Today, I was on a panel discussing lending and access to capital (
not a wooden panel, mind you — but a panel of speakers. Now that I think about it, we may have been sitting on wooden panel flooring).
At any rate, the discussion covered alot of ground, all as part of the larger context of fixing the “access to capital problem” for SMEs (Small & Medium sized enterprises) in Bahrain.
Of course, this challenge isn’t unique to Bahrain — and in this post I wish to break down how I would go about assessing the extent of this problem, and the specific solutions that would result in the greatest “bang for buck”.
This is the first in a five-part series where I approach the problem in-depth and come up with some suggestions for solutions. If this 5-part series sounds suspiciously similar to the 5-step DMAIC problem-solving methodology, that’s because it is! Read up on that if you’re interested in the meta learning aspect of how I approach problem solving.
Some basic background on the issue may be helpful, for the uninitiated. Capital essentially means money, and “access to capital” is concerned with making money available to people that wish to do something productive with it; this usually goes towards starting a business of some sort.
Already, you can sense the nature of the issue. If people that start businesses are unable to access the funds they need to become productive — this can have serious negative consequences, including:
- Lower GDP growth, as productivity is limited to growth of existing entities. New ventures, that typically experience faster relative growth, become a smaller and smaller contributor to the overall economy.
- Increased unemployment, as joining an existing entity becomes the primary source for jobs.
This seems like a pretty serious issue after all!
Is access to capital even the problem?
Before diving into solutions, it’s important to dwell on the problem — and particularly the inherent assumptions.
A search for solutions to “access to capital” assumes this problem already exists. What is that assumption based on?
To know for sure, we’d need to first gauge present demand for loans . Having a “gut feeling” that this is an issue (no matter the individual that gut happens to belong to) won’t cut it — anecdotal evidence is only marginally better.
At minimum, we’d need to know:
- the total number of corporate loan applications
- the number of these applications that are rejected
- a breakdown of rejections by reason
This shouldn’t be difficult to come by; banks and corporate credit unions keep such records on hand, and it may take little more than a letter from the Central Bank to convince them to share these details.
After all, if we’re spending all this effort working through such a crucial issue, we better make sure we have solid data behind us.
Once we have this data, we can encounter four potential outcomes (across our two axes of demand and rejection rate):
High demand, low rejection rate
This is the easiest one to deal with — we just found out that there’s no issue with access to capital! Most of the people that are coming to banks to receive loans are getting them.
High demand, high rejection rate
Just as with the previous scenario, this outcome is equally obvious. We appear to have a real issue on our hands, as well as a baseline that we can refer back to once we’ve implemented our solutions. We can come back to this data and compare figures after the fix is implemented with those before.
Aha, now this is strange!
We assumed that the access to capital issue was purely a result of a restriction on supply of capital, but what is this you say: Demand is low?
There are all sorts of reasons for why this could be the case, all beyond the scope of this post. Suffice to say, if demand is low, we need to look upstream to understand why people aren’t asking for capital. Is it because they aren’t starting up businesses that need capital? Or maybe they’re quite happy working at a larger, more established company (or government). It could even be that they are opting to start low capital businesses, like software businesses.
The bottom line is, if there’s low demand for capital, then that completely changes the approach that we need to take to solve this “issue”.
Next, we'll go ahead and assume that we have high demand, high rejection rate and discuss the next step to solving this issue. Continue to read Part 2 >
 One could also make the argument that “true” demand would actually be more than just the present demand, because if an easier form of loan were made possible, this could attract those that would otherwise not have considered a loan to begin with. Be that as it may, I’m not certain how such a figure could be determined — and moreover, how it can further be refined to exclude bad actors given the information asymmetry inherent in the lender-borrower relationship (see moral hazard, adverse selection).
 This doesn’t mean there’s no issue — just that there’s no issue in that specific step of the funnel: banks converting applications to loans. Other issues can take place up/downstream. Some examples: it could be that consumers don’t know that banks offer corporate loans, risk aversion by consumers to taking on debt so early in the project, etc.