By Clinton Urling President Georgetown
Chamber of COmmerce and Industry
It is encouraging to see the issue of development banks being placed on the government’s agenda for discussion (“Government, private sector to collaborate on Development Bank white paper- Burrowes” SN, September 28, 2012). The introduction of a development bank should be a salient priority for our policy makers.
I have previously written on this topic, noting that specific types of businesses and entrepreneurial activities typically qualify for less-than-favourable, higher interest rates of credit from commercial banks because of the actual and perceived increased risks involved. These clients include new industries/activities, young entrepreneurs, low collateral entrepreneurs, micro businesses, start ups, rural businesses, among others. This reality should not be discounted nor trivialized.
In that same article I noted that development banks are not an unfamiliar entity in Guyana’s economic history. In fact, Guyana’s financial system once was populated with development finance institutions and small enterprise development agencies that were owned and controlled by the government. These included the Guyana National Cooperative Bank (GNCB), Guyana Cooperative Agricultural and Industrial Development Bank (GAIBANK), Guyana Cooperative Mortgage Finance Bank (GCMFB), the Guyana Bank for Trade and Industry (GBTI) and the National Bank for Industry and Commerce (NBIC)
Moreover, development banks have proliferated around the world in many developed as well as developing economies. At the national level, these banks can be found in Canada, China, India, and Britain, to name a few. At the multilateral and regional level, there are the Caribbean Development Bank, the African Development Bank, the Asian Development Bank, and the European Bank for Reconstruction and Development as prominent examples.
Pragmatically, markets are imperfect and that imperfection occurs because of information asymmetry along with the inefficient flow of information between borrowers and lenders. In Guyana this effect is more pronounced than in other nations because of the lack of a credit bureau which would make it easier for banks to access timely – even immediate – firm-specific information that would assist them in making more informed lending decisions.
Even with an established credit bureau, this inefficient information gap still would exist, making it difficult for specific industries, entrepreneurs, and business ventures to borrow at affordable and favourable interest rates. For instance, if a new entrepreneur or existing business decides to pursue the production and/or delivery of a product or service that does not currently exist in the market, commercial banks understandably are extremely cautious to proceed with project financing because lending officers lack critical data for decision-making purposes. For example, the product or service is untested in the market and, thus, there are few, if any, empirically-driven cases available that would demonstrate the project’s feasibility or that would serve as a solid reference point for lending officers to form their analysis.
In these circumstances, banks incur additional costs in screening projects for their feasibility and these costs inevitably are passed along to the borrower in the form of higher loan administrative fees and interest rates. Or, the banks may deem the project too risky and walk away from the venture, even if it promises to be conducive to growing emerging sectors in the national economy. When this occurs it robs the country the opportunity to diversify its productive basket of goods and services.
A development bank would help to limit the financial consequences that arise as a result of market imperfection and inefficiency in the credit and lending venues. A development bank would be able to offer more favorable lending requirements such as longer borrowing terms, lower interest rates, and manageable capital and collateral requirements, among other features.
It would be prudent to adopt the essential elements of the public-private partnership (PPP) model where the decision-making roles of corporate boards of directors and capital investment requirements are shared by government and the private sector. Then, the daily administration of these institutions would be left to competent and highly qualified professionals, who would be responsible to all stakeholders and whose positions would not be compromised unnecessarily by potential political changes in government that occur with election cycles. Furthermore, development bank regulation should come under the auspices of the Bank of Guyana, along with an independent auditing system that ensures generally standardised rules and procedures, expectations of accountability and good governance practices.
With proper planning and internal management mechanisms in place, national development banks can return to play a highly useful role in Guyana’s programme for sustainable economic development.
