From the pulpit to the house of assembly, from street corner to speech writer we hear the refrain that our banks charge too much interest, their only motive is profit and they don-t care enough to help us as Bahamians. These assertions come from many people who run their own enterprise or have senior positions in the community and they are absurd! Here-s why.
- Anyone who is in business, is there to make a profit. Whether it is the Prime Time Cinema, the Church of Rose Island or the Member of Parliament. If these enterprises do not make a return on their investment, the doors will have to close.
- Banks re-lend money placed on deposit with them from other people just like those of us who need to borrow. If careful policies are not crafted for the loans granted, many of these institutions would not be around today.
Mr. Hometown Banker is Not a Big Risk Taker.
It would appear that many investors with speculative projects expect to walk into their Hometown Bank and receive approval for a loan of depositors money with alacrity. Mr. Hometown Banker is not expected to be a “high” risk taker. He is trained to lend within certain parameters to ensure his depositors money will be returned, with a profit of course. This anticipated profit is no less than what any other enterprise, like Prime Time Cinema or the Church of Rose Island expects.
Should banks become high risk lenders, their interest rates would have to be even higher to compensate for the increased likelihood of a defaulted loan. Interest rates are already under attack for normal lending. Would these enterprises be in a position to pay the higher rates? I suspect not.
Beside, banks do not expect to receive an equity position in the operations they fund. And they surely are not in business to collect unsold inventory or property. They expect to make a return on loans granted to pay interest to depositors and salaries to their staff and so on.
I would suggest that the reason for banks and their lending practices are misunderstood. Maybe the people who think that banks are such vile and unhelpful institutions should open a bank of their own, implement the loan policies they desire and see how long they can survive.
An option available in larger countries for entrepreneurs is Venture Capital. However, for this high risk lending Mr. V. Capital banker gets a stake in the business and the interest rate tends to be higher than banks.
Venture Capitalists monitor closely the management of a business and can dictate what policies are followed. Like banks, they have preferred situations in which to provide funding. The difference is their “depositors” are willing to take higher risks for higher reward.
Since no Venture Capital is available locally entrepreneurs must find funding through other sources. Private loans or share offerings are becoming more favourable now that “fronting” seems to be less in vogue.
A very serious issue relating to venture capital is whether our market is big enough for an operation like this. Many people don-t think so. Besides , just as our bankers require a fairly large spread, the Venture Capitalists tend to demand the “real prospect of a healthy dividend yield and capital growth over five to seven years.”
The Bahamian Entrepreneur
The positive thing about “bank bashing” is that it means that more Bahamian Entrepreneurs are emerging. Bahamians are beginning to take advantage of the opportunities out there. Unfortunately it may now take a few years for the credit facilities to catch up.
Based on recent tirades against banks it appears that we (Bahamian entrepreneurs) expect loans because we have an idea but we cannot provide the comfort that we have a business track record or we do not want to provide assets to secure the financing.
What Have Other People Done?
I understand that groups of Bahamians, or families came together to invest portions of their money into a venture in the past. Basically a Bahamian Venture Capital company. The risks might have been great, but there have been many rewards for those people willing to put in the effort.
An example of this in the US is Motown Records. Mr. Barry Gordy-s family decided to pool their capital to support family ventures. The first proposal was $800 in a song writing and recording venture… the rest is history.
Give The Banks Some Credit
While I am not an authority on the reasons for the demise of the People-s Penny Savings Bank and Gulf Union Bank I would be willing to bet that sound banking principles were not applied. It-s easy to suggest that banks are unreasonable or don-t care about the entrepreneur or are solely motivated by profit, but the true business builder is the one that hits the wall and bounces off running like a good running back in the Super Bowl. Eventually you break through and learn valuable lessons from the experience that will help in the years ahead.
Banks do finance numerous entrepreneurs and new ventures however, when we consider that five to seven of every new business fails we can surmise the reasons for their being more conservative than we would hope.
The recently enacted government guarantee scheme might assist banks to open up more, because if a debt goes bad our taxes will bail them out. But in reality, banks do help a lot of people. However it is only reasonable that they should protect their depositors money. In the meantime many markets to capital are opening up and these should only improve as more people take advantage of share offerings.