Gov't could crowd out private lenders

Hopeton Morrison, Guest Writer

I WISH to commend the Government for its strong renewed emphasis on microfinance lending, and rural microfinancing and development activities.

This form of development financing can form a platform for impressive and sustained economic development, concurrent with widespread poverty alleviation.

But there are some serious red flags in this strong push for economic development.

The government should never be in the business of competing with private enterprises in retailing funds to the microsector.

The government's role is to wholesale these funds, and in that regard the Development Bank of Jamaica is doing an excellent job. In earlier times, the Micro Investment Development Agency also did a decent job of wholesaling funds.

Today, there are several private microfinancing institutions now actively engaged in retailing funds for the sector, among them credit unions, JN Small Business, COPE, Access Financial Services, Development Options Limited's Micro Fin programmes, PanCaribbean, Scotiabank's Micro Enterprise Finance Limited, the same-day loan services such as OBF Financial Services and Union Financial Limited, and a host of other players.

In recent times, the Government has moved aggressively to engage state-run entities in direct retailing of funds to end-users.

Most notable among these has been the Jamaica Business Development Centre.

This is an institution that has an excellent history of offering technical assistance to entrepreneurs of all types, across many years. But I would be remiss not to remind the decision makers here that government's history in this endeavour has been pathetic - this across different governments, and over an extended period of time.

We recall the abject failure of the Solidarity programme of the 1980s, the bankruptcy of the Self Start Fund, the dismal failure of the community-based organisations as a composite, in which considerable funds were placed and big losses incurred, and last, but by no means least, the enormous economic losses suffered by the national co-operative banks as a group over several years.

The problem is not so much that these institutions are led and staffed by incompetent persons, but the widespread stance among many Jamaicans that if it is the Government's money then there is no obligation to repay.

Invariably, failure of these institutions leads to an increased burden on taxpayers to underwrite their losses.

Likely to fall

There is another factor that is based on strong global empirical evidence.

Microfinancing institutions that are not deposit-taking organisations are not sustainable, and in nearly every case they fail.

Private deposit-taking institutions fall under the rigorous supervision of the Bank of Jamaica.

Central bank supervision places very heavy fiduciary and capital-adequacy demands on these institutions. And so, at the end of the day, the government's investment, as well as the benefits to the end-users, are more readily assured based on the fact that these institutions must conform to rigorous stress, risk and compliance tests that, themselves, define the profitability and sustainability of their operations.

In that regard then, I would argue that the private sector must remain the engine of economic growth in the Jamaican economy at this time.

I particularly commend both the ministers of agriculture and fisheries, and industry, investment and commerce, for their aggressive push to fund micro- and small businesses.

But, I would caution both ministers that their immense zeal should be matched with wisdom derived from strong, empirical local and global experiences.

State agencies do a poor job of retailing funds to micro entrepreneurs, whether these funds are disbursed as loans or grants.

The best empirical evidence globally is that this activity is best left to private-sector institutions and, more specifically, those that are deposit-taking institutions.

Hopeton Morrison is general manager of St Thomas Co-operative Credit Union Limited.