Dear Editor,
IN 2006, my friend, Tarron Khemraj, now a professor, presented a paper at the Bank of Guyana in which he demonstrated why the local banking system’s contribution to development was relatively limited. In his study, later published in the Journal of Social and Economic Studies, he attributed this outcome to the size of both the economy and the banking system.
According to Professor Khemraj, Guyana’s small economy meant that the volume of bankable business opportunities was limited and relatively risky. Given the prudential regulations that banks are required to observe, financial institutions tended to target low-risk projects and invest their funds in safe securities, both locally and overseas. The remaining funds, described as excess liquidity, often remained idle and unremunerated. As a consequence, many businesses were starved of capital, and the economy did not fully benefit from the financial reforms implemented since the 1990s.
Professor Khemraj also noted that the banking system was highly concentrated. This concentration helped explain the high lending rates and wide interest-rate spreads. Apart from the collateral requirements that are standard throughout the banking industry worldwide, these high interest rates effectively locked many businesses out of the formal financial system.
Since 2020, the number of bankable business opportunities across multiple sectors has grown significantly, with small and medium-sized enterprises (SMEs) poised to benefit from these emerging prospects. However, one of the most significant constraints preventing these businesses from fully capitalizing on these opportunities remains the combination of high interest rates and stringent collateral requirements.
Recognizing this reality, the Government promised to establish a Development Bank. Within months of being re-elected, it moved to advance plans for the institution. This bank, which could address a critical gap identified in Professor Khemraj’s earlier analysis, is expected to provide more accessible financing options for SMEs. Businesses that have been burdened by high borrowing costs or excluded from traditional lending channels could gain greater access to affordable capital to expand their operations.
The Development Bank is also expected to help de-risk projects through co-financing mechanisms that could unlock a portion of the excess liquidity currently held within the banking system. For the first time, many SMEs may have access to affordable financing on a scale not achieved through previous financial-sector reforms alone.
We are now only days away from the establishment of what could become one of the most transformative institutions in Guyana’s post-independence history. The Government has allocated the necessary resources and is moving to enact the legislation required to establish this important institution in a relatively short period.
The projected benefits are significant. In a paper I recently co-authored with Professor Khemraj, titled “Bank Concentration, Interest Rate Spread and the Case for a Development Bank in Guyana,” we quantified some of the potential gains that such an institution could deliver. Our findings suggest that Guyana has an opportunity to develop a financial system that is more closely aligned with its development aspirations and better equipped to support sustained economic growth.
If successfully implemented, the Development Bank could help transform idle capital into productive investment, expand opportunities for SMEs, and strengthen the link between financial-sector development and national development. In doing so, it may become an important pillar in Guyana’s ongoing journey toward broader economic growth and shared prosperity.