Tunisia ministry of industry, energy

Supply constraints.

• 
  Credit risk is high in Factoring. Non-payment rates for invoices are usually higher for SMEs than they are for large companies. Factors must meet the high cost of assessing creditworthiness;
  
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  Fraud (false customers, false invoices) is a serious problem in the sector, irrespective of country. There is a high risk of collusion among factoring companies’ customers. This risk is worsened in Tunisia by the weak legal environment and the non-existence of credit bureaus and rating agencies.
  

3.4. SME financing through the stock market.

78. In December 2007, an alternative market (Marché Alternatif) was launched to facilitate SMEs’ access to financing. The alternative market is in keeping with the rationale underlying similar markets in other countries, e.g. Alternext in France and Nilex in Egypt. In the first quarter of 2009, only two industrial⁴¹ enterprises were listed on the alternative market. The hope is that once this newly-created market is fully up and running, it will help to diversify financing sources (and therefore reduce the cost of capital), be a vector for the transformation of SMEs, which are often family enterprises, and increase the notoriety of firms that participate in the market. In line with international best practices, the requirements for SMEs’ entry into the alternative market have been adjusted to their size and are less stringent than those applied to larger companies listed on the primary market. Table 5 summarizes the key differences in this area.

Table 5. Specific conditions governing entry to the primary and alternative markets.

Primary Market	Alternative Market
The company’s business must be profitable in the two financial years preceding its entry.	The profitability condition is not imposed.
Securities held by the public must be distributed among at least 200 shareholders, on the day of the IPO at the latest.	Securities held by the public must be distributed among at least 100 shareholders, on the day of the IPO at the latest.
The company must have a minimum capital of TND 3 million on the day it is floated on the market.	No minimum capital requirements.
	The company must appoint a list sponsor for the duration of its existence on the alternative market. The sponsor’s term of service must not be less than 2 years.

Source: BVMT.

79. Nonetheless, the conditions relating to: (i) the existence of a manual for organizational procedures, processing and disclosure of financial information; (ii) existence of an internal audit and administrative services structure; (iii) the presentation of a 5-year business projection; and (iv) the publication of a CMF-approved prospectus, are still imposed on SMEs.
80. Even though most of the features of this second market conform to international best practices, there are still various problems that need to be addressed. Some of these problems are systemic to Tunisia’s stock market, and others are specific to the alternative market.

Institutional constraints on the stock exchange.

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  The Tunisian stock exchange (BVMT) remains very modest in size; market capitalization of listed companies is at 15.9 percent of GDP in 2008, i.e. more than three times smaller than the market in Egypt and almost five times smaller than in Morocco (Chart 23). Similarly, there was no major change in the number of domestic companies using the stock market as a source of funding from 2003 to 2008 (Table 6). According to CMF, the possibility of obtaining bank credit and the family culture of Tunisian companies are the two main factors that are holding back the development of the primary market. Even though the alternative market could, in principle, be attractive in a bank credit environment that is not very favorable for Tunisian SMEs, small family enterprises’ low appetite for capital market financing may have a negative impact on the growth of this market;
  
• 
  Market liquidity is relatively low in Tunisia, as shown by the liquidity and turnover ratios (Table 6). Low liquidity markets make entry and exit difficult for investors and are therefore less attractive. It is costly for firms to raise funds on low liquidity markets, for investors generally demand a premium in exchange for buying shares, which creates a form of aversion to this type of financing. In this context, the low liquidity of the primary market increases the risk of low liquidity on the secondary market; all the more so because the less liquid shares typically come from SMEs.
  

Chart 23. Market capitalization of listed companies (Pct. of GDP).



Source: DDP Database, World Bank, updated October. 2009.

Table 6. Indicators of Stock market development.

Source: DDP Database, World Bank, updated October. 2009.

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  Investor protection remains still below global standards (Doing Business 2010). The investor protection index measures the strength of minority shareholder protections against misuse of corporate assets by directors. It describes three dimensions of investor protection: transparency of transactions (Disclosure Index), liability of directors (Director Liability Index) and shareholders’ ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indices range from 0 to 10 (highest score). Tunisia ranks 73 out of 183 economies on the overall Protecting Investors index with a score of 5.3 (compared to a regional average of 4.9 and a score of 5.8 for OECD countries). This ranking is the result of a relatively low score on the disclosure of appropriate information. Tunisia is still (relatively) behind best practices in this regard. This is detrimental, for experience has shown that better investor protection is positively correlated with an increase in market capitalization (Pasjuste 2002, Shleifer and Wolfenson 2000). This therefore impacts the secondary market;
  

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  Tunisia’s financial information reporting and disclosure system still diverges significantly from international standards (ROSC 2004). Various studies (Khanchel El Mehdi, 2007, CIPE 2005) have shown that there is room for significant improvement in corporate governance in Tunisia and that there is a sizeable gap between the law and its application. Financial industry professionals underline a lack of confidence in the current financial information reporting and disclosure system;
  
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  Obstacles to the participation of foreign investors need to be progressively removed. The cap on foreign property (currently 50 percent without government approval) is an obstacle to market development. Experience shows that increasing openness to foreign capital improves firms’ capacity to obtain capital and boosts market liquidity (Levine and Zervos 1998). There are no such restrictions on the other markets of the region. In Egypt for example, foreign capital accounts for roughly 48 percent of stock exchange capitalization, compared to roughly 28 percent in Tunisia.
  

Demand constraints on the alternative market.

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  There is a lack of information and awareness of the fact that the alternative market could be a source of long-term financing for SMEs. In an environment in which there are substantial cultural bottlenecks stemming from the reluctance to dilute control, as is the case in family SMEs, it is necessary to make special efforts to promote this second market. But that is not sufficiently the case yet;
  

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  A large number of SMEs are highly reluctant to disclose the information required for market flotation. As the FSAP notes on Tunisia (2006), most family SMEs remain unwilling to tap into the stock market and the second market despite the fact that the 2005 financial transparency bill reduced the discrepancies between listed and non-listed firms in the area of certification and disclosure. Owners of SMEs – particularly family SMEs – are strongly opposed to the disclosure of their business plans and their financial information because they usually fear a loss of competitive edge and the possible tax ramifications of such disclosures (Poutzioris and Wang, 2004).
  

• 
  The perception that there is a high cost of entry to the alternative market is a strong deterrent to potential candidates. IPO costs are the same regardless of the size of the firm and potentially prohibitive in certain cases.