By NEIL HARTNELL
Tribune Business Editor
The Bahamas faces a $180m “finance gap” in providing capital to small businesses, the Inter-American Development Bank (IDB) has revealed, as its project covers just 17 percent of demand.
The multilateral lender, in documents detailing its $25m initiative to enhance credit availability for micro, small and medium-sized enterprises (MSMEs), said there was a “considerable” capital shortfall that must be “addressed by the financial system in The Bahamas”.
Yet the IDB’s own papers, obtained by Tribune Business, showed why private lenders are unlikely to step into the breach by highlighting their risk averse nature. It noted that Bahamian MSMEs reported the highest “rejection rates” in the Caribbean of 85 percent when they approached commercial banks for loans, meaning that over four out of every five applicants were turned away.
And 77 percent of credit extended by the Bahamian banking system is classified as “personal loans”, which are typically taken out to finance the purchase of vehicles and other consumer goods such as furniture, appliances and vacations.
Personal loans have become increasingly popular among commercial banks, especially the Bahamian-owned ones, as they can be secured via salary deductions and are thus viewed as less risky than housing mortgages and credit to businesses.
Yet the IDB documents effectively expose how the private sector, the most productive sector of the economy and which is responsible for all Bahamian economic growth and job creation, is being starved of the capital it needs to fulfill its key functions. And those most vulnerable to this are the small businesses and entrepreneurs vital to increasing output.
An analysis of likely demand for the IDB-financed “credit enhancement” enhancement initiative, which will provide $22m in guarantees to underwrite Bahamian commercial bank lending to the small business sector, drew on the Government-owned Small Business Development Centre’s (SBDC) estimate that there were just over 22,500 MSMEs in this nation in 2018.
With the SBDC estimating that the average loan under the initiative would be $62,680, the IDB’s analysis said 50 percent of small businesses surveyed had not applied for a loan or credit line the previous year.
Putting these figures into the mix, the IDB came up with a “conservative” $215m total credit demand among Bahamian MSMEs, also factoring in the proportion who had invested over the past year via the likes of internal funds, supplier credit and customer advances.
“We have a range of a potential demand that could go from $215m to $605m. Following a conservative approach, we opt to consider for this analysis the smallest amount, noticing that is smaller than the one derived from the most direct question regarding credit constraints,” the IDB concluded.
“Given these calculations, we see that the $35.7 million that the programme will mobilise (backed by the $22m destined for guaranteeing loans to MSME) would correspond to 16.6 percent of the potential demand of $215m.
“Thus we can conclude that there is enough demand for the funds of the programme, and that there remains a considerable finance gap to be addressed by the financial system in The Bahamas.”
It is doubtful, though, whether the risk averse commercial banking industry will fill this gap. There are also questions over whether it is the right industry to do so, given its obligation to protect depositors’ funds by not engaging in the sort of risky lending some entrepreneurs and small businesses represent.
The IDB noted: “One of the main constraints to private sector growth in The Bahamas is access to finance. The Bahamas ranks 142nd out 190 countries, and 22nd in IDB borrowing countries, on the World Bank’s ‘ease of getting credit’ indicator based on the absence of an established credit bureau and weak legal rights.”
While the credit bureau deficiency is being addressed, the multilateral lender added: “According to one 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.”
This was said to be higher than similar rejection rates of 35 percent in Barbados, 55 percent in Jamaica and 27 percent in Suriname, with only Trinidad & Tobago found to turn down small business credit requests with the same frequency as The Bahamas.
“According to the latest enterprise survey of The Bahamas, only 14.6 percent of firms used banks to finance investments versus 38 percent for Latin America and the Caribbean at the time, and 78.3 percent of firms used supplier or customer credit to finance working capital (versus 58.8 percent in the region),” the IDB added.
“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 a low risk appetite from the banks. This trend has been reinforced recently by the legacy of the prolonged recession and the non-performing loans it produced.”
Digging deeper into these woes, the IDB documents said interest rate spreads had “widened significantly” since the 2008-2009 recession in an environment where commercial banks sought “higher risk premiums” for lending to borrowers whose creditworthiness is uncertain.
“Despite ample balance sheet space, banks are cautious in making new loans. Persistent weakness since the global financial crisis in economic activity, coupled with a debt overhang problem, has strained households’ debt-servicing capacity, constraining their access to credit,” the papers said.
“A Central Bank survey of bank lending conditions consistently shows an excessively high debt-service-to-income ratio as the most common reason for rejecting loan applications. At the same time, weak economic activity has also affected businesses’ profitability.
“Therefore, banks have been reluctant to lend in an environment where the only recent development of a credit bureau and the absence of book-keeping tradition, combined with a prolonged recession, make it more challenging to screen borrowers.
“Large intermediation spreads, which in addition to limited competition also reflect a risk premium on lending, have widened significantly since the global financial crisis. These factors have kept credit to the private sector, excluding non-performing loans, broadly flat.”
The IDB papers reveal that it has also been asked by the Minnis administration to strengthen the SBDC’s ability to “efficiently carry out its mandate” as the agency responsible for working with small businesses and entrepreneurs, helping them to prepare business plans, access needed professional expertise and facilitating access to potential financing.