Central Bank looks at alternative financing for MSMEs

The Central Bank aims to help micro, small and medium enterprises (MSMEs) with financial access through alternative means after a study found that 75-84 per cent of the sector is underfunded.

This, it says, should not be the case as MSMEs are considered key to economic diversification.

The Central Bank hosted a webinar on Monday where they shared the study's findings and suggestions.

The study was conducted over a year and aimed at evaluating alternative sources of funding for MSMEs and to identify an appropriate mix of financial intermediaries. This comes as previous studies on MSMEs showed that access and cost to finance their businesses are barriers to their survival and growth.

With financial services being predominantly bank-based, the Central Bank deemed it important to look at alternatives methods of financing.

The Central Bank’s study sought to address:

• if bank-based financial systems can effectively facilitate digital transformation

• the appropriate mix of financial intermediaries to support economic diversification including the role of the state

• the spectrum of financial risk of these alternative financial vehicles – including fintech instruments

• how can financial market development compliment traditional financing methods

• and what is the appropriate role of the government in fostering the evolution of financial development.

(Fintech or financial technology is the use of software, apps or other technologies to improve and automate traditional forms of financial business for consumers and businesses.)

Kateri Duke of the Central Bank’s research department presented a sample survey done on MSMEs with the aim of quantifying the finance gap. The online survey was conducted on Planting Seeds Caribbean and National Entrepreneurship Development Co Ltd sites between October 11 and December 9, 2022.

Duke said out of the 144 participants there were only two large enterprises and the rest were MSMEs which is what the analysis is based on. Duke said the MSME country indicators database suggested that around 80 per cent of registered enterprises were micro enterprises with most sole traders being between the ages of 25 and 44. She added that there were more female sole traders than male.

She added, “Asked to identify their major growth inhibitors, they pointed to lack of financing, cost of financing and local economic conditions as the top three constraints affecting their availability to grow.”

She said conditions over the last three years would have contributed to that negative response in spite of reduced interest rates and liquidity during the period. Market liquidity is a market feature where an individual or firm can quickly buy or sell an asset without causing drastic changes in the market price.

Duke said funding from banks, credit unions, development banks and government programmes were well-known among this group. But over the past five years, 44 per cent of businesses said they did not apply for financing because of challenges such as onerous requirements, loan affordability and complicated application process.

As for the alternative means of financing, Thorsten Beck, director of the Florence School of Banking and Finance warned businesses to stay away from crypto currency unless it has been regulated by the state.

He said lending platforms in theory should be able to link investors directly to borrowers with the platform providing matching and information services. But this is not the reality as investors in Europe and the US are primarily institutional while in China, it’s a full financial cycle.

“The jury is still out, I think this can be a useful contribution, it is important for investors to know what they are getting into and it is important for the borrowers to know what they are getting into in this kind of funding,” said Beck.

He said while artificial technology can aid in this drive with its fintech solutions, there are risks to consider. He did not list any, but the most prominent would be cyberattacks and ransomware. Ransomware is a type of malware that threatens to release private information or permanently block access to information unless a ransom is paid.

As for the role of government, he said it should be able to provide macroeconomic stability, build institutions, regulate financial markets, provide financial services and create or enable markets. Beck said evaluation and possible rationalisation of government support programmes for MSMEs can also help.

He said if a public credit registry is created at the Central Bank, it can ease the stress of doing business for MSMEs as well as a moveable collateral registry. He added that information and awareness of financing options must be improved.

Beck stressed that there must be a cautious regulatory approach to alternative financing as it can allow foreign providers with the necessary safeguards.

He said improving data of MSMEs and their financing conditions will provide a better picture of the struggles and financial needs of these entrepreneurs.