Letters & Opinion

Don’t Bank On Banks

Brian M. Francis (Ph.D)AT a time when the economies of most Caribbean countries are struggling to generate, much less sustain, any meaningful levels of real economic growth, our commercial banks with a history of ridiculous lending policies and strategies seem to be getting a pass from a highly unlikely source, at least in this writer’s estimation.

A recent article in the Barbados Business Authority, under the caption: Entrepreneurs, don’t depend on banks, the Chairman of the Board of Scotiabank Barbados, Dereck Foster, is reported as having advocated that entrepreneurs should “be both pragmatic and strategic when they are seeking financing for their start-up ventures.” Those statements were made during the latest Scotiabank Business Success Series at the Lloyd Erskine Sandifordcentre, St. Michael, Barbados.

The story carried in the Barbados Business Authority covered Mr. Foster who heads Automotive Art, saying: “Early on he and business partner Hugh Blades turned to a major competitor for investment in their fledgling company to “fuel the growth we felt that we would need and could do”. He explained that they chose this option rather than a bank loan as they knew banks have a duty to be responsible with their depositors’ money and hence are not inclined “to finance a high risk start up”. “You shouldn’t expect it,” said Foster, adding it would not be in the interest of the average person for banks to finance start-ups “because they would not have any money left for us to go and get out of the banks” if they did so. The businessman, who is the champion of the Barbados Entrepreneurship Foundation’s (BEF) angel investing network, Trident Angels, said friends and family members were the best bet for initial investment and recommended angel investment as a practical option for the next phase. He said that by seeking out angel investors in Automotive Art’s second year, they were able to increase their revenue tenfold.”

While the Chairman of Automotive Art must be complimented for the successes he has realised, particularly in relation to the tenfold increase in revenue as a result of initial investments in his company by friends and family members, it is decidedly mystifying that he seems prepared to overlook the importance role that commercial banks can and should play in the development of small and medium enterprises (SMEs) in Barbados and by extension the rest of the Caribbean. Am I supposed to accept the failure of commercial banks to provide adequate financing to SMEs throughout the region over the years as an appropriate business decision because if they so do that would create such a drain on their liquidity that they would then become incapable of satisfying the public’s demand for their deposits? That argument is grossly flawed given the strength of the liquidity position of many of our banks from year to year, over a prolonged period of time. Further, what are the high-risks’ projects that our commercial banks are known to have financed through time? When one examines the commercial banks’ balance sheets and specifically the asset side, what high-risks does one see? What about the level of profitability of those commercial banks operating throughout the Caribbean?

But perhaps the most important issue arising from those statements is: what is the message that the Chairman is sending to all and sundry? In this writer’s opinion, is the Chairman suggesting that SMEs in Barbados and the rest of the Caribbean should abide by the adage: “don’t bank on the banks”? I hope not! But, just in case that is the warning being issued by the Chairman, then, let’s put some things into proper context so as not to leave any ambiguity in the minds of well-meaning entrepreneurs.

First, “banking sector loans are the principal source of capital for small and medium business ventures in India, comprising firms that are not large enough to be registered with stock exchanges. Non-performing assets (NPAs) are an important measure of the success of these businesses, as well as of their levels of discretion in carrying out their commercial activities conditional on their role in developing India’s entrepreneurship outside the stock markets.”

Second, “small and Medium Enterprises is an integral part of the Indian industrial sector. Less capital investment and high labour absorption are the distinctive features of Small and Medium Enterprises (SMEs). It has created unprecedented importance to this sector. As per the Development Commissioner of Micro, Small and Medium Enterprises (2001), the sector has the credit of being the second highest in employment, which stands next to the agricultural sector. The nature of the businesses in this sector plays an important role to alleviate poverty and propel sustainable growth and equitable distribution of income in India. The SMEs play an important role in efficiently allocating the enormous labour supply and scarce capital by implementing labour intensive production processes.

SMEs trigger private ownership, boosts entrepreneurial skills, and their flexibility in responding quickly to changing market demand and supply conditions are noteworthy.”

The above points were direct quotes from the economics and finance literature. But as a practical matter and based on experience, it is clear that in Barbados and other Caribbean countries commercial banks are seeing small businesses as “charity” and hosting a TV show won’t change the harsh reality facing our economies.

Hence, going forward, our commercial banks have to put serious efforts into figuring out lending programmes that are sustainable and address the market needs. Perhaps if the collective energy of all our bankers is put on creating frameworks that can support SME’s rather than searching for excuses, and not shy away from the real issue at hand. Banks in the Caribbean have drifted away from their real purpose. Scotiabank Chairman was correct in stating that banks do have a responsibility to their depositors but neglected to note their responsibility extends to the wider development of our economy and that will only be achieved by stimulating the small and medium size businesses.

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