By K. C. Soares, ContributorDURING THE year 2002, the small business sector accounted for approximately 30 per cent of the total employed labour force. This represents a decline of about 4.5 per cent when compared with 2001. It is generally accepted that the success of this sector will play a pivotal role in Jamaica's strategy for economic growth and development. The decline in employment in this sector, bearing in mind the massive redundancies over the past few years, should therefore be of great concern.
The overall performance of the sector last year fell far below expectations. For instance, total new employment in entities receiving loans was 11,495, a decrease of 30 per cent compared with 2001. The sector received approximately $523.2 million in loans from wholesale lending agencies and non-traditional government credit sources. This represented a decrease of 20.1 per cent compared with 2001. This overall decrease is even more significant when one takes into account that the total number of loan granting institutions had increased during last year. I make reference to Micro Enterprise Financing Limited, which is a private sector lending initiative with external support.
CLOSER LOOK
Let us take a closer look at financing to this sector during last year. Of all the institutions dealing solely with the small business sector only two showed an increased amount of funds disbursed in 2002 when compared with 2001. Development Options Limited, through its Micro-Finance Organisations (MFOs) disbursed $78.6 million, a decrease of 54.4 per cent. The National Development Foundation of Jamaica (NDFJ) disbursed $38.6 million, a decrease of 60 per cent. The Self Start Fund (SSF) held firm as the same amount - $20.93 million - was disbursed in both years. The Micro Investment Development Agency (MIDA) and Jamaica National Business Loan Limited, now renamed the JN Small Business Loans, also increased their disbursements.
MIDA, through its Community Development Funds (CDFs), disbursed $144.7 million, 32 per cent more than the amount disbursed in 2001. The JN Small Business Loans recorded a 34 per cent increase in loan disbursements as $267.1 million was granted to the sector in 2002 compared with $110 million in 2001. Overall, total disbursements to the sector amounted to $545.4 million compared with $800.4 million in 2001, a decline of 32.1 per cent. The big question is, why was there a decline in the disbursement of funds when there is still a great demand for such funds?
REASONS FOR THE DECLINE
One of the main reasons for the decline is that almost all the institutions have high bad debt portfolios. In the financial world it is acceptable when an institution has five per cent or less non-performing loans. Only the three-year old JN Small Business Loans, which has a three per cent non-performing loan base, has such an acceptable level. All the other institutions SSF, MIDA, DOL, NDFJ have non-performing loans ranging from 30 per cent to 67 per cent. How can these institutions effectively service the sector? Wouldn't they be cautious about putting more bad loans on the books? What does this say of the systems in place?
I have, in previous articles, discussed the reasons for the high percentage of non-performing loans in these institutions and have put forward, without change, workable solutions to the existing problems. To date, only one institution has taken my proposals seriously and has instituted my recommendations. Maybe the other institutions are going by the common colloquialism - what is free is never good.
PROVIDE BETTER SERVICE
In light of the above, it is crucial that institutions dealing with the small business sector reassess their positions with an aim to provide better service at reasonable costs. One area that I suggest they take a hard look at is the matter of interest rates. I am of the firm opinion that interest rates of 120 per cent per annum, which is the rate charged on micro-credit loans, is repressive and need to be adjusted downwards. Another area that needs to be addressed is the system of management. This I have discussed at length in previous articles.
To sum up, the reduced activity in the small business sector experienced in 2002 is a direct result of the high levels of non-performing loans brought about by the high interest rates of micro loans, low productivity levels and weak business and management skills. These are the areas that must be addressed for the sector to achieve poverty reduction, increased employment and ultimately economic growth and development.
With the contraction of the traditional sector there is urgent need for the small business sector to achieve the foregoing objectives.
K. C. Soares is a former banker and is now a business consultant with Soledad Financial Services Limited. E-mail: soledad@netcomm-jm.com.
