Part I
By Richard Rambarran & Shaleeza Shaw
Richard Rambarran – Richard Rambarran is the Executive Director of the Georgetown Chamber of Commerce & Industry and a lecturer in the Department of Economics at the University of Guyana. He holds a Masters’ degree in Economics and several certificates from the IMF on macroeconomic stability, financial programming etc.
Shaleeza Shaw – Shaleeza Shaw is the Head of Credit/Corporate Secretary of Guyana Bank for Trade and Industry Limited. She holds a Masters’ degree in Business Administration among qualifications in Banking, Law and Business Management.
The recently concluded Inaugural Conference organized by the School of Entrepreneurship and Business Innovation (SEBI) of the University of Guyana under the theme “Economic Transformation through Entrepreneurship and Innovation,” must be applauded for its boldness in discussing issues of particular relevance to Guyana. This essay seeks to advance on an area of discussion at the conference, that is, “Developing a Financial Sector to Support New Business Development.”
1. The Importance of Finance and Entrepreneurship to Economic Growth
It must be noted that pivotal in articulating a ‘conducive’ or ‘enabling’ business environment is ensuring that there is synergy existing between the financial sector and the real sector. In any development paradigm, it is necessary that the financial sector and, specifically the banking sector provides adequate support in facilitating business growth and development through, among others, the provision of credit, suitable digital and financial infrastructure for business growth, appropriate banking technologies for business and relevant support services. This nexus between financial development and economic growth is well documented in the literature of development and validated and evidenced by the rate of growth of the rapidly emerging economies.
Guyana’s economy is no different. With an emerging oil and gas industry, greater foreign injections and a cultural transformation in the ethos of doing business in Guyana, the financial sector and its development, is one which is certain to catalyse economic transformation. While there exists great expectations from the oil and gas industry, it is necessary to bear in mind that it is a capital intensive industry which cannot employ a mass of Guyanese people. As such, the importance of entrepreneurship cannot be understated in ensuring that gainful employment is realized for Guyanese.
2. The Banking Sector, Risk & Entrepreneurship
The financial sector, more specifically the banking sector is integral in this regard. However, from a banking perspective, there exist constraints in lending to start-up entrepreneurs, micro and small businesses. These constraints primarily revolve around risk and allocation of capital. They are twofold but can be observed as being ‘two sides of the same coin’ of risk management.
On the one hand, limited resources drive the allocation of finance to more profitable, established entities which pose less risk of default in repayment. As a result of the quantum of the lending being larger and the likely repayment of a higher interest rate from these entities, the capital (in the form of credit), will move to these higher returning, established entities. This can be termed as ‘pull factors’ in the allocation of capital and can explain why there is a bias to giving a medium or large entity credit.
There also exists ‘push factors’ for capital from the Startups, micro and small businesses who inherently present greater risk. The push factors tend to drive capital away from startups, micro and small businesses. These can be classified into two (2) types – internal dynamics (those which can be controlled) to the entity and exogenous factors (those which cannot be controlled) to the entity.
In Guyana, these are but not limited to, as follows:
Internal Dynamics or Controllable Factors:
1. The inability of these entities to formulate properly researched and credible business plans;
2. Financial illiteracy and poor financial practices in operations;
3. Lack of a capacity or engaging in an activity where not skilled or trained.
4. Absence of proven track record in and around the production
5. Inefficient production processes.
6. Improper knowledge of markets including access to technology-to do research
7. Inability to forecast.
8. Inability to adapt or incorporate market standards such as quality assurance, packaging, environmental requirements, etc
9. Intra-household dynamics for women entrepreneur who often times have little or no help in their childrearing or child-bearing duties.
Exogenous or Uncontrollable Factors:
10. Transportation cost – Access to markets from rural areas are sometimes prohibitively high, making products uncompetitive and the activity unviable
11. Exchange rate fluctuations – This can affect cost of inputs and is a source of great uncertainty for entities which have to import inputs
12. Industry structure – Small population size causes internal markets to become quickly and a quasi-monopoly to held
13. Access to storage – Storage is prohibitively costly and many startups, micro and small entrepreneurs require storage for perishables and poultry products
Whilst this list is by no means exhaustive, it certainly elucidates some of the most common concerns which contribute to the risk of lending to startups, micro and small businesses here in Guyana.
3. Some Private Sector Measures undertaken to Alleviate Constraints and Reduce Risk
While government policy has a critical role to play in alleviating these constraints, the financial sector has recognized that for long-term growth to be realised, access to finance is critical not only for large well-established businesses but new ventures and micro and small businesses. As such, the private sector arm of the financial sector has engaged in a number of measures to address some to these limitations as it seeks to reduce the risk associated with startups, micro and small business.
These efforts range across the spectrum, from radio and television education programmes to actual engagement of participants. Some specific engagements include Guyana Bank for Trade and Industry’s (GBTI) community business workshops across its network of twelve (12) branches to improve financial literacy and even their partnering with entities such as Conservational International (Guyana) in Region 9 to educate the residents about banking and the opportunities it avails to them. Its Women of Worth Loan (WOW) Programme which is aimed at empowering women and improving their socio-economic status has simple business plans which credit staff guide and help them complete. Republic Bank, in tandem with Empretec, has similarly supported the Venture Out programme providing training to women to develop their business skills. Scotiabank has also staged its “Live Pitch Vision Achiever” competition aimed at motivating, highlighting and rewarding a diverse new generation of entrepreneurs.
At GBTI, as alluded to, the Women of Worth (WOW) and People of Worth Entrepreneurial Resources (POWER) Loan programmes which involve collaborative efforts with the Ministry of Social Protection (formerly Ministry of Human Services and Social Security) provide loans ranging from $100,000 to $300,000 to start up or expand a micro or small business at a rate of 6 percent per annum to women, men and couples. GBTI also, in collaboration with Conservation International (Guyana) and the Ministry of Finance also launched its Rupununi Ventures Loan Programme aimed as supporting community-based activities which concurrently ensure the preservation of the environment (natural capital) and a low carbon footprint, again at a low rate of 6 percent per annum.
Republic Bank and GBTI have also partnered with the Small Business Bureau arm of the Ministry of Business (formerly Commerce) and the Inter-American Development Bank (IDB) to grant loans up to $30M for micro and small businesses in low carbon sectors at a low rate of 6 percent per annum (as the lenders get a tax break on income earned on these products) similar to the abovementioned three loan products. The other attractive features of this loan programme is that beneficiaries can obtain an interest subsidy further lowering this rate; and the programme offers the banks a Collateral Guarantee of 40 percent. This was recently increased to 70 percent to mitigate risks taken by banks particularly in the absence of collateral or sufficient collateral. These banks and other financial institutions including those such as Institute of Private Enterprise Development (IPED) under their retail lending portfolio provide similar support.
4. Concluding Remarks
However, despite the efforts of the private sector, there needs to be deliberate, concerted and coordinated efforts between public institutions and the private sector to increase the catchment of borrowers by reducing risk and granting supportive mechanisms for entrepreneurial, micro and small business. As has become pellucid, this will facilitate more inclusive economic growth and facilitate more equitable economic development. The subject of the next article will be focused on policy and legislative measures which can support this enabling business environment and foster the financial-growth nexus.