Finding help for ailing companies
To convert the post-Jamaica Debt Exchange relatively low-cost stock of cash held by financial services institutions into liquidity, a range of approaches were used to encourage these institutions to reduce the interest rates to their customers.
The most fundamental policy move to realising liquidity for the real/productivity sectors was the licensing of credit bureaus.
The intended purpose of credit bureaus is to aid financial services firms in their assessment of risk, thereby increasing the likelihood of credit facilities being extended to individuals, sole proprietors, and micro, small and medium-sized enterprises.
A secondary benefit of the credit bureau regime is that it would encourage business formation so that these firms may enter legal arrangements and access a wider range of financing solutions.
Access to affordable financing is most definitely a key enabler in any growth strategy for the country.
It is our contention that the investment regulations covering pension funds should be reviewed to increase the pool of available funds to invest in a broader class of assets than currently permitted.
Once these investment regulations are relaxed, we would then need businesses and entrepreneurs to package feasible and attractive opportunities for pension funds through tradable corporate bonds or investments that may be pursued through venture capital funding.
This is by no means a magic bullet, but it is one answer to the problem of limited and unaffordable financing for business start-up and expansion.
However, as business formation, job creation, economic growth and development are the main goals, the rate of business discontinuation in Jamaica is problematic, especially those arising from insolvency.
The cost of insolvency, based on current laws, is not only loss of business, but loss of reputation. Growth in Jamaica will not occur without businesses taking calculated risks.
Should entrepreneurs be punished perpetually for responsibly managing their enterprises, but failed due to some domestic or external shock?
Failure in one's business should not be seen as the entrepreneur's personal failure. To encourage risk taking, symptoms of insolvency should be detected and mitigated earlier rather than later by regulators and other functionaries.
We believe that to encourage business formation, in addition to credit bureaus, an effective insolvency act, having the following three main objectives should be adopted:
The rehabilitation of companies,
Rescuing viable commercial entities, and
Ensuring the best return for creditors, either as a going entity or through the orderly post-insolvency appropriation process.
Rehabilitation (one of the objectives of the Barbados Banking and Insolvency Act) seeks to remove the negative stigma attached to business failures.
Furthermore, the rehabilitation of viable entities provides a greater opportunity for maximising the wealth of both creditors and shareholders, because when a business is subject to forced sale and liquidation its value diminishes when compared to that of the going entity.
The essence of rescue is for the entity to continue as a going entity, but not necessarily in its original form.