COMMERCIAL BANKS – ONE STEP AT A TIME
COMMERCIAL BANKS – ONE STEP AT A TIME – BASIL SPRINGER COLUMN TO APPEAR IN THE BARBADOS ADVOCATE’S BUSINESS MONDAY ON OCTOBER 26, 2009
Click here for information on a new venture capital investment opportunity! http://www.mediaexchange.info/portals/2/biba.pdf
In my column last week, I proposed a new paradigm for commercial banks that, given the advent of the CBET Shepherding Model, they should examine their risk assessment processes. This was in the context of the commercial banks’ position on not funding start-up enterprises because of the high risk involved. My thesis was that, if one examines the reasons for the high risk – management of marketing, operations, people and money – and addresses them, the commercial bank might have less of a concern about the risk of business failure and then this would open up a new start-up enterprises portal to expand their business model and therefore induce greater economic growth. This in turn will fuel business activity at the bank and everyone would win – the entrepreneur, the commercial bank and the country.
There were several responses to the column ranging from a retired Central Banker and a retired commercial banker, through an international economist and fledgling, well qualified and dynamic marketing and financial specialists.
The shepherding concept, in terms of its logical design, was recognised and praised. The challenge of getting bankers to embrace it as a tool with which to mentor and nurture start-up enterprises in the embryonic stages into viable activists of the private sector, was another issue.
One of the respondents said that “this challenge is all about balancing emotional intelligence with a healthy dose of fiscal conservatism”. She said, “The emotional intelligence to see a start-up loan seeking small business as a gentle sheep to be shepherded – and not a buzzing fly to be swatted – will result in banks enjoying positive pay-back rates on the moneys they lend and allow bankers and loan seeking businesses to build and enjoy a positive working relationship. This relationship will NOT be based on the tactical asymmetry that is generally inherent to the loan relationship between the loan seeker and the lender, but on one’s connection to the other and on their shared sense of community.”
It was generally felt that the shepherding model had its merits but it was too much to expect commercial banks to effect immediate change to their well oiled risk assessment machine. Indeed, the Shepherding Model, as a new initiative, does not have any track record and the best that could be expected is for the more visionary of the commercial banks to consider a “shepherding as collateral” model when there was convincing evidence of its credibility. We shall, therefore, set about diligently to implement this shepherding concept, starting in Barbados, and to ensure that records are accurately kept of the shepherding effect from idea, along the journey to sustainable business success.
Of course, we are well aware of the international statistics which state that 80% to 90% of businesses fail within the first two years of operation. My vision is that the shepherding process will convert that failure rate from 80% to 20%, say, thus introducing a fourfold growth factor for new enterprises. The shepherding process is expected to demonstrate that it is a powerful tool for generating cash flow so that, when the bank is asked to partner with the CBET Venture Capital Fund as the business starts up, the bank will see that the cash flow potential based on the historical performance of the shepherded businesses will outweigh the need to rely on hard collateral.
The experience to date in our six pilot projects, using the Shepherding Model, has taught us many things about why start-up business fail and has allowed us to address these weaknesses in a very creative and innovative way through the Shepherds as they bond with the entrepreneurs to lay a sound foundation for sustainable success. Introduction of the Shepherding Model will ultimately result in consistent economic growth, one successful enterprise after another.
The Shepherding Model assumes a passionate entrepreneur with a “DNA of an elephant idea” i.e. potential for sales on the global market. Our first six enterprises selected will be showcased at the launch of the Barbados Quick Response Entrepreneurs’ Venture Capital Fund in mid-November, after which we expect to attract significant investment into the Venture Capital Fund.
Whereas, I am prepared to concede that it is a bit premature to ask commercial banks to change their risk assessment process, based on a promise of the advent of a risk mitigating measure, I think that the time is right to invite commercial enterprises, including commercial banks, to invest in a bond issue which will capitalize the Venture Capital Fund, especially if the Government, on behalf of the people of Barbados, is prepared to give a significant incentive to guarantee the investment principal.
The response given to many an emerging entrepreneur with a brilliant idea but with no supporting collateral to offer the bank has been “I am sorry, we do not fund start up enterprises”, presumably because of the high risk involved. I have explored ways which could lead to a change in the paradigm of the commercial bank, but these were short lived and indeed even though they might have been supported by the visionary thinking of some local commercial bank managers, they were not supported at the head office level for whatever reason. If we all work together for a win-win outcome, the Shepherding Model may well be the catalyst that turns concepts into commercial realities and stimulates economic growth.
(Dr. Basil Springer GCM is Change-Engine Consultant, Caribbean Business Enterprise Trust Inc. – CBET – Columns are archived at www.cbetmodel.org)