In our Sunday Editorial, “Modernising our financial architecture”, we referred to the IDB’s “Caribbean Country Department” and IDB Invest Report: “Finance for Firms — Options for Improving Access and Inclusion”. We discussed the need to increase our “financial depth” – the ratio of credit to the Private Sector and the GDP. That the ratio for Singapore is 131 versus our 39 should give us an indication of the need to increase credit to our Private Sector.
In the survey conducted by the authors, they asked the Guyanese firms to rate the “obstacles that can affect the current operations of your establishment.” In view of the present claims that there is widespread racial discrimination in the granting of credit by financial institutions, the results of the survey should go a long way in dispelling such perceptions. It was reported that, “The item “access to finance (e.g., collateral)” was increasingly reported to be either a major or very severe obstacle between 2014 and 2020. The share of firms reporting collateral to be a major obstacle increased from 15.4 percent in 2014 to 32.5 percent in 2020, while the share of firms reporting it to be a very severe obstacle increased from 8.2 percent in 2014 to 18.1 percent in 2020”.
The period under review, of course, was politically charged between 2014-2015, since the PPP Executive was checkmated by an Opposition majority in the National Assembly, and between 2015-2020 the APNU/AFC coalition adopted policy positions that were considered very much “anti-business” by the Private Sector. The “animal spirits” – as the psychology of investors was dubbed by John Maynard Keynes before the Great Depression – was roiled. Be that as it may, as was pointed out in yesterday’s editorial, the underdeveloped financial system is very traditional and restrictive in restricting “collateral” to real estate. This notion needs to be broadened in line with developments in the Developed World, into which we are now integrated, to include Business Equipment Collateral; Inventory Collateral; Invoices Collateral; Blanket Lien Collateral; Investments Collateral (such as securities). Agricultural loans are our largest financing needs, but without a forward market, there is not even the possibility to use such contracts as collateral. These markets will have to be developed.
Most interesting, in view of the high liquidity in our banking system for decades, the Report announced: “Cost of finance (e.g., interest rates)” was cited in 2020 as a major or severe obstacle by 48 percent of firms – higher than the 40 percent figure in 2014. The 2020 survey reported average interest rates in Guyana were 11.8 percent compared to the Caribbean average of 13.3 percent. However, lending rates have declined in Guyana since the survey, and averaged 9 percent in 2021 and 8.59 percent this June. But these rates are still astronomical, considering that interest on savings deposits – from which the loans are sourced – are 0.81 percent. Commercial banks remain too conservative, and it is hoped that the entrance of the new Merchant Bank – New Hayven – will offer competition to help lower lending rates.
The restrictive effect of high interest rates in lending is borne out in the following: “The 2020 survey also asked firms to report the reason why they did not even apply for a loan or line of credit in the previous year (2019). A significant share of both small and large firms had similar responses. The most frequent responses were either that the firm “had sufficient capital” or “interest rates were not favourable.” Among large firms, 40.9 percent reported that the interest rates were not favourable and 30.9 percent reported having enough capital, while 27.2 percent of small firms identified interest rates as a challenge and 22.6 percent mentioned having enough capital. A smaller share of small firms mentioned other reasons for not seeking loans, such as the complexity of loan applications, loan sizes being insufficient, or challenges with collateral requirements.”
According to the latest Bank of Guyana Report, there was a 15.8 percent increase in credit to the Private Sector between June 2021 and June 2022. Hopefully, this signals that the needed structural change in our “financial depth” has begun.
