Trade Min­is­ter Paula Gopee-Scoon has of­ten de­scribed small busi­ness­es as the “back­bone” of T&T’s econ­o­my, con­tribut­ing to more than 30 per cent of the coun­try’s GDP and em­ploy­ing more than 200,000 peo­ple.

How­ev­er, the de­vel­op­ment of a thriv­ing mi­cro, small and medi­um-sized en­ter­prise (MSME) sec­tor in this coun­try has been stymied by ac­cess to fi­nanc­ing, lim­it­ing its ca­pac­i­ty to con­tribute to sus­tain­able growth and job cre­ation, a Cen­tral Bank pa­per has found.

The pa­per ti­tled, “Al­ter­na­tive fi­nanc­ing for MSMEs in T&T: Ex­pand­ing fi­nan­cial in­ter­me­di­a­tion to sup­port eco­nom­ic di­ver­si­fi­ca­tion” was au­thored by Ka­teri Duke of the Bank’s re­search de­part­ment.

Ac­cord­ing to the pa­per, the lat­est da­ta from the Cen­tral Sta­tis­ti­cal Of­fice’s reg­is­ter of busi­ness es­tab­lish­ments sug­gest­ed that MSMEs ac­count­ed for 95 per cent of reg­is­tered busi­ness­es in 2018.

These firms op­er­ate in var­i­ous sec­tors of the econ­o­my, but their most sig­nif­i­cant ac­tiv­i­ties are in the ser­vices sec­tors such as re­tail and dis­tri­b­u­tion, per­son­al ser­vices and con­struc­tion.

Ac­cord­ing to the pa­per, al­ter­na­tive fi­nance in­stru­ments, in­clud­ing those in the fin­tech space, have been in­tro­duced suc­cess­ful­ly in some de­vel­op­ing economies to min­imise com­mon bar­ri­ers to fi­nance from both the sup­ply and de­mand per­spec­tives.

How­ev­er, it em­pha­sised that these must be ap­pro­pri­ate­ly matched to the needs of mod­ern busi­ness­es with­in a par­tic­u­lar econ­o­my.

Ac­cord­ing to the pa­per, in de­vel­op­ing economies such as T&T, the cap­i­tal mar­ket is con­sid­ered an “al­ter­na­tive” so­lu­tion as it is not a tra­di­tion­al source of fi­nance for MSMEs.

Even so, the pa­per ad­vised that it may be bet­ter suit­ed for larg­er firms.

It said the do­mes­tic mar­ket has been char­ac­terised by a lim­it­ed num­ber of list­ings and low trad­ing vol­umes, not­ing that in 2012, a ju­nior stock mar­ket was in­tro­duced to al­low SMEs to raise cap­i­tal on the T&T Stock Ex­change.

“De­spite tax in­cen­tives of­fered by the Gov­ern­ment and the in­tro­duc­tion of an SME men­tor­ship pro­gramme in 2022, up­take of eq­ui­ty-based fi­nanc­ing has been low,” the pa­per stat­ed as it fur­ther not­ed that oth­er pub­lic sec­tor ini­tia­tives have been in­tro­duced over the years with lim­it­ed suc­cess.

The pa­per fur­ther not­ed that be­yond the reg­u­lat­ed bank­ing sec­tor and cap­i­tal mar­kets, al­ter­na­tive fi­nance mech­a­nisms in­clude fi­nan­cial prod­ucts and ser­vices de­vel­oped through in­no­v­a­tive and pre­dom­i­nate­ly on­line plat­forms, in­stru­ments, and sys­tems, not­ing that fin­tech com­pa­nies such as mar­ket­place lenders or crowd­fun­ders, al­so present a vi­able so­lu­tion to bridge the MSME fi­nanc­ing gap.

“T&T is well po­si­tioned to cap­i­talise on the bur­geon­ing fin­tech move­ment in al­ter­na­tive fi­nance with the launch of sup­port­ive ini­tia­tives such as the In­no­va­tion Hub and the Reg­u­la­to­ry Sand­box. The sand­box will en­able fin­techs to op­er­ate pro­vi­sion­al­ly and with­in lim­its un­der the su­per­vi­sion of the reg­u­la­tors in a live-test­ing en­vi­ron­ment,” it added.

Fur­ther, it said the in­tro­duc­tion of such fin­techs in­to the do­mes­tic fi­nan­cial en­vi­ron­ment may ne­ces­si­tate a change to reg­u­la­to­ry and le­gal frame­works, es­pe­cial­ly if cross-bor­der ven­tures are con­sid­ered.

Ac­cord­ing to the pa­per, it is against this back­ground that a deep dive in­to al­ter­na­tive fi­nance mech­a­nisms is time­ly to un­der­stand the ca­pac­i­ty to ex­pand fi­nan­cial in­ter­me­di­a­tion in T&T, so as to pro­mote fi­nan­cial in­clu­sion and al­le­vi­ate long-stand­ing fund­ing chal­lenges that have sti­fled the MSME sec­tor.

It is en­vi­sioned that the nar­row­ing of the MSME fi­nanc­ing gap will have pos­i­tive im­pli­ca­tions for the sec­tor to stim­u­late in­clu­sive growth and sus­tain­able eco­nom­ic di­ver­si­fi­ca­tion, the pa­per added.

Rec­om­men­da­tions

Cre­at­ing sus­tain­able and mean­ing­ful di­ver­si­fi­ca­tion through the MSME sec­tor re­quires a two-pronged ap­proach, the pa­per ad­vised, as it not­ed that this ought to in­clude a tar­get­ed ac­tion to re­duce struc­tur­al fi­nan­cial and non-fi­nan­cial bar­ri­ers to fi­nanc­ing while si­mul­ta­ne­ous­ly fa­cil­i­tat­ing an en­vi­ron­ment con­ducive to ex­pand­ing the range of al­ter­na­tive fi­nanc­ing op­tions avail­able to the sec­tor.

It al­so ad­vised there be spe­cif­ic in­ter­ven­tions such as es­tab­lish­ing a pub­lic cred­it reg­istry, which could com­ple­ment ex­ist­ing cred­it bu­reaus to re­duce in­for­ma­tion asym­me­tries faced by cred­it providers and min­imise trans­ac­tion costs in as­sess­ing bor­row­er cred­it­wor­thi­ness.

“Reg­istries can go be­yond in­for­ma­tion shar­ing be­tween a se­lect few fi­nan­cial in­sti­tu­tions and oth­er lend­ing agen­cies, and con­sid­er the in­te­gra­tion of pay­ment da­ta from non-tra­di­tion­al sources such as util­i­ty com­pa­nies.

“These en­hance­ments may re­quire a shift in cur­rent da­ta col­lec­tion meth­ods and will like­ly be labour in­ten­sive to con­vert re­cent his­tor­i­cal da­ta to an ap­pro­pri­ate for­mat; leg­isla­tive changes would there­fore be nec­es­sary to man­date such re­port­ing from non-tra­di­tion­al sources,” the pa­per added.

Im­prov­ing fi­nan­cial lit­er­a­cy among MSMEs is al­so crit­i­cal as the pa­per cit­ed that im­prov­ing fi­nan­cial lit­er­a­cy rates could build con­fi­dence among MSMEs and im­prove their chances of suc­cess­ful cred­it ap­pli­ca­tions.

In par­tic­u­lar, it not­ed that ad­vi­so­ry ser­vices to im­prove the de­sign of busi­ness plans, de­vel­op­ment of loan pro­pos­als, and prepa­ra­tion of fi­nan­cial state­ments could be en­cour­aged.

The pa­per fur­ther ad­vised that large-scale cam­paigns could be launched with the sup­port of the Na­tion­al Fi­nan­cial Lit­er­a­cy Pro­gramme to com­ple­ment and pro­mote ex­ist­ing busi­ness in­cu­ba­tor pro­grammes in T&T, adding that based on the cur­rent MSME de­mo­graph­ic, in­ter­net plat­forms such as so­cial me­dia should be the pri­ma­ry mode of com­mu­ni­ca­tion for busi­ness­es, es­pe­cial­ly star­tups.

There is al­so a call to im­prove the qual­i­ty and cov­er­age of da­ta in the MSME sec­tor.

Col­lect­ing da­ta from MSMEs and cred­it providers are two sides of the same coin.

Ac­cord­ing to the pa­per, more ac­cu­rate in­for­ma­tion on loan port­fo­lio dis­tri­b­u­tion and bor­row­er cred­it­wor­thi­ness could be gath­ered by ap­proach­ing cred­it providers di­rect­ly.

It ad­vised that a pro­por­tion of the dataset can be prox­ied from the Cen­tral Bank’s reg­u­la­to­ry re­turns for the bank­ing sec­tor, but a spe­cial da­ta re­quest may be re­quired for gran­u­lar de­tails.

“More­over, da­ta re­port­ing from oth­er providers, in­clud­ing al­ter­na­tive fi­nance op­tions, could be en­cour­aged in­for­mal­ly through moral sua­sion, as the ul­ti­mate goal is ex­pect­ed to be mu­tu­al­ly ben­e­fi­cial, or more for­mal­ly through ex­pand­ing the reg­u­la­to­ry perime­ter or con­sol­i­dat­ing reg­u­la­to­ry over­sight of fin­techs in­to one en­ti­ty to mit­i­gate re­port­ing bur­den. Sup­ply con­straints could al­so be in­ves­ti­gat­ed through sur­veys and in­ter­views,” the pa­per added.

It em­pha­sised that the col­lec­tion and dis­sem­i­na­tion of time­ly and rel­e­vant sta­tis­tics for the MSME sec­tor could fa­cil­i­tate in-depth analy­sis by sev­er­al stake­hold­ers and sub­se­quent­ly be utilised to in­form pub­lic pol­i­cy or pri­vate busi­ness de­ci­sions, adding that cor­po­rate fi­nanc­ing sur­veys could be con­duct­ed on a wider scale, at more fre­quent in­ter­vals, to mon­i­tor the chang­ing char­ac­ter­is­tics of MSMEs and fash­ion ap­pro­pri­ate pol­i­cy in­ter­ven­tions.

Dis­ag­gre­ga­tion of the da­ta could al­so high­light the needs of new­er busi­ness­es in more in­no­v­a­tive in­dus­tries.

These tools, the pa­per not­ed, will keep a pulse check on the suc­cess of pol­i­cy mea­sures and pro­grammes tar­get­ed at re­duc­ing the fi­nanc­ing gaps with­in the sec­tor.

South­ern cham­ber head

Ang­ie Jairam, pres­i­dent of the Fyz­abad Cham­ber of Com­merce (FCOC) told the Busi­ness Guardian that many of her mem­bers face dif­fi­cul­ties when it comes to fi­nanc­ing, not­ing that ex­hor­bi­tant bank charges is a big chal­lenge.

Ad­di­tion­al­ly, she not­ed that her mem­bers are not al­ways for­tu­nate to get bank fi­nanc­ing.

“Some of the prob­lems would be on the part of the mem­bers be­cause of statu­to­ry doc­u­men­ta­tion re­quired. How­ev­er, they would al­ways have to have a se­cu­ri­ty to back it up and a lot of the mem­bers would have in­vest­ed all their fam­i­lies’ sav­ings and every­thing they have to get their busi­ness­es go­ing. To have fi­nan­cial se­cu­ri­ty is a ma­jor prob­lem and some may al­ready have mort­gages on their prop­er­ties or some may not have a prop­er­ty to fi­nance...what kills peo­ple are the in­ter­est rates that we have to bor­row at. The bank charges for every sin­gle thing,” she out­lined.