Scotiabank Jamaica is developing a new risk-rating system for small businesses in eight sectors, in partnership with the Development Bank of Jamaica and with backing from the Inter-American Development Bank.
The two-year programme will clarify for businesses, especially those without adequate collateral, how to qualify for bank credit.
Professor Rosalea Hamilton, president of the MSME Alliance, said Monday that the project represented the culmination of years of work and was a complement to a pilot study done by the Institute of Law and Economics (ILE) between 2008 and 2009 in Jamaica.
Hamilton headed the institute.
"It came out of years of study of the problem … a part of which is information asymmetry. The idea is that the banks do not have adequate information about the SMEs (small and medium-sized enterprises) to make a proper judgement - the viability, the capacity - of the business to do what they say they will do," said Hamilton.
"On the other hand, the business does have a sufficient understanding of what the bank wants in order to assess the risk of lending to them."
Scotiabank was willing to work with the ILE-assessed companies, but the initiative faltered because the information was not filtering down to branch managers, Hamilton said.
300 SMEs to be assessed
The more expansive Scotiabank Enterprise-Wide Risk Management and Financing Programme (SERMAF) will be piloted over two years. The business and risk-rating system will be used to assess some 300 SMEs ranging across eight sectors - including health, education, housing, transport and the creative sectors - over the pilot phase.
The project is being financed by US$550,000 through the IDB's Multilateral Investment Fund and US$420,000 by Scotiabank - a total of US$970,000 or J$91m.
Other partners in the project are the Development Bank of Jamaica, Microsoft and the University of Technology (UTech).
The DBJ will guide the develop-ment of the risk-management assessment programme through UTech and also seek funding to expand the reach of the programme to a wider pool in its post-pilot phase.
Microsoft will provide software for data capture.
Hamilton, who is attached to UTech, says the project will drive capacity development both within Scotiabank itself and within the targeted SME group; as well as refinement of Scotiabank's SME loan appraisal process, staff training and making the case for a possible replication of the project in other countries in the English speaking Caribbean.
Hamilton told Wednesday Business that SMEs without collateral could expect better loan prospects under the project.
"If the client gets an A rating and no collateral, the institution can assume that the risk is less than the client with a C rating," she said of SERMAF.
"The assessment is more rigorous than what the banks are able to do, both in terms of scale and scope."
DEVELOPING LINE OF CREDIT
Component one of the two-year project will refine the metrics developed by the Institute of Economics. A consultant will be attached to UTech for the execution of this task. Scotiabank is also expected to develop a line of credit and an assessment of its internal capabilities during this phase.
"Phase two is staff training - looking to beef up internal staff. The third component, which is a significant one for SMEs, is capacity building," Hamilton said.
She stated that the credit-assessment tool being implemented was one plank of several measures needed to bring financial health to the group; others being the need for supporting legislation and the development of a venture-capital industry.