traditionally shut-out investors.

CONCLUSION

The international partners, and in this case the Inter-American Development Bank (IDB), have consistently supported the Exchange as a source for capital access. Researchers including the Mona School of Business Management (MSBM) have pointed to the stock exchange as “good business for SMEs”. It is therefore reasonable that, other things being equal, a micro exchange, in adding another layer for businesses to access capital, augurs well for micro entities and by extension the Jamaican economy. The preparatory framework as referred to above is critical to establishing a sound foundation upon which micro businesses can source equity funding and contribute to a market that is viable and sustainable; thereby securing all the desired macroeconomic outcomes. CIJ