The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian small and medium-sized enterprises (SMEs) face a “financing gap” that could be as large as $748m, the Bahamas Development Bank’s (BDB) transformation plan estimates.

The report, a copy of which has been seen by Tribune Business, suggests that the funding requirements for businesses that have a collective $4.2bn annual turnover is much higher than the $180m allowed for in a recent Inter-American Development Bank (IDB) report.

Canadian consultants, International Financial Consulting, employed data obtained from the Small Business Development Centre (SDBC), IDB and commercial banks to come up with figures indicating that Bahamian SMEs suffer from a “financing gap” equivalent to between $8,000 to $30,800 per firm.

Taking the IDB’s figures, and estimate that 85 percent of SME loan applications are rejected by Bahamian commercial banks, the BDB strategic plan said this figure was supported by the fact that 77 percent of credit issued by the banks went to retail clients.

“Commercial banks in The Bahamas are liquid and well-capitalised but have little risk appetite,” International Financial Consulting said in the report. “SMEs make up approximately 80 percent of the total firms in the Bahamian economy. Yet there is a large financing gap of $180m to as much as $748m in the SME landscape.”

“The SME loan application rejection rate by commercial banks is at 85 percent, which is a high number regionally and internationally. This is due to the quality of the application or business proposal, lack of available collateral and low-risk appetite by commercial lenders. Non-performing loans to the SME sector are high relative to consumer lending.”

The BDB report derived its figures from first marrying the IDB’s work with the $544.5m combined commercial lending portfolios of CIBC FirstCaribbean International Bank (Bahamas) and Scotiabank (Bahamas), adding: “Data from the SBDC estimates that there are 22,500 SMEs and the total MSME turnover to be equal to $4.2bn.

“This would imply the average market gap per company is approximately $8,000, with an average turnover of $185,000. When applying a conservative working capital requirement equal to one month of turnover (for example, the financing of accounts receivable aged under 30 days), the market gap is estimated to be almost twice as big ($15,400).

“General commercial terms of financing could finance accounts receivable aged up to 60 days, and under these conditions there is an implied financing gap of $30,800 or a total of $693m.”

International Financial Consulting obtained its top-end $748m “financing gap” estimate by turning to gross domestic product (GDP) and the 15 percent SME loan approval rate into the equation. “The determination of the market gap at between $693m to $748m using these two methodologies is considerably higher than the IDB’s estimate,” the BDB strategic plan said.

“And whilst IDB has estimated the finance gap to be $180m, a range between $180m to $605m was said to exist. The macro estimate made by these two calculations is much closer to the high end of IDB’s range. It is believed this higher threshold range of $605m to $693m is much closer to economic reality.”

The “financing gap” estimates reiterates that Bahamian small and medium-sized enterprises (SMEs), considered the driving force behind growth, innovation and job creation in most economies, continue to be starved of capital by a risk averse banking and credit system that fails to properly meet the sector’s needs.

The Government has sought to assist through the creation of the SBDC and other entities, such as the Bahamas Entrepreneurial Venture (venture capital) fund, but the International Financial Consulting Report - which was completed after the COVID-19 pandemic started - suggests much work remains to be done and that these initiatives have merely scratched the surface of a much larger problem.

The estimates were also made to indicate that a large potential borrower market exists for the Bahamas Development Bank, which still has a long way to go to achieve its ambitions despite the House of Assembly’s Wednesday approval for the conversion of $37m in bonds to a long-term, 20-year loan from the National Insurance Board (NIB) that carries a 3.94 percent interest rate.

While that is below Bahamian Prime, the 4.25 percent benchmark that commercial banks use to price their loans, the BDB’s last audited financials for the 12 months to end-2018 show an institution with a $62.536m “accumulated deficit” representing the combined losses it has racked up since its creation in the early 1970s.

The Bahamas Development Bank’s net worth was a negative $33.302m at that point, meaning that its total assets of $38.18m were dwarfed by total liabilities of $71.482m, thereby rendering the state-owned institution insolvent without continuing taxpayer support.

Its external auditors, BDO Bahamas, qualified the financial statements in saying: “The bank’s total liabilities exceeded total assets by $33.302m, and it has an accumulated deficit of $62.536m as at December 31, 2018.

“However, the directors are satisfied that the bank is a going concern and that the preparation of these accounts on this basis is appropriate since the bank has been receiving financing from the Government of The Bahamas. The bank will continue to rely on the Government’s support in the foreseeable future.”