#BTColumn – The role of small firms in the development agenda of SIDS – Part 1

During Small Business Week 2023, stakeholders had the pleasure of hearing Christopher Sinckler, alternate executive director with the World Bank Group, share his perspectives on the Role of Small Firms in the Development Agenda for Small Island Developing States (SIDS). His experience within the global financial and development system provided the backdrop for a sterling presentation on the outlook needed for SIDS in an environment of perennial exogenous shocks affecting these vulnerable economies. Still on the theme of transformation, the presentation concretised what the Small Business Association of Barbados and its partners identify as key areas to be addressed at the policy and programmatic levels for the development of micro, small and medium enterprises.

Business Basics will present an extract of Mr Sinckler’s lecture in two parts, highlighting three areas of interest to strengthen the MSME ecosystem. These are climate resilience building, democratisation of finance access, and business facilitation and inclusion.

In most SIDS, including in some Caribbean states, there is a lack of clearly defined and integrated climate resilience plans within the private sector and especially among MSMEs. In some countries for example, it is estimated that as little as 19 per cent of SMEs have active adaptation and resilience-building plans, while governments have struggled to find the finance necessary to assist these firms to pull such plans together.

The serious fallout for plants, investment income, jobs and suchlike from direct impact climate events is well known. There are also the potentially disruptive effects of supply chain interruptions and cost effects when events occur in critical source markets. This is so for operators in both goods and services markets. It is therefore critical for sector leaders to work collaboratively with domestic authorities, regional organisations and international institutions to help small firms build awareness of and programme expansively for climate change events.

What is the defined plan agreed between critical stakeholders in the sector with private and public financiers and investors should an event occur? We noticed, for example, that during the COVID-19 pandemic, the major private financial institutions and several public sector entities introduced· temporary “pause clauses” on loans and some recurrent payment schedules for companies and individuals to help them through that tough period. This was good!

In the context of climate resilience building, how much of this effort is currently codified in policy and practice? How many MSMEs across the region can confidently say that they have clearly articulated and agreed “pause clauses” in their debt instruments with financial institutions or even government lenders, for example? Beyond “goodwill”, there is a need for well-considered and negotiated clauses standardised at the policy level and individualised at the operational level to suit the firm or company circumstance.

Special measures like these can mean the difference between a business surviving or going under completely, and unfortunately, across many SIDS the latter has, in fact, been the case.

The second critical developmental area is the democratisation of finance access. Emerging literature is showing that despite whatever progress has been made over the years in SIDS to get more women involved in business ownership and administration, women continue to find it unpalatably difficult to access financial resources to start, run and sustain business operations. In fact, a recent edition of its quarterly, Caribbean Economics, the Inter-American Development Bank in exploring the issue of financing for small firms noted that: “Not surprisingly, two-thirds of Women-owned Firms (WoFs) report access to finance as a major or severe obstacle to their business…. In most Caribbean countries, more than half of WoFs report that financial costs (i.e. interest rates and collateral) were either a major or a very severe obstacle to growth. Approximately 39 per cent of WOFs in the Caribbean (excluding the Organisation of Eastern Caribbean States) view required collateral as a major or severe obstacle to doing business.”

Indeed, should this situation be allowed to hold, it will seriously challenge Sustainable Development Goal 5 which speaks to gender equality. Most of the new businesses being created in SIDS, including in our region, are being done by women. There is no lack of creativity, drive or innovation among women but there continues to be a shocking number of obstacles to access of capital. Where such access does occur, the costs of the capital are so high that it often leads to servicing failures. For example, in some jurisdictions, too many women can only get funding or credit for their businesses if they present in conjunction with a male.

It’s a serious development issue for SIDS generally because if women cannot access resources to create employment for themselves and other women, the feminisation of poverty will continue to adumbrate the rate of success at beating income and gender inequality. Small firms and businesses have been doing well in the region in changing that narrative, and regional governments have been in the forefront of providing several venture capital opportunities to women and small businesses, but more must be done to help them along.

When we reflect on the number of small businesses in operation and the tremendous contribution which they make to development in our countries, and juxtapose that with the number of high-quality and well-capitalised non-bank financial cooperatives in SIDS, there seems to be a disconnect somewhere. What’s the disconnect?

It is understood that regulatory and other challenges constrain cooperatives, especially credit unions, from being more expansive in their support for small businesses and businesses generally. However, it must also be front of mind that black-owned financial cooperatives across the Caribbean and in other SIDS cannot for much longer be held back from the historical responsibility to support MSMEs which are predominantly black and local. How much longer can any of our countries continue to rely on or expect foreign-owned and controlled banking institutions, or indeed governments, to meet the financing needs of small firms while our indigenous financial institutions are restricted or constrained in their attempts to do so?

Many financial cooperatives do want to help and are in fact finding ways to do so, but we also know that current legislation severely limits such efforts across several jurisdictions. It is a matter that requires deeper attention and collaboration between sector leadership, government, and regulators at all levels.

Mr Sinckler’s lecture can be viewed at – https://youtu.be/jTPO-cQUfE8