2. Obtaining the loan
PHILIPSBURG — Creating a business in St. Maarten is sometimes an expensive road full of obstacles. The Ministry of Internal Affairs and Kingdom Relations and the Ministry of Economic Affairs, Tourism, Transport and Telecommunications commissioned a report to assess the local business climate, identify obstacles and recommend solutions. The report was produced by the Foundation for Economic Research (SEO), the Amsterdam Economic Bureau (EBA) and Law Treatment.
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In this second episode in a series of articles based on the report, we take a look at the problems entrepreneurs face when trying to get a loan to start a new business or expand an existing business.
Getting a loan to do something productive in the private sector should be easy. Right? Unfortunately, in St. Maarten is not. Interest rates are high, collateral requirements sometimes impossible and banks’ confidence that they will get their money back is low. Combine that with a lack of knowledge and skills among (startup) entrepreneurs and you have the perfect recipe for economic disaster. But it doesn’t have to be like that.
Let’s first consider the problems that entrepreneurs in search of credit encounter on a regular basis.
According to the report, banks are reluctant to grant loans because they lack reliable information about the creditworthiness of loan applicants. Firms often lack solid financial management and lack annual financial reports. And then there’s this issue: many entrepreneurs lack the basic financial and business expertise to start or run a small business.
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Banks are also wary of demands to combat money laundering and terrorist financing. While the Central Bank only has two requirements for opening a bank account, banks often add unnecessary and redundant rules that set the bar too high for a startup entrepreneur.
While the rest of the world has fully embraced electronic payment systems, St. Maarten lags behind: it is not possible to receive international payments using common electronic payment solutions with a St. Maarten bank account. Maarten. “St. Maarten is considered a high-risk country from the point of view of money laundering,” the report states.
Apparently, banks are not treating all loan applicants equally. “Local connections are important,” the report says. “Whether or not a business gets a loan depends on who you know on the island. And banks may have an incentive to protect existing customers from new competitors.”
In 2021, the profitability of domestic banks came under pressure as the ratio of non-performing loans (NPL) increased from 9.4 to 11.8 percent. “This limited the banks’ capacity to provide organic capital growth. However, the availability of bank capital does not appear to be a limiting factor,” the report states.
Then there is the issue of collateral. Banks often use real estate for it, but a large segment of beginning entrepreneurs cannot access mortgage loans. The authors suggest that the creation of a mortgage guarantee fund can increase home ownership and indirectly make it easier for entrepreneurs to obtain bank loans. Such a fund was already established at the beginning of the century, but it is currently not operational.
The problem of obtaining credit is not caused only by the reluctant attitude of local banks, it appears from the report. He points out that entrepreneurs are often unable to make a compelling business case or provide credible financial statements that show sufficient profitability. Reason? “Entrepreneurs intentionally minimize taxable profits to minimize income taxes.”
The fact that St. Maarten is considered a high risk country in terms of money laundering, according to the authors it is due to the unregulated gambling sector. The International Monetary Fund (IMF) has therefore called for strengthening the AML/CFT online gaming framework.
If St. Maarten managed to meet the requirements of the Caribbean Financial Action Task Force, the question still remains whether this is enough for payment providers to enter into contracts with local banks.
Again this relates to the gambling sector. There is no gambling authority, although the establishment of a gambling control board has been the subject of political discussion for more than ten years.
All this hinders the access of St. Maarten in online payment systems such as Paypal. Making payments is possible, but receiving money is not. Area code St. Maarten is not recognized on the platform and therefore it is not possible to verify an account through phone numbers.
Local banks have tried to fill this void, for example by offering CXPay, but this solution comes at a relatively high cost and with strict conditions. Banks require, for example, a deposit equal to a significant portion of annual sales from CXPay users.
The lack of a credit registry office also hinders the process of obtaining a loan. “Such a register would contain people’s outstanding loans and whether they have defaulted on such loans,” the report said. “A credit register helps banks assess overall credit risk.”
Companies are also not transparent because shareholder registers are often only available in a company’s internal documents and there is no requirement to file such a register with the Chamber of Commerce.
Banks require a minimum of 30 percent equity before considering a loan application. They want to keep their loan-to-value ratio under 70 percent.
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However, loans remain expensive. Banks and Loans apply interest rates from 5 to 8 percent. “These conditions are driven by the risk banks perceive in lending to entrepreneurs in St. Maarten,” the report notes.
Qredits is a Dutch non-profit entity that started operations in St. New and existing entrepreneurs can borrow up to $50,000 in loans. They do not have to provide collateral, although the interest rates are slightly higher than the market rate.
Credit rejects approximately 32 percent of loan applications. The main reason? “Lack of preparation on the part of the entrepreneur, lack of proven skills or track record, or a proposal that targets a saturated industry.”
The reasons for rejecting loans for existing firms are that sometimes they lack documentation such as annual reports and financial statements, but also that they have little or no profit. “This is partly driven by a desire to avoid paying income tax,” the report said.
The Enterprise Support Project started in August 2020 and will be in force until 2024. The objective is to support small and medium-sized enterprises. The Dutch government has made available a fund of 35 million dollars for this purpose. By the second quarter of 2021, 39 firms received a total of just over $3 million. “This shows that the acquisition of these funds is relatively low. An important reason is that banks require 100 percent collateral for a loan and set a market interest rate of 6 to 8 percent.
All this shows that there are many obstacles for entrepreneurs who need credit to start or expand their business. So what are the solutions?
The report mentions the establishment of the credit registry office as a first step in the right direction. Such a register would enable the bank to access information about the credit history of loan applicants. “The bank will be more informed about the creditworthiness of a business and will be able to make a better decision. This will improve financing opportunities for entrepreneurs.”
Giving other businesses access to this registry would support risk management at the firm level.
The report also recommends requiring limited liability companies to submit annual financial reports to the Chamber of Commerce. “These annual reports must be accessible to external parties.”
Third, the authors recommend creating a game control board. This should need no further explanation: the unregulated gambling industry is giving St.
There are thirteen casinos on the island, but there is no significant casino or gambling tax. This is why the IMF recommends imposing a tax on gambling.
“From a business perspective, the presence of a gambling authority will contribute to a positive image of Sint Maarten and the ease of making payments by attracting payment providers. The move may face resistance from casinos,” the report said.
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Similar links:Report: Boosting entrepreneurship in Sint Maarten Review article SEO Economisch Onderzoek (in Dutch) Reducing bureaucracy improves business climate Doing business in St. Maarten
