Few takers for small business loans

Published: Wednesday October 1, 2008

A mere $11 million out of $2.3 billion in low-interest loans provided by Government for the small and micro business sector has so far been accessed by those sectors since April this year, partly because financial institutions are more interested in their own high-interest loans rather than production and job creation, says Karl Samuda.

This amount includes $1 billion from the Development Bank of Jamaica (DBJ) for which small businesses can access a maximum of $5 million from approved financial institutions at a rate of less than 10 per cent per year. But so far only $1.6 million has been borrowed, Samuda revealed last week.

"That tells me there has to be a complete mind change in how we view the micro sector. If we don't, we will be living in a fool's paradise. The only way we are going to build a peaceful, harmonious and just society is to give the little man a chance," Samuda said.

The minister indicated that the financial institutions have no interest in promoting the low-interest loans because they make less money from them.

"They shy away because the profit margin isn't big enough, based on the guideline offered by the government," Samuda said.

By doing so, thousands of talented but poor Jamaicans are being denied the opportunity to develop their businesses and to create jobs, the minister said.

"The majority of the talent does not reside in Norbrook (an affluent St Andrew neighbourhood), it resides in the inner-city communities of Jamaica", he stated.

However, representatives of the micro and small business sectors say the blame for the lack of access to the loans should be shared by the government and the small businesspersons themselves.

President of the Small Business Association of Jamaica (SBAJ) Edward Chin Mook says government needs to be more creative in ensuring that the money gets in the hands of those who need it.

He says because the financial institutions use conventional tools to assess the risk of potential borrowers, most small and micro entrepreneurs are unable to satisfy the criteria for loans. This, he says, is because most potential borrowers are new to business and lack the collateral, formal accounting or track record with the banks to qualify for loans.

"The minister know why the loans are not going to the (small business) sector," Chin Mook told the Business Observer. "To me it's like you have put the bait out there knowing that none of the fish are going to bite."

Chin Mook suggests that Government should establish a mutual guarantee company which would guarantee part of the risk - perhaps 20 per cent - on behalf of small business persons, thus reducing the collateral required. He said such facilities are used to help fledgling businesses get off the ground in developed countries.

Another creative method is the issuing of graduated loans, in which loans are disbursed in small amounts over time, according to the needs set out in the borrower's business plan.

"So if it's $2 million, you don't get the $2 million all at the same time, it is doled out over a period of one year to minimise the risk", the SBAJ head suggested.

Meanwhile, government needs to do more to promote its loans, because the financial institutions are not going to do it for them.

"The banks are not promoting these facilities; they are putting their facilities up front because will give uncollateralised loans at 23 per cent. If more persons knew about it (the DBJ loans) they could do a mix with the bank's loans in order to bring down their overall payment", Chin Mook said.

Long-time advocate for the small business sector Andrea Graham says although the DBJ facility should be relaxed to enable more access, at the same time members of the sector need to become more professional in order to access the facility.
"
The days of handouts are long gone and will never come again. If you are in business you have to have a proper business plan, accounting records and so forth. I don't think that we should ask the banks to lower their standards," she said.

Graham noted that there were a number of facilities through which small entrepreneurs could access money below the market rate, but that they had to be tax compliant and organised to qualify. She said organisations like the Small Business Development Agency that she heads, offer services in structuring businesses for them to access funding.

According to correspondence from the DBJ, the low-interest loans give considerable focus to areas such as small and medium-sized enterprises, modernisation of agriculture and agro-processing; dairy, fishing, alternative energy, and persons with disabilities.


Source: Jamaica Observer
http://www.jamaicaobserver.com/magazines/Business/html/20080930T190000-0500_140768_OBS_FEW_TAKERS_FOR_SMALL_BUSINESS_LOANS_.asp