By KC Soares, ContributorOVER THE past few months there has been a definite shift towards a more sympathetic treatment of the small businessman and businesswoman by the traditional banks.
This may be due to a number of factors but chief among them is the overall reduced demand for loans at this time.
Back in the 1970s and 1980s when there were eleven commercial banks, and 32 merchant banks, the financial institutions in general literally begged people to come in for loans.
Small businesses were looked at favourably as there were not enough business being generated to keep the 43 banks and near banks, plus other financial institutions operating on a viable basis.
The other financial institutions referred to included private institutions such as the National Development Foundation of Jamaica (NDFJ) and government institutions such as the Self Start Fund and the Micro-Investment Development Agency (MIDA).
In short the country was 'overbanked'. During this time the small business sector grew as the more than 50 financial institutions catered to the needs of this sector.
The rapid expansion of the financial sector coupled with the migration earlier on of experienced managers - both locals and expatriates - resulted in the appointment to managerial positions of persons who were not quite ready to assume such positions.
Many of these managers, due mainly to lack of experience, embarked on what I commonly refer to as collateral lending. Simply put, they lent if the borrower had collateral three or four times greater than the loan amount requested.
When the financial sector crashed in the 1990s, the number of commercial banks was reduced from 11 to 6, and the merchant banks from 32 to 8.
This meant then that there were much fewer institutions catering to the needs of the many borrowers. They could now pick and choose to whom they would lend, and they tended to lend to the larger businesses which had impressive balance sheets and which could provide them with blue chip collateral up to five times greater that the amount requested.
This policy excluded the small businessman as most businesses in this category did not and still do not have financial statements nor do they have bluechip collateral.
TRADITIONAL BANKS
The traditional banks at this time had effectively turned their backs on the small business sector. As a result the vibrancy the sector experienced in the 1980s and the early part of the 1990s was no longer in evidence by the latter part of the last decade.
However, today, although there are only five commercial banks and eight merchant banks, a situation similar to what existed in the 1980s seems to be returning.
Then the banks were wooing customers for loans, and the competition for the limited business was so intense that marginal loans to the small business sector was not uncommon.
Recently there has been a significant slowdown in investments. This may be due to the fact that large businesses now tend to put money in commercial paper (savings) rather than projects (investment), resulting in a reduced demand for loans.
To survive banks have to make loans. They cannot continue to accept deposits and pay interest on such deposits without they themselves earning interest. Since the large businesses appear not to be interested in borrowing the banks are forced to turn to the small businessman.
The small business sector should capitalise on this opportunity. Loans from traditional banks are preferred when doing business mainly because of the swiftness of approvals and the support services (current accounts, overdraft facilities, etc.) offered.
One may argue that the banks may concentrate on consumer loans rather than on business loans. But, how many more motorcars can we buy? Are these motorcar loans being repaid?
In the final analysis, small businesses should at this time aggressively approach the banks, as chances are they will be favourably accommodated.
This applies even for the accessing of loans from the Development Bank of Jamaica (DBJ) where the commercial banks act as the Approved Financial Institution. Although the banks usually tend to shy away from accessing DBJ funds due mainly to the small spread, in the prevailing circumstances 3 per cent is better than zero per cent.
K.C. Soares is a former banker and is now a business consultant with Soledad Financial Services Limited. E-mail: soledad@netcomm-jm.com.
