Established in 1985 as a non-profit, tax-exempt organisation to promote
growth and development through the provision of business-guidance,
technical assistance and non-traditional credit facilities to small and
medium-sized entrepreneurs and groups, the Institute of Private Enterprise
Development (IPED) has developed into the country's leading micro-finance
organisation. Its policy is to support and encourage the development and
growth of all other economic activities designed to improve the social and
economic welfare of Guyanese.
This week's Business Page examines the performance and achievements of the
company as recorded in its sixteenth Annual Report presented to its
members at the company's annual general meeting on December 2, 2002. Once
again, we see another of our companies failing to meet the statutory
deadline of six months to present its financial statements.
The highlights of the year are as follows: 2001 2000
Change %
Loans financed
4,352 5,455
(20.2)
Value of loans financed $669.8M
$739.7M (9.4)
No. of jobs created
7,113 9,680
(26.5)
Contribution to GDP 4.1%
1.38% (2.72)
Average value per loan in 2001 was $153,900 compared with $135,600 in
2000, while the average number of jobs per loan remained just below two.
The administrative cost per loan increased by 40% from $14,811 in 2000 to
$20,701 in 2001 which may be accounted for by the decline in the number of
loans granted as compared to the previous year.
Job-creation continues to be a major focus of IPED, and the projects and
businesses it has funded have helped to create and sustain employment for
a considerable number of persons. According to the Annual Report, the
number of jobs created as a result of loans in 2001 was 7,113, a decline
of 2,567 jobs over the previous year. Indeed, job creation is a key
performance- indicator used by IPED although the term 'jobs
created/sustained' is really quite confusing and does invite more careful
analysis.
Since its inception, IPED has disbursed 29,908 loans with 27.7% going to
men, 45.6% to women and 26.7% jointly to men and women. Interestingly,
since 1996, women's access to IPED's Micro Loan facility has far
outweighed the yearly percentage of total loans that are granted to men.
The number of loans granted to women was 4 times the number granted to men
in 2000 but this had a marked decline to 1.3 times in 2001.
According to the Report, "the sum of net profit generated and wages paid
out by loan beneficiaries was $4.6B or 4.1% of GDP." Last year the Report
referred to "clients' contribution to GDP at the current market prices" as
1.38% of GDP. This "contribution" to GDP has to be viewed with
considerable skepticism and is at best a very rough if not unscientific
calculation of numbers. Given the decrease in the number of loans granted
and the performance of the national economy this is a bit surprising.
Financial highlights
2001 2000 %
G$M G$M Growth
Interest income
170.2 172.3 (1.22)
Investment Income
72 55.6
29.50
Other Income
24.7 24.4
1.23
Total Income
266.9 252.3
5.79
Expenditure
219.5 162.3 35.24
Net surplus of income
over expenditure
47.4 90.0
47.33
Average interest earned on loans was 22.9% compared with 20% in the
previous year. Interest expense on the other hand averaged 4%, making it
by far the highest interest spread among all financial houses in Guyana.
By comparison, NBS, which also enjoys tax-free exemptions, average
interest earned on loans is 10.82% while interest paid on deposits is 7.9
per cent.
Notwithstanding the larger net interest income (NII), NBS pays out 31.8%
of NII in staff costs compared with 24% at IPED. While NBS discloses
information to allow for the cost per employee (as required under
International Accounting Standards) to be computed, this is not possible
for IPED.
Expenses
Operating expense is made up of interest of $22.6M paid on total loans
outstanding, salaries and allowances of $40.8M, while the provision for
doubtful debts increased from $47.5M to $98.5M. The second largest
expenditure item shown in the financial statement is other expenses of
$45.5M for which no information is provided. Why the company would
disclose as a separate line item printing and stationery of $3.8M while
not offering a breakdown of others is puzzling.
In spite of the increase in income, the company was only able to achieve a
net surplus of income after expenses of $47.4M, a 47.3% decrease over
2000. Income generated from earning assets fell from 10.98% in 2000 to
10.34% in 2001. The return on the Institute's assets showed a decrease
from 5.5% in 2000 to 2.72% in 2001.
Other operating income to total assets showed a small increase of 0.71 per
cent. The share of interest income used up in staff cost increased by 1.86
per cent.
The income and expenditure account indicates that only interest on PL 480
loans is recognised in the financial statements despite the fact that the
IDB loans attract a commission of 1% and the EIB loan, interest at the
rate of 2 per cent. The Report offers no indication for this
non-recognition.
Risks
The increase in the number of loans granted to an average of 4,955 in the
last three years over the 1995 number of 3,029, the continuing poor
performance of the economy and the increase in the value of its loan
portfolio has increased the risk associated with IPED's operations. The
effects can be seen from the chairman's statement that the main reason for
the decline in the surplus was the need to substantially increase the
provision for doubtful debts because of the slowdown of economic
activities.
Non-performing loans increased from $86M in 2000 to $193.8M in 2001, while
the provision for bad debts increased from $64.9M in 2000 to $162.9M in
2001. Loan provision as a percentage of total loans showed a clear
increase from 7% in 2000 to 18% in 2001 and as a percentage of
non-performing loans it is 84 per cent.
A somewhat puzzling comment in the chairman's report was the intention of
IPED to increase provisions to 25% within the next two years. This is a
staggering $63.5M and if this was recognised in the current year, the
surplus of $47.4M would have been wiped out. If the conditions that have
triggered the chairman's statement exist now, one wonders why the
provision was not recognised in its entirety.
Like the New Building Society, IPED is an extremely liquid company with
liquid assets of $903M out of total current assets of $1.5B. $50.8M is in
cash and bank balances, while $459.5M is held as fixed deposits and $392M
is held as a short-term investment. Despite the significance of this
amount, no details are given of the investment except to say that it
"represents monies held for repayment of loans."
Loans payable during 2002 are shown at $221M. The liabilities side of the
balance sheet continues to reflect large balances of loans and other
payables within one year but for the past several years these amounts are
not shown as paid in the cash flow statement leaving one to ask about the
arrangements under which the Institute has been able to borrow PL480 and
other funds.
Related party relationships
IPED has a related party relationship with Demerara Distillers Limited and
Demerara Bank Limited by virtue of some directorship in common. Accounting
Standards require that since a related party relationship could have an
effect on the financial position and operating results of the reporting
enterprise, then transactions between related parties should be disclosed.
Indeed, the operating results and financial position of an enterprise may
be affected by a related party relationship even if transactions do not
take place between them since the mere existence of a relationship may be
sufficient to affect the transactions of the reporting enterprise with
other parties.
IPED has liquidated its entire holding of treasury bills and put all into
bank deposits which at December 31, 2001 amounted to $460M, in addition to
short term investments (also in bank deposits) of $392M.
Status
Like NBS, IPED clearly falls to be licensed under the Financial
Institutions Act but for reasons which are not apparent, the Bank of
Guyana has been slow to move to license these institutions. Given the
bank's stringent requirements on provisioning, the results of institutions
can be significantly different if other provisioning standards apply, and
comparisons with licensed financial institutions may not in that case be
entirely reliable.
Conclusion
On November 15, 2002, Development Finance Limited diverted its operations
to Suriname following what President of the Guyana Manufacturer's
Association, Ramesh Dookhoo, called "pressures from financiers to start
moving." On the brighter side, the formation of Small Business Development
Finance whose managing director previously worked with IPED, and the Small
Enterprise Development Bill expected to be tabled in Parliament early next
year, will contribute to IPED's drive to promote growth and development.
IPED can certainly do more to lower the cost of lending and borrowing.
IPED is more than a private enterprise initiative - it is a public
interest issue.