Financial system failing our innovators
That’s the gist of a presentation by Central Bank of Barbados Governor, Dr. DeLisle Worrell, who identified a “disconnect between the financing needs of companies that wish to exploit novel opportunities in areas like cultural industries and green energy, on the one hand, and investors who need long term outlets for their money”.
He raised the issue while speaking on the topic “Our Financial System – Fit for Purpose?” this morning at a Barbados Association of Insurance and Financial Advisors meeting at the Lloyd Erskine Sandiford Centre.
“I believe the financial system serves individuals, households, well-established firms and traditional lines of business very well. However, the further development of our economy requires increasing investment in activities that are innovative in one way or another,” the economist said.
Worrell said that in addition to innovations in the cultural industries and green energy, there were “a myriad of other possibilities related to tourism, international business and finance, and agro-processing”.
Using facilities for sports such as polo and rallying, heritage sites, and the production of biodiesel as examples, the official said “for these and similar activities we need to find the appropriate financial channels to overcome the perceived difficulty in securing adequate funding for their implementation”.
Worrell said, based on the World Bank’s Global Competitiveness Index, availability of finance “remained number two in obstacles to doing business in Barbados”, which he surmised “may be that the sources of available finance do not cover innovation”.
“It is the businesses which aim to break new ground which have difficulty in sourcing finance on terms which they can afford. What such firms need is equity finance, funds from sources which will not expect an immediate return, and can wait until the project becomes profitable. We should give some thought to this problem,” he said.
“It may be argued that there is an adequate supply of funds from sources that are prepared to take the long view, foregoing near-term returns on their investments in exchange for a higher yield over the life of the investment.
“Insurance and pension funds, for example, may wish to allocate a portion of their portfolio in this way. What they may lack is an appropriate vehicle for channelling those funds in the direction of innovators.
“The Stock Exchange does not provide such a platform, because innovating firms will not have a track record of success in the intended activity, as the basis for attracting investment in their equity. Investors on securities markets gravitate understandably toward well established firms with a strong track record in areas with which the investor is familiar. In other words – the antithesis of innovation,” he added.
Worrell also advised innovators to avoid commercial banks if they were in search of finance, although he noted that these financial institutions were reluctant to lend to these individuals anyway.
“In my view, firms that are breaking new ground should avoid bank debt if possible, because any new activity needs to be generating a reliable ongoing stream of income sufficient to meet operational costs, before it begins to take on bank debt, which comes with a monthly service cost,” he noted.
“In its infancy the business will not want to deplete its shareholders’ equity to service bank debt. Later, when the business is well established, the entrepreneur should have less difficulty securing bank financing for overhead expenses.”
Worrell said he did not have “a ready solution for filling this gap” and invited the association’s members to offer feedback on his comments on the matter, saying the Central Bank “would be willing to facilitate an informed discussion on this question, if there is interest”. (SC)