Gregory
Errol Gregory, Contributor
THIS week's launch of the long-awaited Bank of Nova Scotia (BNS)/Canadian International Development Agency (CIDA)/Kingston Restoration Company (KRC) Micro Credit Company, which had a long gestation period (some five years), is a positive development in many respects.
In the first place it indicates the entrance of one of the country's premier financial institutions in the traditionally perceived risky business of micro credit lending. In a sense then BNS' foray into micro credit will give the sector greater legitimacy.
Secondly, it is significant that even with the potent strength of BNS in their corner, the designer of the proposed credit scheme definitely focused on coming up with a creditable financial institution to disburse the funds. This is seen in the blend of grants and relatively cheap loans funds that will be used to set up the company. This self-sustaining model is particularly significant given the competitive environment generated by the more than 15 financial institutions providing micro credit in the marketplace.
And, in a related point, it is interesting to see CIDA once more becoming involved in providing grant funds for micro credit institutions. For some time, CIDA has been absent from this market, making it an even more difficult environment for micro credit institutions to source grant funds.
A third point relating to the new credit scheme is that it marks another attempt at reintroducing the group lending methodology that has had chequered results at best. Nonetheless this strategy is often seen as one way of addressing the absence of collateral that usually dogs the micro-sector.
Inner-city development
An equally significant point about the new scheme is that it targets citizens from inner-city communities. This is a group that has been largely ignored by existing lending programmes. If the new scheme works effectively, it could substantially improve inner-city development.
A final point relating to the new scheme's importance is that, given the recent launch of the credit bureau, that should help to reduce some of the risks usually associated with micro credit lending, the new scheme is being launched in an environment that is conductive to the project's success.
But despite the many positives noted above, the new community-based scheme reminds us of a number of unresolved issues that dog the micro credit sector. For one thing, the jury is still out on the effectiveness of the group lending methodology that has been frequently tested in Jamaica but with largely questionable results.
More importantly it should be remembered that the sponsoring bank, BNS, has introduced credit schemes in the past with such stringent conditionalities that these funds were either not taken up or taken up by companies with a strong asset position.
It is not inconceivable then that the new funds could be hamstrung by conditionalities that restrain easy access. In this regard, it should be noted that just recently KRC had grant funds available for community lending but the conditionalities for qualification proved too onerous and had to be modified. Hopefully the new scheme will draw on weaknesses encountered by other credit schemes to ensure that similar mistakes are not made. Regrettably we have had sufficient experience in the sector to know that the existence of funds does not by itself ensure that they are taken up by the target group.
A third unresolved issue to consider is that the credit programme assumes a high level of group cohesion. While there is unquestionable progress in this area of building strong communities, the reality on the ground is that community building rarely happens overnight especially in those areas with a history of political division.
For group lending via community groups to be effective, there must be sustained attempts at providing training in organisational strengthening for these groups to ensure that they are brought up to speed.
Vibrant economy
A fourth issue that must be considered is that successful group lending ultimately depends on a vibrant economy. While it may be true that there is some macro-economic stability in place, micro entrepreneurs remain constrained by the generally tight business environment and weak consumer demand. A vibrant economy is a definite prerequisite for successful group ventures contemplated by the credit facility.
A final issue to consider is whether there was a need to establish a new lending institution or whether the funds could have been used to strengthen an existing one already serving the sector. Even if there was an understandable concern to target inner-city communities, this objective could be met by infusing capital in existing micro credit institution with a track record of performance. In a sense then the new credit facility can be seen as an attempt at re-inventing the wheel.
All told then the new credit facility is a positive development that has happened at last. The programme's success will depend on careful nurturing given the history of many credit schemes that have proved simply ephemeral.
The real irony in all this is that a carefully thought out scheme for the micro sector can make an invaluable contribution to the economy. Such a scheme must be rooted in an acceptance that he sector has special needs, some of which are born out of Jamaica's cultural realities. These issues must be faced squarely.
(For more on small businesses and finding funds for their operations, see this week's Wednesday Business)
