Davies

Dr. Omar Davies, Minister of Finance, has announced plans to broaden access to financing for small businesses, whose lack of collateral either denies them credit or forces them to pay high costs for capital.

On Thursday, Davies said he was putting together a plan with financial institutions to boost lending to small- and medium-size businesses, under which the Government would guarantee some of the risk.

Essentially, the plan calls for bankers to lend directly to borrowers, as they now do for private arrangements, with no state agency acting as intermediary.

Government's involvement apparently kicks in if the loan becomes a bad debt, at which point it will cover the loss to the institution.

Loan guarantee project

"The proposal is that there would be a loan guarantee project, geared towards expanding access to financing by existing or start-up small businesses," said the finance minister.

It was not immediately clear whether the approved institutions would be required to lend at the same rate as if the borrower was properly collateralised.

Davies gave no specifics of the plan, but said the loans would be capped, subject to limits on the guarantee, or the size of defaults that government can afford to cover.

The cost of capital is high in Jamaica, with average lending rates to May running at a near 22 per cent.

Though it was not immediately clear what small businesses borrow at, the lending rate for micro players ranges up to 52 per cent.

Davies indicated that Government was serious about providing the environment for small businesses to thrive, including coming up with creative solutions to impediments.

The financial institutions that sign onto the programme are expected to carry out the same due diligence to establish whether the business or project was a worthwhile risk.

Adequate collateral

"In other words, these are projects that, ceteris paribus (all other things being equal), the lending institutions would have made on their own, if the entrepreneur had adequate collateral," said the Finance Minister.

"The Government would guarantee a percentage of the loan portfolio of the AFI, thus sharing the risk."

The Finance Ministry plans to monitor the scheme via an annual audit, and, after the initial phase, will decide on the size of the lending portfolio per institution, based on the levels of efficiency demonstrated under the programme.

- lavern.clarke@gleanerjm.com