Saturday, February 24, 2018

An engine for growth in T&T


Finance Minister Larry Howai

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In developed and developing countries worldwide, small and medium-sized enterprises (SMEs) are making their mark on the economic landscape due to their strategic importance in reengineering the industrial sector.

Indeed, SMEs are being viewed in many quarters as a vital engine for growth.

This is no less evident in Trinidad and Tobago where SMEs have mushroomed over the last decade numbering some 18,000 by the end of 2010, employing 200,000 people and contributing nearly 28 per cent to GDP.

This compares favourably with India where SME contribution to GDP is expected to rise from 17 per cent in 2009 to 22 per cent by 2012. In developed countries like the USA, Japan, South Korea and Germany the contribution to GDP exceeds 50 per cent.

It is instructive to note that this comparison of SMEs are not on similar parameters, as small and medium enterprises are not uniform, both in size and shape, across the globe. A World Bank study which surveyed 75 countries found that there were more than 60 definitions of small and medium enterprises. However, the most commonly used definitions relate to either size of employment and/or quantum of capital investment/fixed assets.

In the local context, a small enterprise is defined as having six to 25 employees, assets of $250,000 - $1.5 million and annual sales between $250,000 - $5 million. A medium enterprise, is one with 26-50 employees, assets of $1.5 million to $5 million and annual sales of $5 million to $10 million. Based on these criteria, the CSO estimates that SMEs constitute over 85 per cent of all registered businesses in T&T.

SMEs have unique advantages over larger businesses: They are substantial generators of employment, and can act as shock-absorbers during a crisis, responding more readily to vagaries in the market. With the absence of layers of authority, decisions can be taken pretty quickly and so the market expectations can be fulfilled. They also can provide a wide range of products often at affordable prices.

However, SMEs have faced several constraints, the most persistent of which have been non-availability of loan finance, low levels of technology and research and development, and inadequate physical infrastructure. Despite the high liquidity in T&T's commercial banking system and the availability of a small-business window at certain banks, the CSO found that only about 11 per cent of SME start-up funding comes from the banking fraternity with 70 per cent coming from personal savings.

While this disparity could be attributable to the perceived riskiness of SMEs and the associated high cost of borrowing, research conducted by CariCRIS - the regional credit rating agency - has revealed that the SMEs' inability to communicate business models and plans to bankers as well as the inability of commercial banks to engage in a structured methodology to evaluate and price credit risk are among the primary mitigating factors.

Raymond Smith speaking at an SME Conference some time ago, indicated that when evaluating proposals from SMEs, financiers will consider, inter alia, who the owners of the business are; their financing skills and competencies; strengths and weaknesses of competitors and whether the customer base is well diversified and growing.

The absence of these elements in a professionally crafted business model can lead to their rejection. One has to assume also that the banks have the relevant qualified staff dedicated to this process.

Be that as it may, and given current circumstances where SMEs experience significant difficulties in accessing bank financing, the burning question is, where can they source this much needed capital? In response to this, the Minister of Finance in his 2011/2012 budget statement delineates Government's plans for the establishment of an SME Market on the T&T Stock Exchange with the creation of a "third provide Small and Medium Enterprises with access to the capital market". A similar approach has proven to be quite successful in Jamaica and the expectations are that similar results can be achieved here in Trinidad and Tobago.

We are confident that SME sector development will continue to be an integral part of the development thrust in T&T given its potential as a vehicle for employment generation, poverty eradication and promoting an entrepreneurial culture. With more than half of the Chamber's membership comprised of SMEs, we have made SME development a priority.