Business

Minister Shaw guarantees credit for small businesses with IDB help

BY KEITH COLLISTER

Friday, September 08, 2017

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On Wednesday, Minister of Finance Audley Shaw signed a US$20-million investment loan (approximately $2.56 billion) with the Inter-American Development Bank (IDB's) Executive Vice President Julie Katzman (and a large IDB team including locally based General Manager for the Caribbean Therese Turner-Jones) to expand substantially the existing Credit Enhancement Fund (CEF) administered by the Development Bank of Jamaica (DBJ).

The CEF encourages the provision of loans to micro, small and medium-sized enterprises (MSMEs) through the provision of partial credit guarantees for approved financial institutions (AFI's), mainly the major commercial banks. The loan will be disbursed over five years — or US$4 million per year.

In her remarks, Katzman described the IDB as “in awe of what Jamaica has achieved since 2013” in the area of fiscal consolidation, implying that the global bond markets agreed, as she correctly added that after Jamaica's most recent 5 per cent Eurobond offering last month, Jamaica's “10-year bond was now trading around 4.5 per cent”.

She described the challenge now as how to help SMEs who have difficulty in accessing “quality” finance — meaning borrowing for multiple years at affordable rates.

Katzman noted that the signing of the agreement concretised the IDB's commitment to the development of the MSME sector in Jamaica, and congratulated the Government for prioritising the sector, as she believes the CEF will enhance the capability of several thousands of entrepreneurs to expand their businesses and increase employment.

She added that she had just met with three “fantastic” Jamaican entrepreneurs, one of whom had grown their business from one to 50 employees, and another who had grown the business from three to 12 people — all of whom, however, had told her they still had to struggle to get access to finance.

Meanwhile, Shaw noted that micro entrepreneurs are a significant sector that the commercial banks have often overlooked.

In the Ministry of Finance brief justification of the project, it was estimated that there are about 200,000 formal small and medium enterprises in Jamaica, and between 200,000 to 400,000 microenterprises, with Jamaican MSME's estimated to employ 82 per cent of the country's labour force — the source being the Financial Sector Assessment Programme 2015 SME Finance Technical note of the World Bank.

Commercial banks are described as “preferring opportunities in low-risk instruments (such as government securities) that have low capital allocation. A perception of high risks (mainly due to lack of reliable information), coupled with high levels of informality and the absence of a secondary market for fixed assets, has resulted in banks requiring high levels of collateral to offset their risk weighting. As a result, access to financing by banks is reduced to only those firms that have the capacity to meet these high collateral requirements.”

The Credit Enhancement Programme is therefore critical, as it provides an opportunity for MSMEs that are unable to meet the collateral requirements to be able to build their capacity, expand their business ventures and, in so doing, create more jobs.

Over the years of its operation, the Milverton Reynolds-headed Development Bank of Jamaica (DBJ) has only had to pay out on the guarantees for about 1.8 per cent of their total portfolio, an excellent loan loss record on par with or bettering that of the major commercial banks in Jamaica.

At the signing, Reynolds advised the remaining “fund” is currently about Jamaican $450 million, with about an $842-million existing “portfolio” and about $1.5 billion in total guarantees provided over time.

The new enhanced Credit Enhancement Fund will provide a partial guarantee per individual MSME loan up to an amount not exceeding US$385,000, and it can provide coverage of up to 90 per cent of the individual loan for a period of up to 10 years (up from a previous maximum of 50 per cent of the value of the loan).

Individual loan requests in the areas of agriculture, agri-businesses, business services, construction, energy, manufacturing, retail, tourism, trade and distribution, and other activities not included in the IDB's Exclusion List will be eligible for partial guarantees. Investors who are undertaking expansion projects, the purchase of equipment and machinery, and the increase in permanent capital directly related to MSME activity will be able to access the Credit Enhancement Fund (CEF).

Katzman added that there is a trade-off in moving from 50 to 90 per cent (implying the level of guarantee for most loans are likely to be somewhere in between) as the banks need to have “skin in the game”.

In response to a question on loan spreads, Shaw observed that he still believed lending rates to MSME's were too high and went on to break down the current rate structure as composed of four per cent (Ministry of Finance), 1.5 per cent (DBJ), and roughly three to four per cent (commercial banks) for a combined 9.5 per cent to 10 per cent final interest rate. Shaw argued that all the entities involved needed to shave their rates to bring rates down closer to six to seven per cent, including a “careful and friendly discussion with the AFIs”.

In particular, Minister Shaw noted that the programme is highly complementary to the Economic Growth Council's '5-in-4' plan (five per cent economic growth in four years), a key pillar of which is to improve access to finance to SMEs.

He added that Jamaica must provide a business environment in which the MSME sector can grow and develop though becoming “bankable”, adding that, “Over the years the MSME sector has identified lack of access to capital, inadequate collateral and high interest rates as posing a major challenge to business development.”

Shaw committed the Government to providing the sector with “expert guidance and a comprehensive network of resources”, including “access to equity and debt capital, a supportive regulatory framework and tax structures that can also give small businesses a boost and a better chance of survival”, referring, as an aside, to what he described as his rescue of the Junior Stock Exchange “on our return to office”.

In his speech, Shaw also noted that the recently launched National Financial Inclusion Strategy has a “goal of achieving an increase in private sector credit extended to MSME's to 11 per cent, at minimum, by 2020. Achieving this goal requires the creation of an ecosystem for venture capital and the use of non-traditional collateral as security for financial transactions.”

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