At a recent social gathering, I had an opportunity to interact with a small businessperson and a banker. As I was a banker for a short period of my working life, it was very interesting to learn that since I left that industry, banks appear not to have changed in their view of small and micro-businesses. In the outside world, the financial systems and regulatory framework are somewhat more accommodating than the ones which currently exist in Barbados.
Over the years, Government has encouraged people to get into business. If we can remember, the Barbados Development Bank was created to provide long–term financing to new areas of economic development. Indeed, the small hotel sector in Barbados owes its existence to this institution. The commercial banking sector’s reaction to the small and micro-business sector was cool for the most part. There may be several reasons for this, but the one most used is that banks have a responsibility to prudently lend their depositors’ funds. If banks perceive that lending to particular economic sectors is high risk, they will not provide financing to such sectors.
Banks are generally conservative and prefer getting into sectors where there viable businesses with proven track records. Banks require that businesses and the individuals who own them have the required collateral and that the owner/investor has the necessary business acumen to make a success of the enterprise.
However, economic studies have demonstrated that most of the creative energy and innovation have come from the small and micro-business sector. This has been proven in places such as Bangladesh where the small and micro enterprise sector has enabled persons to lift themselves out of poverty. A reasonable question to ask is why Barbados doesn’t appear to have a vibrant small and micro-business sector.
Part of the problem lies in our enabling environment. Most banks in the region are foreign-owned. It can be argued that the banking sector may have a stake in our development only to the extent that it provides financing to profitable entities.
National development is the province of the elected governments. It is their obligation to facilitate development through providing economic incentives via tax benefits, by facilitating securities legislation that encourages people and institutions to invest in securities of fledgling enterprises, and ensuring investors are protected by the proper regulation of securities markets. In addition, business owners should be provided some degree of protection from creditors through bankruptcy statutes.
Banks tend only to provide financing to enterprises where the assessment of the risk of providing such financing is found to be reasonable, and they can recoup such financing with a reasonable profit. It must be remembered that banks lend their depositors’ funds and must, therefore, be very cautious in providing financing to borrowers. I realise that this assessment of what the banking sector does may disturb some readers, but unfortunately it is true.
That same banker made the point that our banking sector tends not to be involved in the management of these enterprises. Part of the challenge here is that as long as the borrower has adequate collateral to cover the loan, banks feel comfortable in lending. If the business fails, banks recover the loaned funds by the sale of the collateral.
Banks also prefer that borrowers seek independent business advice. This is done to reduce, I suspect, the requirement that they actively participate in the management of the enterprise. This is in contrast to some jurisdictions where banks actively participate in the management of some enterprises, as in Germany, for example. This make some sense as the banks have a stake in the success of the enterprise and failure of the enterprise will place the bank’s loans in jeopardy.
One therefore wonders why this wasn’t done here. Part of the reason may be that the banks, if foreign-owned, may have little knowledge of the local economic environment. In other words, there is information asymmetry.
Given that the financial markets are underdeveloped and there is a lack of bankruptcy statutes in individual jurisdictions, this probably led to many banks determining that involvement is too risky an option. Also, active participation in the management of an enterprise involves some degree of legal risk. For example, if the owners of the enterprise rely on the advice of their banker who actively participates in the management of the enterprise, and the enterprise fails due to such advice, the bank may find itself legally exposed.
(Edward Hunte is an attorney-at-law who holds an MBA with concentrations in Economics and Finance; he was also an Economist in the Economic Affairs Division of the Ministry of Finance.)