By K. C. Soares, ContributorONE OF the better-run government related institutions is the Development Bank of Jamaica Limited (DBJ). DBJ is the product of the merger of the Agriculture Credit Bank (ACB) and the National Development Bank (NDB).
Prior to the merger both banks were wholesalers of development funds with the ACB dealing with agriculture and the NDB dealing with other sectors (tourism, manufacturing, mining, etc.). With the merger, the managing director of the ACB was retained as the managing director of the new bank, which now deals with all sectors of the economy.
What is surprising, and is indeed a testimony to the good management of the ACB, is that with the merger almost the entire staff of the NDB was made redundant. This included every single project officer that was employed to the NDB. It must be borne in mind that the project officers were, or should have been, specialists in assessing loans related to the sectors mentioned above.
Now when the new bank (DBJ) was formed not even one of these specialists was retained and this does not say much for the quality of the workers who were employed to the NDB at that time. What we have now at the DBJ are project officers who previously dealt solely with agricultural and agro-processing loans now processing loans for all sectors (tourism, manufacturing etc.) of the economy.
Guess what? Yes, you guessed it - they are doing a very good job. Loans from the DBJ are channelled through what are termed Affiliated Financial Institutions (AFI's). An AFI can be a commercial bank, a merchant bank, a credit union or other institutions such as the National Development Foundation of Jamaica (NDFJ), approved by the DBJ. Prior to the merger, the NDB had entertained direct loans meaning that borrowers could by-pass the AFI and go straight to the NDB for a loan. The ACB did not entertain direct lending and this policy was carried over to the DBJ.
The decision to discontinue direct lending may well have been influenced by the experience of the NDB where a lot of the direct loans have gone bad. While this fact is somewhat disconcerting, the quality of the then NDB staff should be taken into consideration. One of the main reasons why the NDB had started direct lending was that potential borrowers were complaining that the AFI's were less than interested in accessing the available funds.
The AFI's complain that they have to carry the risk and do all the necessary work for a spread of a mere 3%. I should point out to readers that the AFI's access the loans from the Development Bank at 10% and on-lend to the customer at 13%. The benefit to the AFI is therefore only 3%. The AFI's still complain that the 3% is too low and in light of this they tend to entertain only very large loans to large corporations.
The small businessman is therefore at a distinct disadvantage. This disadvantage is even more substantial as the AFI's (especially the commercial banks) tend to encourage the small businessman to use their funds, which is usually at an interest rate anywhere between 25% and 35%. At these rates the small businessman is paying up to three times more than what he should normally be paying.
To make matters worse he is not given a moratorium (grace period) at the commercial bank a feature that goes along with loans from the Development Bank (DBJ). To make sure that their funds are utilised, the commercial banks tend to frustrate the efforts of the customer by drawing out the length of time they take to request the funds from the Development Bank. In some cases the commercial banks offer interim loans frequently by way of an overdraft at even higher interest rates (30% - 40%). These 'interim loans' frequently become regular loans.
The small businessman who is in need of credit finds it extremely difficult to survive in the circumstances outlined above.
To facilitate a more vibrant small business sector, the DBJ should reconsider its stance on direct lending. While I do appreciate the problems involved, I am of the firm opinion that they are not insurmountable. Chief among these problems is what may be termed political interference. To overcome this problem there should be an independent panel of specialists who should review all loan applications to disbursement of those approved.
I am confident that the present management is competent to effectively institute direct lending over to you Mr. Kingsley Thomas.
K. C. Soares is a former banker and is now a business consultant with Soledad Financial Services Limited. E-mail: soledad@netcomm-jm.com
