For the past decade, Haiti’s economy has recorded positive average year-over-year growth and is expected to continue on this path in the short-run according to IMF forecasts. Following the January 12th 2010 earthquake, which killed over 300,000 people and caused extensive damage to virtually all sectors of the economy, the international community provided considerable financial support in the form of grants, loans and debt forgiveness, which created a unique opportunity for the country’s economy to grow rapidly over the coming years.
*Source: Banque de la Republique d'Haiti / World Bank
The lack of credit to the economy from the banking sector has nonetheless hindered this potential for growth by incapacitating part of the private sector and hampering innovation. Currently, total credit to the private sector represents 19% of GDP in Haiti compared to 48% of GDP for Latin America and the Caribbean. Additionally, it seems that the current economic environment does not incentivize banks to take on more risks: On the one hand, the loan-to-deposit (LTD) ratio for the entire banking sector hovers around 42.5%* compared to a 65% average for the Caribbean, illustrating how liquid the sector is. On the other hand, the fact that banks are consistently reporting strong earnings and high ROE (21.9% in September 2013)* suggests that interest revenues fueled by high interest rates, are strong enough to compensate for the lack of lending.
Public policy has protected the financial system from crises for many years since the implementation of the BRH Prudential Norms although it has indirectly impacted the availability of credit. These norms, which are among the strictest in the region, have protected the banking sector and contributed to the stabilization of the monetary and financial system of Haiti for many years. However, it would seem that this protection has come at the expense of expanding access to credit. In June 2014, 74.6% of the banking sector’s most liquid assets were lodged at the BRH*. Currently the cash reserve ratio for commercial banks is 37% for the national currency and 39% for foreign currency*.
Given this situation, the private sector and in particular SMEs (small and medium sized enterprises) find it hard to finance the launch of their projects, these being critical to developing the middle class and stimulating domestic economic growth. It follows that the current credit paradigm in Haiti does little to serve small businesses and rising entrepreneurs.
*Source: Banque de la Republique d'Haiti
The objective of the VC fund is to provide seed capital for the development of early stage businesses that promise attractive return. According to the IFC’s estimations, unfulfilled demand for credit in Haiti is around $2.5 billion, hinting at a sizable market wherein the fund operates. The fund seeks to invest in innovative start-ups that offer novel value propositions to their target customers.
The fund’s strategy consists of breaking away from the traditional vetting process used by Haitian financial institutions to determine “quality projects”, and identify those projects that merit funding based on the validity of their business concept and the aspirations of the entrepreneurs. The approach consists of applying unconventional due diligence processes to supply the unfulfilled demand for credit, while aligning the incentives of the fund with those of the entrepreneurs, ultimately mitigating the risks that are inherent to the sub-prime markets.