Dear Editor,
In 2006, my friend Tarron Khemraj, who is now a professor, presented a paper at the Bank of Guyana where he demonstrated why the local banking system’s contribution to development was relatively small. In his study, later published in the Journal of Social and Economic Studies, he attributed his findings to the size of the economy and the banking system.
According to Professor Khemraj, due to a small economy, the volume of bankable business opportunities was sparse and relatively risky. Given the prudential regulations these institutions are compelled to observe, they targeted low-risk projects and invested their funds in safe securities (local and overseas). The remaining funds, described as excess liquidity, remained idle in the banks’ vaults, unremunerated. As a consequence, businesses were starved of capital, and the economy did not fully benefit from the reforms implemented since the 1990s.
In his study, Professor Khemraj also noted that the banking system was highly concentrated. The high concentration explained the high lending rates and interest rate spreads. Apart from the banks’ collateral requirements, which are standard worldwide, the high interest rates served to lock many businesses out of the banking system.
Since 2020, the number of bankable business opportunities across sectors has grown exponentially, with SMEs poised to benefit from these emerging opportunities. However, the most significant constraint barring these businesses from taking full advantage of the investment opportunities is the high interest rates and collateral requirements.
Recognizing this reality, the Government promised to set up a Development Bank. Within a few months of being re-elected, the Government swiftly moved to establish the Bank. This institution, which was the missing link in Professor Khemraj’s study, will offer interest-free loans without collateral. SMEs that were either burdened by high interest rates or locked out of the financial system will finally be able to access affordable funds to finance their operations.
The Development bank will also derisk project through a cofinancing mechanism that will unlock the excess liquidity in the banking system. For the first time in our history, SMEs will benefit from affordable financing, something that decades of financial reforms couldn’t deliver alone.
We are just a few days away from being gifted with one of the most transformative initiatives in our post-independence history. Thanks to the vision of the Government and its ability to deliver a project of this magnitude in less than one year. Our government has allocated the funds and is in the process of enacting the Act to establish an important institution in record time.
Based on a paper that I recently co-authored with Professor Khemraj, the simulated benefits are clear. In that study, entitled “Bank Concentration, Interest Rate Spread and the Case for a Development Bank in Guyana” we quantified the benefits the Development Bank will deliver. The results illustrated that Guyana will soon have a financial system that is aligned with our development aspirations rather than one that is not fully supportive of our country’s development. Thanks to the visionary policies of our government, the story of our country is being rewritten from one of ‘gloom and doom’ to one of ‘unprecedented growth and development that will drive shared prosperity’.