A new report from the InterAmerican Development Bank (IDB) and IDB Invest recommends Caribbean countries, including T&T, focus on overcoming obstacles to financial access and inclusion for businesses, because having more developed and inclusive financial systems can increase growth and reduce poverty and income inequality.
The report,” “Finance for Firms: Options for Improving Access and Inclusion” emphasised the important link between deeper and more accessible financial systems, and faster and more inclusive economic development.
The publication compared financial systems of six Caribbean countries—the Bahamas, Barbados, Guyana, Jamaica, Suriname, and T&T—to others from across the world.
It also assessed results of enterprise surveys in 2014 and 2020 to identify key financing challenges faced by firms, including small enterprises, and those owned or operated by women.
Regarding T&T, the report said overall, its financial system has absorbed the risks posed by the COVID-19 pandemic, maintaining capital adequacy ratios above regulatory benchmarks and low levels of non-performing loans.
An important component for financial sector development and for increasing access to finance is promoting financial inclusion, the IDB said, noting in this respect, the country has the T&T Financial Centre (TTIFC), for instance, which is charged with developing the sector and pursuing the objective of becoming a cashless society as well as a digitally enabled financial services hub by 2023.
Some key initiatives in this regard include conducting a financial inclusion survey, developing financial inclusion strategies and creating a roadmap charting the way forward.
Additionally, the IDB noted the implementation of the e-Money Issuer Order in 2020 which allowed the sector to provide services similar to those of banks.
The TTIFC also introduced initiatives to facilitate opening bank accounts, by implementing guidance for the banking sector to enable more flexibility and simplicity in the application of Know-Your-Customer (KYC) rules, fundamental for financial inclusion.
Further, along the digital front, the Joint Fintech Steering Committee launched the Regulatory Innovation Hub, where the private sector has engaged e-money initiatives and crypto-currency.
The IDB also noted T&T’s Central Bank has an initiative for having a regulatory sandbox, which would test innovative business ideas and financial products under the regulator’s supervision, though this is still under development.
In terms of promoting financial stability, another pillar of financial sector development, the Central Bank improved risk-based supervision of the insurance industry by implementing the Insurance Act in 2021, the IDB also noted.
Additionally, it said, the banking sector adopted the more stringent and risk-sensitive Basel II/III standard when the new Financial Institutions (Capital Adequacy) Regulations were approved in May 2020.
Consequently, the capital adequacy ratio was raised to ten per cent from eight per cent.
Another set of measures of the Basel II/III standard for leverage ratios and liquidity coverage ratios was delayed due to the pandemic and is expected to be implemented in 2022.
Also, the report identified that the Government is undertaking legislative reform to address challenges to ensure compliance with international standards for anti-money laundering and combating of terrorism financing, and tax for transparency, as T&T is identified as a “high risk” country by the EU with respect to the Anti-Money Laundering/Counter Financing of Terrorism.
Greater challenges for women to access to financing
According to the report survey evidence suggests that women-owned and women-led firms (WOFs) face greater financial constraints than other firms.
Over the last 20 years, WOFs report having accessed approximately 20 per cent of the volume of all short-term credit granted, defined as loans with maturity less than three years.
This is consistent with the share of these types of companies in the Caribbean, and included lines of credit, overdraft facilities, and credit cards, the report said.
However, WOFs only accessed 1.3 per cent of medium-to- long- term loans (by volume) granted in the same period.
Loans allocated to these firms are also of lesser value, on average, than those allocated to other companies.
The report said the average size of a short-term loan granted to WOFs was US$ 163,497.
This amount, it explained, lags the average granted to other firms of US$215,227.
However, this difference can be partially explained by the fact that WOFs in the sample are about half as large, on average, in terms of the number of employees, the report explained.
That said, it added in terms of medium-to-long-term loans the average loan size was about one-tenth the value (US$156,178) for WOFs than for other firms (US$1.54 million)—something that cannot be explained by the average number of employees.
“Not surprisingly, two-thirds of WOFs report access to finance as a major or severe obstacle to their business. In this respect, Guyana, Suriname and T&T have the largest gaps between the proportions of WOFs and other firms with this view (14, 10, and 9 percentage respectively).
In most Caribbean countries, more than half of WOFs report that financial costs (ie, interest rates and collateral) were either a major or a very severe obstacle for growth.
The report also noted that approximately 39 per cent of WOFs in the Caribbean (excluding the Organisation of Eastern Caribbean States) view required collateral as a major or severe obstacle to doing business.
However, responses are heterogeneous within the region.
The countries where more WOFs cited the cost of finance as a major obstacle to business (relative to other firms) include Guyana, Jamaica and the Bahamas.
Of these countries, the largest disparity between women-owned/women-led firms and other firms is in Jamaica (ten per cent) followed by Guyana (nine per cent).
“Interestingly in some of countries where more WOFs cited access to finance as a major obstacle (Barbados and Suriname), the cost of finance is a less prevalent obstacle relative to other firms.
“For example, 76 per cent of WOFs in Barbados cite access to finance as a barrier, but only 36 per cent cite the cost of finance as a barrier.
“This finding suggests that important deterrents of women-owned and women-led firms’ access to credit could be the structuring and terms of loans (eg, tenor), securing enough collateral, or a lack of the business capacity necessary to successfully apply and obtain business loans.
“T&T is a separate case — while its overall reported prevalence for the cost of finance as a barrier is very close to other firms (41 per cent), 37 per cent of WOFs diagnose this barrier as very severe—the highest proportion in the region,” the report added.