A new report from the Inter-American Development Bank (IDB) and IDB Invest recommends Caribbean countries focus on improving financial access and inclusion for businesses because having more inclusive financial systems could increase growth and reduce poverty.

The new IDB publication — Finance for firms-options for increasing inclusion —which compares financial systems of six Caribbean countries, The Bahamas, Barbados, Guyana, Jamaica, Suriname, and Trinidad and Tobago, to others from across the world, says the allocation of more funding to smaller firms could drive growth and jobs.

The report finds that firms across the Caribbean face more challenges compared to global peers. It also finds that the COVID-19 crisis appears to have further constrained access to financing, that smaller firms seem to face more significant hurdles than larger ones, and that businesses owned and/or operated by women face more severe challenges than others. The challenges companies encounter include high borrowing costs, burdensome collateral requirements, inadequate funding mechanisms, and complex application procedures.

The report says that too much of private financing is still being allocated to the public sector in Jamaica. It notes that while the availability of credit has deepened in many nations, distribution remains inequitable.

The IDB report stated, “In the case of Jamaica, a lack of fiscal discipline, high public debt, and resulting difficulties in maintaining continuous access to external credit markets forced the Jamaican Government to rely on domestic financial markets — particularly the banking system — to meet a large proportion of its funding needs. Given the limited size of the domestic credit market, this heavy reliance resulted in a crowding out of private financing, as banks and other lenders allocated most of their credit capacity to the government.” However, the IDB report did highlight the increase in lending to businesses in the decade up to 2020, especially to the tourism sector.

The IDB report outlined that some countries have seen the pace of (credit availability) accelerate considerably since the 1980s, while other countries’ financial sectors have remained stagnant or experienced considerable volatility in terms of credit capacity.

For example, Barbados has experienced rapid private credit growth (measured as a proportion of GDP) since the 1980s. Jamaica has seen the credit market grow appreciably since about 2016, coinciding with successful economic reforms and rapid public debt consolidation after years of decline.

In Guyana, Trinidad and Tobago, and Suriname, market depth has oscillated significantly. However, credit market development has stalled since 1980 for Suriname, it was noted.

The report said that the latest available data on the ratio of domestic private credit to GDP — the most common indicator of sector depth — ranges from as high as about 80 per cent for Barbados, to as low as about 25 per cent for Suriname.

The six Caribbean countries analysed compare poorly with the average for both high-income and middle-income countries, which stood in 2022 at 165 per cent and 121 per cent, respectively.

The countries also fare poorly when compared to the regional Latin American and Caribbean average. Only Barbados has a deeper financial sector than the regional average of 60 per cent.

In 2020, 76 per cent of firms in Suriname and 72 per cent of firms Barbados reported that issues such as significant collateral requirements posed major or very severe obstacles to their performance and ability to do business, up from 22 per cent and 35 per cent, respectively, in 2014.

Meanwhile, in 2020, small firms in five of the six economies surveyed reported high financing costs as a more significant barrier to business than larger firms.

High borrowing costs in Jamaica

The IDB report said Jamaica’s economy is affected by a rapid rise in inflation with implications for domestic financing costs and conditions. It was noted, “This phenomenon has been amplified by the conflict in Europe’s impact on food and fuel prices. As is true for most countries around the world, Jamaica’s rate of inflation has risen rapidly since early 2021 — from about 4 per cent (year-over-year) in April 2021 to almost 12 per cent by May 2022.

This, it was noted, prompted the Bank of Jamaica to undertake a number of policy actions to address rising prices and related expectations, resulting in an increase of the policy rate by 450 basis points between September 2021 and May 2022. This has affected local borrowing costs, as highlighted by the rapid increase in yields on Government of Jamaica treasury securities.

For example, six-month treasury bill yields increased from about 0.8 per cent in January 2021 to over 8 per cent by May of 2022. The same phenomenon has also affected corporate and household borrowers, resulting in tighter domestic conditions.

The IDB analysts reported, “Despite progress at the aggregate level detailed above, IDB-sponsored surveys suggest that Jamaican firms suffer from appreciable constraints that appear to have become more acute during the COVID-19 crisis. For example, in 2014, approximately 40 percent of Jamaican firms reported barriers to credit access (eg, from collateral requirements) as major or severe obstacles to growing their businesses. In 2020, the proportion of firms reporting these challenges had risen to about 60 per cent.

The IDB analysts said that it is likely that rising policy rates driven by inflation have caused borrowing costs to increase dramatically for firms, just as they have for the government, suggesting that this issue remains a significant concern.

Smaller firms report this to be a more significant concern than larger ones. They also stated, “Credit access and related costs were only two of many issues reported by Jamaican firms as barriers to financial access. Concerns over complex application procedures, the incompatibility of firm borrowing needs with bank preferences (eg, regarding loan size or maturity), and broader scepticism regarding their ability to secure credit from providers.” The IDB report stated that the concerns are consistent with barriers to financial access and inclusion observed in other parts of the world, as highlighted by cross-country research undertaken by the World Bank.