Skip the state lenders

By K.C. Soares, Contributor

Soares

FOR THE past four months, I have been writing on the plight of the small businessman and the reasons why the small business sector is not as vibrant as it should be. The articles are likened to the pieces of a jigsaw puzzle. Today, I will put together the pieces of the jigsaw to give the full picture on the state of the small businesses in Jamaica.

Between 1982 and 1995, there was a proliferation of banks and near banks (merchant banks etc.) throughout the island. Prior to this proliferation there was a deficiency of high quality managers brought about mainly by the migration of a number of well trained and experienced local managers and the returning home of expatriate managers.

The persons migrating were scared of the socialist policies expounded by the government of the 1970s. A void was created overnight and this void was filled by persons who were not yet ready for the positions to which they were promoted.

The increase in the number of financial institutions put increased pressure on the availability of good managers. Many branches of the different institutions had to settle for less than competent management.

Many managers during this period embarked on what may be termed "collateral lending". This simply means lending against the collateral offered rather than on the viability of the proposal put forward. This was not surprising as many of the managers at that time were not able to competently assess the viability of a ­project.

Many small businesses were started during this period, as all that was needed was to satisfy the bank manager that the security was adequate. There were 11 commercial banks and 21 merchant banks all going after a limited amount of business.

Small businesses prospered as loans were easy to get. In general, the newly promoted bank managers did not think it necessary to visit the customers' place of business nor did they think it necessary to physically look at the security offered.

Then came the collapse of the financial sector, which, in my opinion, had its genesis way back in the 1970s. (I must make mention here that the high interest rate regime of the 1990s along with the incestuous relationships that existed in some banks contributed to the collapse of the sector).

The collapse of the sector brought about a reduction in the number of commercial banks from 11 to 6 and they woke up to the reality that in many instances the value of security held was much less than the value documented. Customers now had limited options and banks were now able to pick and choose to whom they made loans.

They were forced to become more professional in their approach to lending, requesting up-to-date financial statements along with blue chip collateral. Most small businesses were unable to provide these items especially those businesses engaged in agriculture.

As a consequence, the surviving banks turned their backs on small businesses. National Commercial Bank (NCB) for instance even went further by closing their agricultural department ­ a step that must be considered retrograde.

While all this was taking place, there were massive lay-offs in both the public and private sectors. In reality, small businesses should act as conduits for economic opportunities for workers displaced by redun-dancy.

This was not so as efforts to start small businesses have been very frustrating, as the commercial banks showed little interest in funding them.

The other financial institutions such as the National Develop-ment Foundation of Jamaica (NDFJ) and the Self Start Fund were not equipped to handle the increased demand on their resources ­ both financial and managerial. Even when the small businessman tried to access funds from the Development Bank of Jamaica (DBJ) his efforts were in vain as the DBJ does not entertain direct lending and he is forced to once again approach a commercial bank acting in the capacity as an Affiliated Financial Institution ­ (AFI).

The spread on the DBJ loans channeled through the AFI's is only three per cent. The AFI's complain that the three per cent is too small an amount for them to carry the risk and make the submission on behalf of the customer-styled the sub-borrower. What then is the small businessman to do? His options are limited.

As it now stands, my suggestion is that he should forget those institutions (NDFJ, SSF, etc.) established to help him and use his own resources, no matter how small, to build up a credit rating at a commercial bank. With a good track record, he will no doubt be favourably considered for credit facilities in the future.

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