The Small Business Association (SBA) of Barbados joins stakeholders in congratulating the Barbados Trust Fund Ltd on its fifth year of operations, which is being celebrated this month.
The Trust Fund is indeed a success story with a credible performance over its five years of existence that cannot be easily matched by others in the microfinance space. The state-owned company has disbursed some $20.6 million to over 4.5k businesses, generating over 6.5k jobs. Such results have not been surpassed by any other microfinance institution. The business case has therefore been made for this type of entity and long may it continue to support startups and early growth businesses.
It is against this backdrop that some analysis is needed on the financing of micro, small and medium enterprises (MSME) development in this country. For though we celebrate the achievement of the Trust Fund to date, evidence shows that the demand for micro-lending outstrips the supply. This is a perennial issue that the SBA has called to the attention of policymakers and financiers for the past two decades, unfortunately with limited success. If an investment of $20 million can create and sustain over 6.5k jobs, imagine what $100 million can do!
The level of innovation and creativity that can be unlocked through easy access to affordable finance cannot be overstated. Much research has been done to substantiate the rapid growth achieved by economies that are able to facilitate entrepreneurship and self-employment activity. The converse is also true. Countries that have failed to adequately capitalise MSME development have struggled to sustain economic growth and produce new industries. More importantly, such jurisdictions perform poorly in the areas of business innovation, research and development and internationalisation.
Generally, there are two major forms of financing – debt and equity. A number of derivatives of these have been developed over time to enhance the value proposition of finance institutions, to cater to emerging markets and to provide the best yields for financiers.
Admittedly, there has not been much advancement locally with equity products; however, every effort must be pursued by investors and institutions to continue in this vein of development. Greater education and opportunity will be needed to foster an investment culture on the island. Venture capital, angel investors and the capital market must be pursued unrelentingly, to address the build-out of an equity space in the financial ecosystem.
Debt is still the low-hanging fruit and will be looked upon for some time as the primary source of financing. While this may be true, debt financing is not a one-size-fits-all for the sector.
Two variables ought to be considered in the narrative on debt – firms must access the right instrument for the business depending on its stage in the growth cycle, and the size of the financing pot needs to be increased to make accessibility more plausible for those seeking finance.
For some time, commercial banks have taken a beating for their perceived risk aversion to MSME lending. Whereas some banks have demonstrated a lack of ingenuity in supporting industrial development, the fact is that these institutions are not best suited for start-up financing due to the high levels of risk. The unfortunate reality is that too many budding entrepreneurs and emerging businesses approach commercial banks as their first choice of lender. This should be discouraged. Start-up and early growth firms need financing from entities like the Barbados Trust Fund Ltd, Fund Access, to name a few, where securitisation is simple and even nonexistent. Startups and early growth firms often lack a track record, significant collateral and a well-structured operation, areas that the commercial bank will consider in their underwriting. Another type of entity is required to take on this risk.
This highlights the second point of expanding the pool of funds available. Recognising that mainly government-capitalised agencies are able to extend the risk required on startup and early growth firms, significant capital is needed to cater to the increased demand for financing MSME development. An injection of $20 million annually will not cut it. At a minimum, the sector requires $75 – $100 million in seed financing per annum to unlock the innovation required and to create the entrepreneurial environment desired.
All entrepreneurial economies have these common denominators – the ability for startups and early growth firms to access affordable credit, a culture of risk and tolerance for failure, and the innovation and incubation of business ideas.
Some will quickly argue that the government is unable to sustain huge outlays of capital for on-lending to firms, particularly in an austerity programme. Though over $300 million was found for the tourism sector, the point will be conceded that this may not be feasible for a government to do on its own.
Over a decade ago the SBA developed a proposal and presented to several financial institutions to seed a fund, with a portion guaranteed by the government to create a special-purpose vehicle to finance MSME development. The business case made was that the equivalent of 0.5 – 1% of the NPL portfolio of these financial institutions to capitalise a programme to underwrite credit for small firms, will assist in creating viable firms that can over time access bank credit and thus reduce overall non-performing loans. A fund capitalised to the tune of $100 million in two years was contemplated. The obvious assumptions underpinned the business case – the fund would be operated profitably, good governance and accountability would obtain, and there would be demand from the MSME sector and adequate deal flow. Had such a project been given the opportunity to emerge Barbados may have seen an explosion in entrepreneurial activity, creativity and innovation, and an improved quality of life for citizens.
The business case still remains that to create an entrepreneurial economy in Barbados, the issue of
financing MSME development must be addressed, conclusively.
The Small Business Association of Barbados (SBA) is the island’s non-profit representative body for micro, small and medium enterprises (MSMEs). Connect with the SBA: https://www.sba.bb/sba/
