Members and partners of the Small Business Association of Barbados recently sat down in one of the association’s webinars, with economist Jeremy Stepehen, to discuss the business of banking. The session was held against the backdrop of recent efforts by some commercial banks to introduce fees for the use of the Automated Clearing House (ACH) network and the wave of fees introduced by several banks for various core banking services.
The perception shared by many in the business community is one of skepticism. Following the change in the policy regime by the Central Bank of Barbados in 2015, to remove the minimum interest rate on savings and deposits, it would appear the introduction of fees is skyrocketing out of control. This latest attempt was the proverbial straw for many consumers, resulting in national outcry and prompting the intervention of the Central Bank.
The irony in all this is the reported huge profits being earned by these financial institutions. Media reports indicate close to $200M in after tax profit in 2022 and over $225M for the first nine months of 2023 earned by commercial banks in Barbados. While we appreciate that a key goal of business is to be profitable and provide a decent rate of return to shareholders, the social democratic model of development adopted by Barbados suggests that the austerity levied on consumers on the altar of big profits is a departure from this ideology.
Economist Stephen opined that banks are viewed as a store of value, where deposits are meant to fund the loans they provide in exchange for interest. He reminded the session that commercial banks invest heavily in the ACH network to ensure that their systems are compliant and safe in a technology-driven world, and this carries a high cost.
Identifying the different types of banks, Stephen explained that commercial banks perform a retail function along with a wholesale function, providing a wide range of services for people and businesses.
Merchant banks, on the other hand, provide transactional services for business activity which include procurement services, foreign exchange and factoring, while investment banks provide capital or underwriting services for large-scale projects.
Focusing on commercial banks, with whom small businesses interact the most, the former lecturer in risk management with the UWI, Stephen noted that banks’ consistent cash flow comes through loans, where money is made through interest or transactional fees. They serve as intermediaries between individuals, businesses and government entities and help manage digital banking services and provide consultancy services. Commercial banks also handle exchanges between foreign and national currencies, and in the case of Barbados, they work with the Central Bank to facilitate these transactions.
Of particular note is the role played in sustaining Barbados’ consumer driven economy. Some 80% of economic activity in the country is generated by loans, which in turn generate economic activity and consumer spending. Commercial banks have a higher bank debt when compared to credit unions as they are the principal provider of consumer (short-term) credit in Barbados.
Small businesses were made aware of the consumer loan categories and as analysis showed, loans to small businesses were almost negligible. Home improvement and real estate dominated almost 50% of the market, while the purchase of private vehicles followed at 30%. Commercial vehicles, travel, furnishings and domestic appliances, and taxis and rented cars completed the loan portfolio of commercial banks. A self-employed person or an employee in a small firm can easier access a vehicle loan than for that firm to qualify for a business loan.
Research showed that since 2018, deposits in both banks and credit unions have risen exponentially. Explaining the low interest rates that banks pay on deposits, Stephen noted that when deposits are high, banks determine that they do not have to pay high interest rates.
Several key takeaways were observed for small businesses.
- Banks should be used primarily for transactional purposes.
- The Islamic style of banking is more valuable to this market. Though this model is used by a section of the Barbadian populace, with the absence of the regulatory framework to enable this regime, this style of community banking may not be a reality in Barbados for some time to come.
- The cannabis industry is not a viable sector for investment at this stage due to issues with correspondent banking. The challenge banks in Barbados faced with their corresponding banks in the USA, is that the cannabis industry is legal at the State level, but illegal at the Federal.
- Credit Unions continued to be stunted in their growth and ability to offer value-added services to members e.g. corporate accounts and the attendant products for businesses. In addition, the regulatory framework limits their investment options.
- Small businesses do not benefit significantly from their relationship with banks as there is difficulty in procuring loans for equipment, expansion and business development, compared to the ease in access to a vehicle loan.
Small firms are again being challenged to consider building a regional outlook to leverage business growth and access to capital. The local financial market has its own peculiarities which may not offer significant benefit to a sector seeking growth opportunities. Until products are introduced to unlock a percentage of the huge deposits held by individuals in financial institutions, small businesses will continue to find it difficult to pivot and go beyond their domestic limitations.
