By: Kimberly Ramkhalawan
August 9, 2022
A report compiled by economists at the Inter-American Development Bank (IDB) says that there are many impediments when it comes to accessing finance for business in the region. The report titled, “Finance for Firms: Options for Improving Access and Inclusion” says a lack of inclusive financial systems could be attributed to the increase in poverty, income inequality and also stagger economic growth.
The study examines six Caribbean countries, including The Bahamas, Barbados, Guyana, Jamaica, Trinidad and Tobago and Suriname, and cites a number of reasons, from gender bias, to size of firms but with particular interest in the structure of the financial sector, as it says “there is strong evidence that deeper and more efficient financial systems help increase growth and reduce poverty and income inequality”.
The IDB and partner agencies suggest that firms across the Caribbean saw a considerable deterioration in access to credit and related products at the end of 2020. It notes while the pandemic may have brought on issues of its own for most Caribbean countries, other economic and financial concerns have emerged since 2020, including the global acceleration of inflation driven in part by commodity price shocks and supply-chain issues. It also adds that following what it calls “a period of extraordinary policy intervention and accommodation”, it makes note that many governments and central banks throughout the world have begun unwinding emergency stimulus measures, while simultaneously tightening rates and financial conditions to fight rising prices. This the IDB says now brings on “new and increasingly severe financial headwinds”.
Taking umbrage with current Caribbean financial systems, with an understanding that ideal systems do “consist of different segments, often centered around deposit-taking institutions and other credit providers, public capital markets and contractual savings institutions and a variety of clients and purposes, it notes as economies develop, the structure of the financial system also develops.
And while ideal, and this has been observed in the Caribbean countries, to varying degrees, with all six countries analyzed at having stock exchanges of reasonable size relative to GDP, “they tend to be illiquid”, or where “market capitalization (value of all outstanding shares) relative to GDP”. Turnover ratios (trading volume relative to market capitalization) are very small (in the single digits) relative to regional or middle-income country averages. In 2020 (latest available data), stock market capitalization in Trinidad and Tobago (91 percent of GDP), Jamaica (85 percent), Barbados (64 percent), and The Bahamas (48 percent) compared well with the Latin American and Caribbean average.
“Newly available data from the end of 2020 are compared with a previous vintage survey from 2014, providing important insights into how circumstances have evolved, especially considering the COVID-19 shock to businesses and economies across the region. The analysis suggests that financial sectors and firms across the Caribbean face outsized challenges, particularly when compared to peers across the globe”. It adds that “the COVID-19 crisis appears to have further constrained access to finance, while smaller firms appear to face more significant hurdles than larger firms; and women-owned and/or operated firms face more severe challenges with respect to financial access than other firms across the region.
For most Caribbean countries the proportion of firms surveyed that reported access to credit as a significant barrier to their operations and activities increased between 2014 and 2020—in some cases, considerably.
Firms surveyed in each of the six Caribbean economies analyzed reported a tightening of financial conditions with respect to access to credit. The IDB research shows “76 percent of firms in Suriname and 72 percent of firms Barbados reported issues such as significant collateral requirements driving major or very severe obstacles to their performance and ability to do business”, marking a move up from 22 percent and 35 percent, respectively, since reported in 2014. It noted that similarly troubling developments are also reported for the other countries. “Firms from most countries across the region also report a deterioration of conditions based on the cost of credit. Over 40 percent of firms in Barbados, Guyana, Suriname, and Trinidad and Tobago reported high interest rates as a significant barrier to their operations in 2020. For most of these countries, these concerns became more acute between 2014 and 2020. The only country for which firms in aggregate reported this being less of a constraint in 2020 than in 2014 was Jamaica, though even there, 36 percent of businesses flagged this as a concern.”
However, coming to the end of 2020, different categories of firms report just how much access to finance has affected. Small firms, categorized as having less than 20 employees, reported severe difficulties than larger firms, those having more than 100 employees in Guyana, Suriname, and Trinidad and Tobago.
Responses were more consistent in terms of barriers driven by high costs of credit, with small firms from five of six economies reporting more severe challenges than large firms. Only large firms in The Bahamas reported more severe constraints than smaller enterprises.
The survey also tackled inequality in women owned firms, WOFs, accessing funding, 13 face larger financial constraints than other firms. Two-thirds of WOFs report access to finance as a major or severe obstacle to their business. In this respect, Guyana, Suriname, and Trinidad and Tobago have the largest gaps between the proportions of WOFs and other firms with this view
These include lines of credit, overdraft facilities, and credit cards. However, WOFs only accessed 1.3 percent of medium-to-long-term loans (by volume) granted in the same period, and notes it remains consistent with the share of these types of companies in the Caribbean.
In most Caribbean countries, more than half of WOFs report that financial costs, such as interest rates and collateral, were either a major or a very severe obstacle for growth.
The countries where more WOFs cite the cost of finance as a major obstacle to business (relative to other firms) include Guyana, Jamaica, and The Bahamas.
Of these countries, the largest disparity between women-owned/women-led firms and other firms is in Jamaica followed by Guyana. Interestingly in some of countries where more WOFs cited access to finance as a major obstacle (Barbados and Suriname), the cost of finance is a less prevalent obstacle relative to other firms. However, the reports cites Trinidad and Tobago as a separate case, where its overall reported prevalence for the cost of finance as a barrier is very close to other firms (41 percent), while 37 percent of WOFs diagnose this barrier as very severe, recorded as the highest proportion in the region.
Broader Impediments to Financial Access and Inclusion, the IDB says what remains consistent across all jurisdictions was “the lack of financial access is driven by multiple factors that will require actions and policies across several policy and private sector areas”. It says this demands “concerted efforts by governments, banks, and firms in each country, as well as support from external partners to help design strategies and catalyze new funding sources both from within and abroad”.
Solutions it also recommends for Improving Financial Access, include Policy and Market-Based Interventions needed through “Governments, development finance institutions (“DFI”), private equity and venture capital funds, commercial banks, credit unions, microfinance institutions, insurers, leasing companies, and institutional and individual investors through improving financial, gender, and social inclusion. It says these counterparts can unlock capital and deliver innovative financial solutions, while other players can guide MSMEs on how best to navigate this complex ecosystem of financial players. Governments and development finance institutions can offer solutions that effectively serve to increase options, while de-risking the segment for some of the other ecosystem players”.
It adds that access to finance solutions include “senior and subordinated loans to financial institutions (both secured and unsecured), and equity investments to contribute to the development of the private equity ecosystem for growth-oriented and blended finance”. So far IDB Invest has partnered with JMMB and Republic Bank for developing the SME sector, while it has invested US$10 million in equity in the SME Growth Fund, which it says aims to provide risk capital to growth-oriented companies in the English-speaking countries of the Caribbean Common Market, CARICOM.