Caribbean Export OUTLOOK 3rd Edition

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Clearing The Hurdles

T rade and by extension the role that the private sector plays in contributing towards economic development is integral to the growth of countries across the globe. Within the Caribbean, Small andMedium Sized Enterprises (SMEs) account for between 70 to 85% of the number of enterprises contributing between 60 to 70% of GDP and account for approximately 50% of employment in the Caribbean. Given the importance of SMEs towards the region’s economy, it is imperative that they receive the necessary support to enable their growth and expansion. Given the small sizes of their local markets, SMEs must consider export markets if they want to experience an increase in customers and revenues. In most developed countries, most importers and exporters are backed bymature financial industries and trade facilitation mechanisms. Recent research has suggested that an absence of or limited access to finance can strongly derail formal SME development despite the per capita income of countries. An International Finance Corporation (IFC) global study in 2010 claims that access to finance ranked 2 nd out of 15 different factors that prohibit the advancement of SMEs. Some of the main constraints facing SMEs in accessing financing are as follows: • Their inability to prove credit worthiness to finance houses. • Increased compliance and regulatory burdens on Financial Institutions (FIs), which in turn affects SMEs . • Inability to provide adequate financial history. • Lack of governmental policy support that targets entrenched credit financing options. • Lack of adequate collateral. • Foreign currency limits (in some instances). These issues are all common pitfalls to SMEs desirous of accessing finance. Moreover, research has also shown that transaction costs in loan financing influences the ability of SMEs to access finance. Small loans are unattractive to FIs since they can be just as costly to process as larger loan requests, and this has stymied the growth of lending to SMEs. The glaring lack of finance for trade has been a significant barrier in the Caribbean. The 2016 CDB report stated that over 50% of trade financing requests to FIs proposed by the SME sector are rejected against 7% for multinationals. These statistics are no doubt alarming, especially given their contribution towards regional growth. SME FinancingWithin The Caribbean It is difficult to pin down the exact status of SME finance within the Caribbean region due to the lack of a single repository of information on the sector and the level of financing not being clearly outlined. However, the types

of financing have mainly included a mix of traditional debt financing, from Commercial Banks, Credit Unions and EXIM Banks to Micro Finance Schemes along with a sporadic mix of government schemes (E.g. Fund Access in Barbados) across the region. Export Guarantee Schemes through Central Banks (E.g. in Barbados and the OECS) have come to the fore to enable companies that lack the necessary collateral to still receive funding. One such example is the Export Finance Guarantee Scheme in Barbados which provides pre-shipment coverage for credit approved by Commercial Banks to exporters for manufacturing, packaging and processing of goods against executed contracts or agreements of sale with foreign purchasers. Post shipment coverage is also provided under this scheme to exporters via the purchase, negotiation or discount of export bills for the shipment of goods. This is usually done under executed contract or agreement with a foreign purchaser. An export credit insurance policy is a requirement for this scheme and is both beneficial and prudent for exporters to have in place. This is facilitated by the Central Bank and policies cover Global shipments, Specific shipments, Contracts and Services. SMEs need to provide the description, destination, value for the next 12 months and payment terms for the goods to apply for this product. Another useful example, in Barbados, is the Enhanced Credit Guarantee Fund (ECGF) which was set up to assist SMEs in need of credit for business development projects. The Fund assists by providing the necessary security for SMEs, so they can more easily access business development loans from approved financial institutions (Commercial Banks and Finance Companies). This scheme guarantees 80% of the credit facility and aids with collateral cover on the shortfall usually experienced by SMEs. In addition, this covers a portion of the default risk, but recourse remains in place for the recovery of the collateral held as security. This model is one that can certainly benefit other countries in the region. Financing Transactions If we take the entire financial life cycle of the SME into account there are a myriad of transactional solutions that can be used based on size, circumstances, and resources. As SMEs move from the start-up phase to become full-fledged businesses, there are a few options that can be leveraged to bridge the gap where traditional financing does not lend assistance. These can be summarized as follows: • Trade Credits (which look at the delivery dates between the actual receipt and payment of goods) has been one of the most prevalent forms of credit to buyers and is a pre-arranged facility between the buyer and seller. It is one of the cheapest forms of arranging terms for goods. This form does not normally rely on