“Be kindly affectioned one to another with brotherly love; in honour preferring one another” – Romans 12:10
The primary financial institution in many of the countries in the Caribbean is the commercial bank. Their clients are either businesses or individuals who are in need of loan finance to establish and grow their businesses or personal assets, respectively.
Today’s procedure is quite clear. A proposal is made to the bank; the bank assesses viability of the business, the risk involved and the ability of the business or individual to repay; the bank determines the amount of hard collateral (e.g. land or property) which is required to secure the bank depositors’ interests, in the event that the loan is not repaid according to an amortised schedule (principal and interest); and then the bank responds to the client.
My understanding is that in the early days of commercial banking in the Caribbean, the likelihood of the approval of a loan request was directly proportional to an individual bank manager’s personal assessment of the client’s intention to repay more so than a scientific risk analysis of the project at hand. With the advent of the Central Bank and its Bank Supervision department, the flexibility of subjective assessment in the loan request decision making process of commercial banks has to a large extent been diminished. The story goes that one of the leading commercial companies today had its first loan request turned down by a commercial bank. I can only speculate that it was due the failure of the enterprise to articulate the vision, the lack of hard collateral or the conservative nature of the commercial bank.
Statements by commercial bankers like “we do not fund start up enterprises”, presumably because of the high risk involved, have been the response given to many an emerging entrepreneur with a brilliant idea but with no supporting collateral to offer the bank. I have explored ways which could lead to a change in the paradigm of the commercial bank, but these were short lived and indeed even though they might have been supported by the visionary thinking of some local commercial bank managers they were not supported at the head office level for whatever reason.
The resulting effect is that many promising enterprises have never lived to see the light of day and as a result the corresponding entrepreneurs have been robbed of the opportunity to make that much need contribution to the economic growth of the country. We must remember, of course, that there is no other way of achieving economic growth than one successful enterprise after another.
In spite of the rather conservative attitude of the commercial banking system, there is still an item called “loan loss provision” on their balance sheet which is more often than not at a significant level. What this tells me is that despite the careful risk assessment there are still a number of businesses which fail. My conclusion is that we must be strive to understand why businesses fail and find a solution to the problem.
I have had the opportunity in the last ten years to focus quite heavily on enterprise development as a strategy for economic growth. Indeed we have developed a CBET Shepherding ModelTM which has three primary components. One is the passionate entrepreneur, the second is an experienced shepherd, and the third is the Quick Response Seed and Venture Capital funding. The passionate entrepreneur is driven by the determination to make the idea work. The experienced shepherd brings to the table a history of success in the face of adversity. The seed capital is initially provided by government, on behalf of the people of a sovereign state, to remove some of the risk endemic in the start up enterprise. The venture capitalist makes the first investment in the enterprise.
When the passionate entrepreneur approaches a commercial bank with an experienced shepherd in tow, as well as a professional business plan which has been made possible by the seed capital fund, then the commercial bank, from a risk assessment perspective, has many of its concerns removed. However, there is still the practice of requiring hard collateral before funding can be advanced.
One of my missions in life is to persuade the commercial banker that the shepherding concept, where an experienced shepherd is assigned to the entrepreneur, mitigates the failure of the business in a way that no amount of hard collateral can and that the adoption of the CBET shepherding model by an enterprise, should be regarded as part of their risk assessment process.
More loan business for the bank increases the return on its shareholders’ investments and contributes to the economic growth of the country, which in turn enhances the banks growth. In last week’s article where I addressed the topic of risk in organisational systems, I had a response from Sir Courtney Blackman, the founding Governor of the Central Bank of Barbados, “I liked this piece especially since it places the responsibility for risk management squarely on management”. I interpreted this statement as support for the CBET Shepherding Model.
The CBET pioneering application in Barbados has reached a point where the first six enterprises are about to present their business plans for venture capital funding. I am looking forward to the possibility of approaching commercial banks to encourage them to develop a partnership with CBET’s clients and the CBET Shepherding model in the bank’s own best interest.