Working Paper Series: Special Edition of 2016 to 2018 Interns

Compared to CARICOM, in the ECCU there is a high degree of heterogeneity among firms and countries. Highly innovative firms, those dedicated towards product development and firms with audited financial statements were significantly more likely to have access to credit. In addition, firms’ performance as measured by growth in sales was found to significantly increase their likelihood of accessing credit. Whereas, firms belonging to a larger enterprise, those with audited financial statements and legally incorporated sole proprietors were significantly more likely to demand credit. In the ECCU, the log of GDP was found to significantly reduce firms’ ability to access credit; however, it had no significant impact on the demand for credit whereas real interest rate was found to significantly reduce the likelihood of firms applying for credit. This suggest that there is a role for policy makers to ensure that sound fiscal rules are applied and sound macroeconomic policies are implemented so as to ensure stability in these economies and confidence in the private sector. Individual differences among firms were found to significantly affect the way in which firms access and demand credit particularly in the ECCU. 7 Policy Recommendations Given the information asymmetries that exist in the ECCU and wider CARICOM region, there is currently a gap in credit markets between borrowers and lenders. The empirical analysis confirms some of the key findings that are consistent with the literature. In particular, firm size and audited financial statements were found to have a significant impact on firms’ likelihood of accessing credit. This shows that information as evidence by the significance of the variable audit, does increase access to credit and reduce information asymmetries. It is also noted that the relationship between borrowers and lenders also significantly increases firms’ likelihood of accessing credit. It is also an indication that banks have resorted to the use of “soft information” in the absence of reliable information. The following recommendations are proposed for mitigating the risks in lending to SMEs: (1) the establishment of a regional credit bureau (2) the establishment of a loan guarantee scheme and (3) the creation of a secured transactions framework.

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