In September, the Cambodia Securities Exchange (CSX) announced a new initiative to improve access to financing for cash-strapped small and medium-sized enterprises (SMEs).
The Growth Board, which allows SMEs to issue shares to investors while being given more lenient accounting requirements and capital restrictions than larger firms, was part of a broader government effort to help SMEs obtain financing, as many small firms in the country have difficulties getting loans from banks.
However, almost six months in, no SMEs have listed on the Growth Board, and the CSX is realizing that it will have to improve financial education and business transparency before smaller enterprises will be ready to issue their companies’ stock and work to build investor confidence before people will be willing to put their money behind smaller enterprises.
The bulk of SMEs are still not up to listing standards, despite the less stringent requirements of the Growth Board, said Heu Rachana, acting director of CSX’s listing and disclosure department
“There are no SMEs on the board yet. We’ve received inquiries, but many firms need more time to produce the necessary financial statements,” Ms. Rachana said.
“We do not anticipate any SME listings this year as we encourage firms to become more transparent in their financial reporting.”
Ms. Rachana added that the CSX was holding educational workshops for SMEs to help them understand the advantages of equity issuance and guide them through the legal and financial requirements of the initial public offering (IPO) process.
Companies wishing to list on the Growth Board need to have a net worth of at least $500,000 and one year of audited financial results—compared to $7.5 million and two years of audits on the main board.
But despite the lower requirements, which only a handful of SMEs fulfill, equity issuance remains a gray area for startups, said Chang Bunleang, managing partner and co-founder of Brown Coffee, who received financial support from his family to launch the cafe chain in 2009.
“The board is a step in the right direction, but it is still young, and I think entrepreneurs need more education to understand the risks,” Mr. Bunleang said.
Many young businesses are also wary of losing control by issuing shares in their firms and prefer long-term investment partners or trustworthy family investors, he added.
“Companies like Brown and other SMEs prefer to look for funding from private equity partners or family members, whereas selling shares is more short-term.” Mr. Bunleang said.
Brown’s experience typifies how SMEs find financing in Cambodia: either via non-bank lending channels or sheer entrepreneurial grit, which only works out for a few.
“Banks want collateral, and lending to SMEs is seen as risky, so people get their financing through friends and family,” said Christophe Forsinetti, chief operating officer at property investment firm JSM Indochina, which focuses on business financing and investment.
“I don’t think the stock exchange will change this just yet. Listing means new costs for SMEs, including publishing financial statements, legal documentation and paying tax, which many are currently avoiding,” he said.
The majority of SMEs are still not officially registered with the Ministry of Commerce, according to the government’s 2015 Industrial Development Policy report.
“Among small enterprises, 62.83 percent were not registered, followed by 28.57 percent for medium enterprises,” the report says, adding that “the absence of proper bookkeeping hinders these enterprises from access to finance necessary for business expansion.”
A maturation of the financial system—including a stronger regulatory environment with transparent firms, skilled financial analysts and risk-taking investors—is also necessary before confidence in the CSX will grow, Mr. Forsinetti said.
“There are some days where only $1,000 are traded. This is not attractive for investors,” he said. “There is no liquidity, so after the initial capital gain of an IPO, stock prices would fall as there is nobody to invest.
“Investors want confidence in the whole system first, and only then will liquidity grow and stock issuance rise.”
The CSX is still trying to improve its credibility and confidence in listing by enticing large firms to list on the main board, said Lamun Soleil, director of the bourse’s securities market operations department.
“We believe there will be a trigger point in confidence when more companies begin following to list,” Mr. Soleil said. “We are particularly encouraging large profitable firms from the financial sector to list.”
Since the CSX opened in 2011, only three stocks have listed. This year, however, this number is expected to double, with the Phnom Penh Special Economic Zone, Taiwanese garment manufacturer TY Fashion and the Sihanoukville Autonomous Port preparing IPOs .
Mr. Soleil added that while the CSX was competing with alternate sources of finance, including bank loans and private equity, the bourse wanted to market itself as an additional financial option for ambitious firms.
“We want SMEs and larger companies to be more ambitious, to think regionally and internationally,” he said. “Many Cambodian business do not have this mindset, and are missing opportunities.”