Sabrina N. Gordon, Business Reporter

Milverton Reynolds, head of the Development Bank of Jamaica. - contributed

The Development Bank of Jamaica (DBJ) will be reviewing the arrangements it has with its retailers of capital, designated as 'approved financial institutions' or AFIs, some of whom are reluctant to tap into funds for on-lending and consequently are not dispensing loans to small and medium size enterprises at the pace the bank would like.

The smaller AFIs say the spread they are allowed is too narrow and the margins too tight to make it financially feasible to do business with DBJ.

But even as small business lenders are agitating for better compensation viz wider spreads - which would automatically translate to more expensive capital - manufacturers are persisting with their longstanding, and so far unsuccessful lobby chiefly aimed at commercial banks, for cheaper credit to the productive sector.

"Many people are agitating here - if you are lending at seven per cent and the bank can take three, that is still almost 50 per cent on top of the rates. As a businessman - and that doesn't seem to be a fair rate - it seems to be too large a spread," said Ryan Peralto, vice-president of the Jamaica Manufacturers Association speaking at a forum on competitive-ness in manufacturing organised by the Target Growth Competitiveness Committee.

Loan funds

Adding to the debate two months ago, Robert Gregory, the head of Jamaica Trade and Invest, suggested that the DBJ put its loan funds to tender, forcing AFIs to compete for capital on the basis of lowest loan rates.

It is this conflagration of issues that has prompted the AFI review. But comments by the development bank's boss seem to suggest that the review could end in a culling of the list of institutions rather than an adjustment of the spread.

"The audit will assess the real reason why the monies that the bank have available for on lending is not being taken up by these AFIs," said Milverton Reynolds, managing director of DBJ.

"Particular attention will be paid to the spread at which the bank currently makes the funds available and the viability of the institutions to administer these funds at the approved rate," added Reynolds.

The development bank dispenses funds at single digit rates, but stipulates a cap of three percentage points on the spread that the AFIs can charge to loan applicants.

Reluctant

Cooperatives are among those now reluctant to buy the cheap cash from DBJ, saying to make money on the loans they would need the development bank to be more generous with the allowed spread, by increasing it almost three-fold to a minimum eight per cent.

"A three percent margin cannot work," said Glen Francis, managing director of the Jamaica Cooperative Credit Union League. "The average cost to disburse and keep a loan on the books is eight per cent."

Added Yvonne Ridguard, president of the Jamaica Cooperative Credit Union League: "The conditions under which we get these funds mean that we would be running the portfolio at significant loss. Some of the risk has to be taken up by thegovernment or others for us to take it at three per cent."

While refraining from specifics, Reynolds said the audit was commissioned by the Prime Minister Bruce Golding and that a comprehensive review of the AFI-DBJ relationship would be examined to identify the problems and offer a prescription.

The Golding administration has announced that small business development is a policy priority. Industry Minister Karl Samuda during the budget season announced a raft of initiatives to open the pathway to financing.

But just weeks ago, Finance Minister Audley Shaw, the watchdog over the country's finances, said much of the $2 billion of funds at the DBJ for the purpose was still sitting there.

"The money is not moving," he said.

That situation has sent the DBJ into a problem-solving huddle.

Audit

"We will be looking at what is working, what is not working and what needs to be done," he told the Financial Gleaner, adding that some new initiatives are being contemplated.

The audit is expected to last for a period of three to six months with the terms of reference now being finalised, and a consultant to be contracted.

Reynolds said that the cost of the audit would be fully borne by the DBJ, but did not disclose the amount.

Approved financial institutions include all commercial banks, merchant banks, the National People's Cooperative Bank and JCCUL through which credit unions can access the funds.

Presently building societies are not on the list of approved financial institutions, but they are qualified to apply.

One of the main criteria is that the institution must be a lender and have minimum capital base of J$1 billion.

High-cost loans

Shaw, who raised the issue at the Cuna Mutual launch of a new insurance product to be distributed through credit unions, suggested that some of the AFIs were victims of their own culture, saying they were predisposed to certain kinds of lending - read as high-cost loans.

"The DBJ offers money at rates of between seven and eight per cent," he said, "why the need for such a large spread to on lend money at 16 per cent?"

Francis, however, was steadfast in his position.

"What they are doing is passing on all the risk to financial institutions," he said. "Taking loans at three per cent, we would have to be prepared to stand the losses with a higher rate of delinquency," he said.

The JCCUL executive said the delinquency rate on government schemes is five per cent, and therefore more risky. The margins must, he said, be revised to reflect the added risk, or otherwise that a subsidy or incentive be built into the scheme as compensation to the sellers of government credit.

sabrina.gordon@gleanerjm.com

'A three per cent margin cannot work. The average cost to disburse and keep a loan on the books is eight per cent.'