By Rawdon Adams
BRIDGETOWN, Barbados, Thursday September 7, 2017 – Tinder, a dating app for smartphones, describes itself as “the world’s most popular app for meeting new people”. For Barbadian deposit holders earning zero or near zero interest from their banks, an equivalent service for money would be most welcome: their capital would also like to meet new people.
There are around 1,000 businesses in Barbados turning over between BDS$1 million (US$500,000) and BDS$20 million (US$10 million) per annum. No other segment contributes more to the approximate BDS$18 billion (US$9 billion) the entire private sector generates in sales annually, or to national employment, or to the Value Added Tax (VAT) coffers of the government.
Nonetheless, collectively these small and medium sized businesses (SMEs) do not have it easy. Caught between a tough borrowing environment and the inability to self-finance growth they tread water instead of investing in expansion, consistently increasing revenues, creating jobs and powering the nation’s gross domestic product (GDP).
So why do the SMEs not seek funds from private and institutional investors through a listing on the Barbados Stock Exchange (BSE)? Certainly there is capital in the system: private depositors alone have nearly BDS$4.5 billion (US$2.25 billion) in commercial banks earning next to no interest; and total commercial bank deposits are over BDS$8.1 billion (US$4.05 billion).
Yet, incredibly, of the 1,000 businesses referred to above not one is listed on the BSE. There are, in fact, only 15 non-mutual fund companies listed on the BSE – and the trend is towards delisting.
SMEs are the main engine of growth in all economies. If they cannot invest for that growth the national economy idles. How, then, can the spirit of a financial Tinder app be invoked to encourage them to list on an exchange, tap that large pool of dormant capital and plan expansion?
There are 3 crucial steps towards achieving this: legislation, technology and fiscal policy
1. Innovative legislation
Listing shares is complicated and involves several intermediaries (for example, brokers, transfer agents, centralised securities depositories and exchanges like the BSE). All these add “friction” to the issuance, trading and record keeping of share transactions. This friction is measured in additional costs and time spent on the complexity of the process. The end result, especially to SMEs, amounts to a disincentive to list.
This is not an issue unique to Barbados. On July 21st this year the US state of Delaware passed into law Senate Bill 69 (SB 69) specifically to reduce such friction. SB 69 amends Delaware’s General Corporation Law to permit private companies to issue and track shares of stock using technology known interchangeably as ‘blockchain’ or ‘distributed ledger’.
Ultimately the law seeks to radically simplify the process of matching up of those with capital to those seeking it – exactly what Barbados needs desperately to do. SB 69 might well serve as a template for us. Its potential impact is far reaching and, in the context of Barbados, transformational. However, the legislation cannot be separated from a discussion of the technology it seeks to harness.
2. Blockchain / Distributed ledger technology
Distributed ledgers unite technologies that have existed for some time: they combine distributed computing systems (examples of which include email, air traffic control and multiplayer internet-based video games) cryptography and, at their most powerful, “smart contracts”. An everyday example of the latter is a bank direct debit programmed to pay down a mortgage monthly.
The crucial innovation of distributed ledger technology is that it allows multiple parties to see the same information in real time in a fully transparent manner and know that it is valid. In the context of share issuance – and this is the intention of Delaware’s SB 69 – this means transactions are verified and processed directly between companies and shareholders on a peer-to-peer basis without the need for intermediaries. Fewer intermediaries means transactions are settled within moments, market liquidity increased, capital untied and transaction costs lowered.
It is an attractive solution suitable for Barbados and already commercially available. It and the enabling legislation alone, however, cannot achieve the desired effect.
3. Fiscal policy
The decisive factor in radically improving SME access to capital is the provision of a fiscal incentive. One example I have seen suggests reducing corporate taxation from 25% to 15% for companies who issue at least 20% of their shares to investors. For many firms that kind of incentive will more than cover the associated costs of listing as well as the hassle of meeting regulatory and compliance requirements. Financing the short term cost of that change can be realised by increasing the corporate tax rate for the largest private sector companies as measured by assets.
Of course, there are other approaches to consider. What is vital is pragmatically using what has worked and avoiding what has not. Jamaica, for example, provides tax holidays for up to 5 years to encourage listing. This has produced some interesting success stories (Jamaica Teas and LASCO Manufacturing for example), some abuses but in aggregate an impressive market performance the sort of which Barbados deposit holders would not mind getting to know better:
Overall, creation of an appropriate fiscal incentive in Barbados is about the efficient allocation of capital in the economy, wealth creation, and the professionalization of corporate governance for the most important economic strata of the private sector. It can increase the size of the SME economic pie and would have the handy side-effect of also increasing demand for the investment services industry in areas like company analysis, research and advice.
For Barbados there are clear implications for the BSE in permitting blockchain for the issuance and trading of shares. Allowing a competing exchange based on this technology that specialises in SMEs would be an elegant approach in keeping with the spirit of the financial Tinder metaphor. Market participants will then decide, in cash, which wingman is best suited to expanding the SME sector.
Rawdon Adams has worked in Britain’s finance ministry as an expenditure analyst monitoring the spending of the UK’s Overseas Development Administration; as well as at Rank Xerox in the UK and General Electric Medical Systems in France in finance roles ranging from revenue analysis, research and development cost control and inventory management. For the last nine years in France he has run a FinTech company he founded specializing in the hedged trading of US equities. He is a keen observer of developments in Barbados and is currently considering professional opportunities that might bring him home.