The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A $25m Inter-American Development Bank (IDB) loan is aiming to reverse an 85 percent rejection rate on small business financing applications, it was revealed yesterday.

Unveiling the strategy developed with the government and private sector for unlocking the growth potential of micro, small and medium-sized enterprises (MSMEs), the IDB said some $22m of this sum will be injected into a Credit Enhancement Facility (CEF) overseen by the Small Business Development Centre (SBDC).

This mechanism is designed to overcome the reluctance of commercial banks to extend loans to Bahamian MSMEs, especially those overseen by the SBDC who are “unable to meet collateral requirements”, by providing at least partial loan guarantees.

Besides incentivising banks and others to expand their MSME portfolio through this extra security coverage, the IDB said the project will also help make inroads into lending practices where 77 percent of credit issued in The Bahamas goes to personal loans - not the productive sectors of the economy, such as housing (mortgages) and commercial loans.

The IDB’s paper on its MSME “credit enhancement” project, which has been obtained by Tribune Business, said the “enabling environment for private sector investment” is one of the key structural weaknesses that The Bahamas must address to achieve higher GDP growth rates.

Linked directly to this is entrepreneur and MSME access to capital, a long-standing deficiency that continues to hold job creation and business expansion back, especially since 98 percent of Bahamian companies fall into this category.

Suggesting that the Credit Enhancement Facility’s creation was well-timed with the Bahamian economy poised to rebound, the IDB said: “In order to improve productivity and reverse a decline in external competitiveness, the government needs to address structural impediments, particularly an enabling environment for private sector investment.

“The Bahamas continues to lag most Caribbean peers in terms of distance to the frontier in the World Bank’s Ease of Doing Business Index, particularly due to onerous administrative processes, high costs of trading across borders, and low access to credit.”

It added: “One of the main constraints to private sector growth is access to finance. The Bahamas ranks 144th out of 190 countries, and 22nd among IDB borrowing countries, on an ‘ease of getting credit’ indicator, which is based on the absence of an established credit bureau and weak legal rights.

“According to another study, less than one-fourth of companies undertaking investment projects in The Bahamas have been funded by private banks, and access to credit is particularly harder for SMEs, which report rejection rates as high as 85 percent (higher than Barbados at 35 percent, Jamaica at 55 percent, and Suriname at 27 percent)>

As a result, Bahamian MSMEs had to rely heavily on internal funding sources and retained earnings, along with so-called “angel” investors and other financing forms. Some 50 percent of Bahamian MSMEs need such financing to expand their operations.

However, risk averse Bahamian commercial banks have tended to shy away from commercial loans, especially where MSMEs are concerned. This is despite the six institutions, including the three Canadian-owned banks, possessing a total $12.2bn in assets and solid liquidity and capitalisation, with the average capital adequacy ratio standing at 33.3 percent.

“Notwithstanding the high liquidity and capitalisation, credit to the private sector has been falling, particularly loans, with a decline of 5.6 percent over the last year [to September 2018] after annual decreases of 2.2 percent on average between 2014-2017,” the IDB paper said.

“The commercial banking sector typically does not prioritise MSMEs, preferring mortgages and consumer loans. Observing the sectoral distribution of credit in the banking system, 77 percent is categorised under personal loans, albeit some of these may include those destined for small business purposes.

“The financial sector’s restraint from lending to MSMEs stems from two main problems; the lack of collateral, and lack of information and financial statements from the firms, which substantiate banks’ appetite for other instruments with lower capital allocation. The trend for lower risk had been reinforced recently by the legacy of the prolonged recession and the non-performing loans it produced.”

While The Bahamas possesses a higher proportion of MSMEs than the Caribbean average, the IDB paper said they provided jobs for just under half this nation’s workforce - slightly less than the Caribbean average.

“In The Bahamas there are close to 17,000 business licenses, and it is estimated that MSME form 98 percent of them and hire 47 percent of all employees,” the IDB said, drawing on SBDC data.

“This reflects a strong dichotomy between a very small number of large companies in tourism-related activities and financial services that make a very significant contribution to economic activity, and a large number of smaller firms.

“According to one study, most firms tend to have less than 10 employees and engage in wholesale and retail trade and services, such as transport and storage, construction, personal and business services, communication, education and health. Also, the vast majority of agricultural and fishery producers are small.”

Still, the IDB said increased economic activity is set to “gradually improve the flow of bank credit”, with both the SBDC and impending creation of the Credit Bureau set to improve the enabling environment.

The Credit Enhancement Facility (CEF), which will receive $22m of the project’s $25m in total funding, is designed to boost MSME lending by addressing bank concerns over sufficient collateral by providing sufficient financial guarantees to underwrite their credit.

“Banks have initially confirmed their interest in participating based on the operating mechanism contemplated, which among other issues assures automatic drawdown from the CEF after a certain period of non-payment, and the improved information and skills of the MSME given SBDC support,” the IDB added.

“Financial institutions and end-beneficiaries of the loans will be established in the operating regulations. The target beneficiaries are credit constrained MSMEs with viable projects that have received advisory support from SBDC.”

The remaining $3m will go to expanding the business advisory services, mentorship and incubation services offered by the SBDC, which has already registered some 1,868 firms. The initiative is scheduled to launch this year.