By: Tamika Dorival-Phillip
So often, as citizens and entrepreneurs of the Caribbean Region fortunate to have Small-Medium Enterprises (SMEs), making an average annual gross income of XCD $ 65,000.00 to XCD $ 120,000.00 and above, we are grateful for the banking services and lending facilities extended when we engage the services of financial institutions.
We do not consider, however, the vast majority of SMEs that have been denied access to financing due to challenges in meeting banking requirements. This reality is true for many young entrepreneurs, unable to qualify for financial statement lending.
In this article, I refer to Berger and Udell (2006) as they defined financial statement lending as “a transaction technology based primarily on the strength of a firm’s financial statements.” I beg you to imagine how many young SMEs would be able to produce financial statements, or are already financially strong, before approaching a Financial Institution? To be frank, not many.
A reasonable solution needs to be reached to support the youngest entrepreneurs to get off their feet and to ‘break even’ at some point within the five year growth period for new business startups. We have seen some initiatives across the region which seek to make access to financing easier and more accessible for all but, unfortunately, these come with very high interest rates which may be counterproductive for all interested stakeholders, especially the young SMEs.
Interestingly, in a survey conducted in 2015 to assess to what extent bank financing policies hindered the SMEs ability to access finance in the Commonwealth of Dominica, “collateral required” and “proving credit worthiness” received the highest percentage as the contributing factors in terms of banking policies that hindered successful SME credit applications.
The results of the survey also indicated that more than fifty percent (50%) of the SMEs interviewed received access to financing, but were generally dissatisfied with many of the financial institutions’ processes. Some of these processes included, but are not limited to collateral required, proving credit worthiness, showing evidence of ownership of business plans and other documentation required for submission to qualify to receive a financial institution lending facility.
Additionally, international banking covers different types of facilities which include supplier credit, debtor finance, invoice discounting, factoring, bills of exchange, overdrafts, revolving credit facilities, medium term loans and commercial paper. The question remains, however, why do most SMEs engage the regional financial institutions for term loans?
Another interesting observation is the ease in obtaining a term loan to purchase an automobile but not to start a business. Financial institutions seem to prefer providing credit to purchase “assets” that can be repossessed in the event of failure to meet the debt obligations.
Perhaps it would be worth exploring forums geared towards selling a product that suits the needs of the buyer. This requires a paradigm shift for financial institutions within this developing region, but it is worth consideration as this may stimulate positive results for all stakeholders. This is said taking into consideration the fact that financial institutions are partially responsible for the types of services offered as they do shape aspects of their own agenda; albeit they are governed by Regulations and Central Banks.
Earlier research on monetary policy indicated that Monetary Policy Transmission is based on two explanations: the Balance Sheet Channel and the Bank Lending Channel, referred to as the Credit Channel of Monetary Transmission - Bernanke and Gertler (1995). Berger and Udell (2006) also document the Framework for Lending Technologies, described as: 1. Transaction Lending 2. Relationship Lending
This Framework for lending seems to be a common feature of financial institutions’ policy on lending. For example, in transaction lending financial institutions lend to borrowers based on hard quantitative data but in relationship lending financial institutions lend to opaque borrowers based on soft qualitative information. Some researchers view the latter as highly subjective creating an unleveled playing field for SMEs to qualify for access to finance. Additionally, in recent years, Caribbean regulators have been actively working on the adoption of International Accounting Standards for banks and core principles for effective banking supervision. I refer to the Caribbean Community’s (CARICOM) Bank Supervision Harmonisation Project which speaks to a legal framework to include provisions for capital, regulations for shareholding, bank holding companies, large exposures, audit requirements, special powers, prudential regulations, supervision of non-bank financial institutions, deposit protection mechanisms, financial reporting requirements, on-site and off-site inspection procedures and training. International Monetary Fund working paper (2001).
These initiatives suggest that the influence, and focus, is geared towards monitoring and protection of a Financial System that appears to have a solid foundation but could suffer fatal blows if left unchecked. While this approach may be a good management principle, without the customer of the financial service there would be nothing to monitor and therefore, more value needs to be placed on the customer to improve the services and the customer’s experience in obtaining lending facilities from financial institutions.
Through evidence we can recognise that uncontrollable factors and theoretical literature influence the services provided by the financial institutions, however the empirical literature which exists indicates that there are scientific approaches that are used to understand the characteristics of SMEs in relation to access to finance. In South Africa, Fatoki and Asah (2011) identified collateral, managerial competency, business information, networking, age of the firm, size of the firm (number of employees), demographics, age of the owner and location of the firm as characteristics which influenced the success of credit applications of SMEs. Fatoki and Asah (2011) observed that SMEs in South Africa established for more than five (5) years had a far better chance of success in their credit applications compared with SMEs established for less than five years.
Additionally, Abdulsaleh and Worthington (2013) document and observe that to determine the stage of the business life cycle of an SME, the age and the size of the SME are paired together. Abdulsaleh and Worthington (2013) went on to indicate that size of an SME can be measured by the total assets, sales and or number of employees.
In developing regions, such as ours, we similarly observe a high concentration on financing viable new businesses which fall within the 5 - 10 year range. Undeniably this realisation is valuable, indicating that there is a correlation between the age of an SME and its success with credit applications. Learning from the observations of other researchers, that the stage of the business life cycle can be determined by using scientific approaches, our region is able and should develop strategies aimed at finding solutions for SME financing challenges. ¤ :start
Tannel George [email protected]
By: Tamika Dorival-Phillip