Launched in 2017, the Bahrain Investment Market (BIM) has so far secured one listing. However, with expectations that the worst of the Covid-19 pandemic may now be over, the financial authorities are intent on breathing new life into the initiative as a means of promoting rapid growth of high-potential small and medium-sized enterprises (SMEs).
Vibrant Ecosystem
The BIM provides an alternative, less-regulated source of financing for growth companies that require support before going public on Bahrain Bourse (BHB) or elsewhere. For example, while the BHB requires listing companies to maintain paid-up capital of some $10m, the BIM accepts a little more than $600,000, considerably broadening the access pool, especially as cost has been identified as a primary impediment to SME listings on the BHB.
Support comes in the form of a direct public offering, allowing companies to raise capital without having to bear the expense of hiring an underwriting firm. Instead, potential BIM entrants are allocated a sponsor to assist with meeting the listing criteria before being able to sell securities directly to the public, both domestically and overseas.
Tamkeen, a semi-autonomous government labour support agency, was enlisted to help enterprises meet the regulatory and sponsorship costs. Authorised sponsors include global advisory firm KPMG and its GCC peer Keypoint, as well as law firm Almoayed Chambers and accountancy Grant Thornton.
When the BIM was conceived, Bahrain’s start-up ecosystem was thriving – a situation that remains fundamentally unchanged. The kingdom ranked as one of the world’s top-five fastest-growing start-up ecosystems among countries with fewer than 1000 start-ups, according to the “2020 Global Start-up Ecosystem Report”, which also placed Bahrain among the top 10 in the MENA Ecosystems for Funding rankings for 2020. The report found that Bahrain successfully created some $164m in ecosystem value over the 30 months to August 2020, with wage subsidies and a liberal tax regime identified as key growth enablers. Financial technology (fintech), in particular, has been booming, with the number of companies in the space doubling between 2018 and 2022 to about 400, including some valued at more than $1bn.
Another motivating factor was strong growth in demand to invest in companies in the region, as indicated by a 42% increase in BHB trading volume in 2016. The Bahrain All Share Index continues to perform strongly, closing 2021 up 20.6% on the 1797.3 points recorded at the end of 2020, suggesting that investor appetite for local firms remains robust. Financial services firm Morgan Stanley expects $82bn in foreign money to flow into Middle Eastern equities in 2022, tracking higher energy and commodity prices, and waning developed market returns.
Addressing Challenges
This bodes well for the BIM’s continued efforts to attract a higher number of listings. In 2019 Sprinkle Holding, a blockchain-based fintech company, became the first company to make its BIM debut. At the time of the announcement, Sprinkle Holding was listed as a closed company and aimed to raise capital from an initial public offering (IPO) within two years. However, the Covid-19 pandemic hit shortly after Sprinkle Holding’s debut was announced, and it is unclear how this may have impacted upon the planned IPO.
In 2017, several years before the pandemic, Bahrain required a $10bn support package from Saudi Arabia to weather a downturn in oil prices, and the economy was still recovering in 2020, when GDP contracted by 5.8% due to the impact of Covid-19. Things are now on a more stable footing, with GDP recovering to 2.2% growth in 2021 and on course to expand by 3% in 2022, on the back of higher oil prices and the ongoing post-pandemic rebound. Crucially, the government is expected to swing back into fiscal surplus after 14 years of deficit financing.
SME Sector
Investors should be attracted by an SME sector that is gathering momentum amid considerable government support. SMEs account for almost 30% of GDP and provide employment for 75% of private sector workers. Recognising its importance, in 2017 the government formed the SME Development Board (SDB) to coordinate the efforts of the Ministry of Industry and Commerce, the Bahrain Economic Development Board, Tamkeen and other related agencies. This should help address key challenges by cutting red tape, improving access to talent and innovative technology, and allocating subsidies to address the high cost of technology acquisition. Tamkeen and Bahrain Development Bank (BDB) are cooperating to support SMEs with financing, training and advisory services. Entrepreneurs will also benefit from steps to ensure that SMEs secure 20% of the value of government procurements and a 10% preference on bidding for government services.
The Central Bank of Bahrain (CBB) plans to create a unit in the credit department dedicated to SME financing and is formalising a response to a call for consultation input from its licensee banks in 2021. New regulations on crowdfunding promise to enable the new local platforms, further catalysing start-up and SME growth. The BDB’s 2021 move to join the global SME Finance Forum, which aims to expand SME access to finance through knowledge exchange and innovation, also signals ongoing support.
Meanwhile, Bahrain’s Economic Recovery Plan (ERP) is set to consolidate growth over the medium term through a series of five-year sector plans. The Financial Services Development Strategy 2022-26, for example, targets increasing the share of financing allocated to SMEs from the domestic financing portfolio to 20%. This will be implemented in phases, rising in 5% increments each year from the target of 5% in 2022. The government recognises that SME growth is vital to meeting several key ERP targets, including driving a 20% increase in the number of IT start-ups, and broadening the base of Bahraini workers employed in high-value jobs.
BIM Targets
The ERP aims to encourage at least five companies to list on the BIM. As of June 2022 Sprinkle Holding was the only company to have applied to join. Aside from the pandemic, other contributing factors may include the specification that founders must lock up their shares for two years after listing, and a provision for any issuer to apply to the CBB for transfer to the main board six months after their BIM debut. Some SMEs may consider this a prohibitively short period of time, given that one of the BIM’s primary objectives is to avoid the drain on resources required to meet the main board’s more stringent and costly regulatory requirements.
While it may well be the case that this fast-track procedure needs to be reviewed for the BIM to find its niche, local banks have indicated it is not just access to finance that is holding SMEs back. Bahrain Islamic Bank has identified knowledge sharing as vital to ensuring that SMEs are aware of the opportunities available, and has hosted joint workshops with Export Bahrain, the government’s dedicated support arm for companies selling overseas, to introduce financing options. Efforts by banks and the government to digitise services, with more than 60% of the latter’s processes migrated online as of late 2020, are expected to help increase take-up of financing. The CBB is leading regulatory efforts to break down the barriers to accessing financial services. For example, in 2019 the bank issued directives providing a framework for lenders to obtain a licence to offer digital financial advice using artificial intelligence.
While no plans have been announced, it would make sense for the BHB and the SDB to coordinate with local banks and authorised BIM sponsors to move the listing application process online. An investor-facing portal could do the same for those seeking to inject capital. As it stands, potential investors are instructed to contact a broker, with little guidance on how local broker offerings are differentiated.
Nothing is more likely to galvanise interest in the BIM from SMEs and investors than seeing a highgrowth company seamlessly receive the additional financing required to achieve region-wide scale. The “Bahrain FinTech Ecosystem Report 2022 suggests fintech will drive a large number of investment exits through to 2024, with real estate and property technology companies providing fertile ground for venture financing. Stakeholders in the BIM could open talks with such companies to gauge their needs.
There is a clear and concerted effort to foster the successful development of the kingdom’s SMEs, with substantial progress being made to improve their access to finance. This should cultivate a robust pipeline of firms with high growth potential and generate interest from global investors seeking above-average returns in the MENA region. Whether the BIM becomes the market to connect the two may ultimately depend on efforts to enhance its appeal.
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