Wherewithal of the domestic financial sector and capital market development

In last week’s column, it was established that the total assets in the banking sector and non-bank financial institutions stood at $956 billion at the end of 2020, but this does not necessarily mean that this total sum is available to lend. The total assets, in fact, include the current loan portfolio of the financial institutions as well as existing investments in other instruments, both domestically and in international capital markets. Therefore, to understand in simple terms how much money is available in the banking sector to lend, one has to examine the liquid assets of the sector. In this regard, according to the Bank of Guyana’s Annual Report for 2020, total commercial bank liquid assets stood at $162.4 billion, and the average level of liquid assets held in the sector amounted to $283.4 billion, or US$1.3 billion.
Essentially, this is the sum that is available for lending, which represents just about 20% of GDP (2020).
Guyana’s financial market is largely underdeveloped, and is dominated by six commercial banks. This structure necessitates an oligopoly, which does not facilitate healthy competition within the sector in terms of financing cost. The financial services sector is also very traditional, thus lacking innovation and the provision of a wider range of financial services and instruments.
Guyana is on the verge of entering an era of massive growth and expansion, and transformational economic development. This is largely on account of the emerging petroleum sector. In view of this economic reality, the Private Sector needs to become more proactive, innovation-driven, and buoyant. Among the key elements necessary to facilitate the development of the Private Sector are increased easy access to financing and more competitive and/or lower financing cost.
One must be cognisant of the current state of the local financial sector and the notion that microfinancing institutions and venture capital firms operate differently from commercial banks in terms of their structure. Microfinancing institutions undertake a more hands-on approach to helping their clients manage their businesses, including the extensive field work, and they even have training programmes for their clients. Moreover, the financing structure of these institutions – that is, the source of their financing – is different from the commercial banks. They are not deposit-taking institutions; their capital is actually shareholders’ funds, accumulated surplus, or donor funds.
As such, there is a need for further development of the local capital and money markets, with more innovative products to meet the demands of the MSME sector.
Arguably, it is imperative that policymakers consider the need to liberalise and/or reform the financial regulations, in order to dismantle some of the burdensome regulatory and administrative costs and/or barriers to accessing financing from the financial institutions. Failure to achieve these objectives may continue to stymie Private Sector development and advancement, and in turn the transformational development of the country as a whole.
Further, it would be of paramount importance that, over the next five years, the financial sector becomes more diversified and efficient as a result of the adoption of reform measures aimed at markets, institutions, instruments and services. The emphasis should be on a well-regulated and properly managed financial system that is facilitative of innovation and growth without compromising stability and soundness.

Key Recommendations
* Reform the financial sector regulation to be a bit more liberal
* Promote more innovative financing instruments from financial institutions
* Stock market development through regulatory/ legislative reform and the enhancement of the institutional infrastructure in line with international standards
* Create an enabling framework to attract new entrants into the market – international banks, for example, which could bring more competition and introduce new and innovative financial services
* Establish a Development Fund to focus on large scale lending in the Private Sector.
Finally, with respect to the financial capacity of the domestic financial market, this would necessitate the need for foreign capital inflows, as well as the need for the Private Sector to access capital in the regional and international capital markets to finance Private Sector investments over the medium to long term.

About the Author:
JC. Bhagwandin is an Economic and Financial Analyst, and an Adjunct Instructor at Texila American University Business College. The views expressed are exclusively his own, and do not necessarily represent those of this newspaper and the institutions he represents. For comments, send to [email protected]