Working Paper Series: Special Edition of 2016 to 2018 Interns

Establishment of a Regional Credit Bureau In credit markets, information is a key factor lenders consider when making a decision about whether to grant credit or not. In the absence of reliable credit information, lenders are unable to differentiate the good borrowers from the delinquent ones. Applying the work of Akerlof (1970) to commercial lending, financial institutions could end up with a significant amount of undesirable credit facilities. Thampy (2010) argues that inefficient allocation of funds is due to the absence of a mechanism to bridge the information gap between borrowers and lenders. Triki & Gajigo (2012) finds that public credit registries, which provide positive and negative information work in favor of firms when it came to accessing finance. Findings by Djankov et al. (2007) suggest that the association between private credit and public and private credit registries was strong in poorer countries but not for the richer countries. Evidence by Galindo & Miller (2001) suggests that countries where credit registries were better developed enjoyed lower financial restrictions as opposed to those where credit bureaus were underdeveloped. Jentzsch & Rientra (2003) finds that information sharing led to increased access to credit and furthermore increased indebtedness among firms. From the findings in the preceding section, evidence shows that small and medium firms are less likely to have access to credit in both the CARICOM and ECCU sub-region. Credit information sharing can enforce discipline among borrowers and reduce risks associated with moral hazard, furthermore it would allow the firms to build a credit history and establish a reputation that can be useful later on particularly as it relates to SMEs (Malhotra, et al., 2006). The ECCB is partnering with the World Bank on the establishment of a regional credit bureau for the ECCU 8 . This initiative would allow banks to access more information on SMEs, which should reduce the risk in lending to this sector. This would result in more credit allocation to the private sector, spilling over into the real economy and leading to overall economic growth.

8 At the time of this paper there is current draft legislations awaiting approval by the different regional governments.

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