By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian economy will enjoy a 15 per cent GDP growth surge if lenders reduce collateral requirements for business borrowers to world minimum levels.

An International Monetary Fund (IMF) book, Unleashing Growth and Strengthening Resilience in the Caribbean, found that removing impediments to the private sector’s credit access would unleash a significant “phased” GDP expansion in the Bahamas and wider region.

In the Bahamas’ case, the book found that while the credit access barriers for business were relatively high compared to rival Caribbean nations, those able to obtain debt financing were usually able to obtain competitive costs (interest rates).

Only Jamaica, at 30 per cent, has a smaller percentage of small and medium-sized businesses (SMEs) able to access credit than the Bahamas’ 34 per cent. And this nation was in the ‘middle of the pack’ with collateral requirements equal to 118 per cent of a loan’s value.

“The Bahamas has higher collateral requirements and very few firms with access to credit, but very low interest rate spreads,” the IMF book found. “In this case, credit market entry costs are high - but leverage is kept at low rates, so funding is relatively cheap for those that can access it.”

Collateral requirements were identified as one of three major obstacles to SMEs accessing credit, with interest rates and fees and ‘participation costs’ the other two. The latter reflects the amount of bureaucracy and ‘red tape’ that businesses encounter, including account opening requirements and Know Your Customer (KYC) due diligence, plus the need for guarantors.

The IMF book assessed what would happen if banks and other lenders reduced their collateral requirements to the world minimum of 50 per cent of loan value, and eliminated interest rate spreads and so-called ‘participation costs’.

Acknowledging that the final two objectives were ‘ideals’ unlikely to happen in practice, the book said the benefits would positively impact GDP growth over several years. “These policy changes are significant and would take time to phase in,” it conceded.

Still, reducing collateral requirements for Bahamian SMEs to the world minimum 50 per cent would boost this nation’s GDP growth by a total 14-15 per cent over several years, the IMF researchers found.

Eliminating ‘participation costs’ would have a near-6 per cent GDP impact for the Bahamas, while narrowing interest rate spreads to zero would have an more modest 2 per cent effect.

“The largest GDP gains accrue from lowering collateral requirements,” the IMF book said. “The model predicts that total cumulative expansion of the Caribbean countries’ GDP could range between 10 and 20 per cent if all collateral requirements were lowered to 50 per cent, which is the lowest level of collateral across countries in the World Enterprise Surveys.”

Access to credit is a frequent complaint among Bahamian businesses, especially among small start-ups and entrepreneurs who have minimal assets to pledge as collateral and no credit history.

Lincoln Deal II, the JetLink Adventures founder and chief executive, told the Bahamas Institute of Chartered Accountants (BICA) conference earlier this week that he was rejected by 17 potential financiers - including two commercial banks - before finally obtaining funding from the Government-sponsored venture capital fund.

The inability to obtain capital, on the timeline and scale required, is frequently cited as a major factor that inhibits economic growth in the Bahamas. However, the study showed that just 15 per cent of Bahamian SMEs identified access to capital as a major constraint - the smallest percentage in the Caribbean.

The IMF book concluded that ‘financial development’  in this nation “could be improved”, finding: “The financial development levels of the Bahamas, Barbados, Jamaica and Trinidad and Tobago remain in the mid range of Latin America and the Caribbean.

“There is scope for further financial development, but care should be taken to safeguard financial stability. Policies that may be pertinent for these countries include strengthening institutional and legal frameworks related to property rights and collateral registries, as well as improving the credibility of financial systems and deposit insurance, enhancing capital and liquidity buffers, and addressing balance sheet mismatches.”

The IMF book said the Bahamas’ has “relatively high levels of financial development”, and was among the top four in Latin America and the Caribbean for ‘market depth’ given the level of debt issuances by banks and corporate entities. It also exceeds the regional average on physical access to finance.

“As for financial institutions, the Bahamas surpasses the Latin America and Caribbean average in both access and efficiency, thanks to strong performance in the number of automated teller machines (ATMs) and bank branches per capita, and high levels of credit to GDP,” the study added.

“[But] the strong performance of Jamaica and the Bahamas is likely linked to proliferation of banking access points in tourism areas, illustrating a potential weakness with the measurement of physical access: ATMs and branches could be highly concentrated in some areas, leading to high measured access that does not necessarily reach everyone in the population.”