Small business Act
Legislation offers hope for easier financing
By Nicosia Smith
Stabroek News
March 26, 2004
One big obstacle to many small businesses could be surmounted with new legislation providing for government-backed loan guarantees.
On March 15, Parliament passed the Small Business Bill No. 18/2003. Of great significance, is the provision for small businesses (under certain conditions) to become eligible for loan guarantees from the government. Also of interest is the requirement that the government has to "use its best endeavours" to procure at least 20% of its goods and services from small businesses.
"That would be a good move," says Timothy McIntosh, the manager of Moogoodies Dairy Plant, in New Amsterdam.
He hopes that the government will now be buying local milk for use in hospitals and not the large quantities of powdered milk it advertises for.
Prem Raghubar, the manager of Royal Woodworking General Store on Regent Street, feels the government should have been buying from small businesses a long time ago.
He says it is the small businesses who contribute to the government's 'coffers' and should get its support. He thinks the minimum 20% should be increased to 40%.
Meanwhile Manzoor Nadir, Minister of Tourism, Industry and Commerce explained that many small businesses usually do not have the necessary security for loans they require, thus elements such as the loan guarantees should help to alleviate this.
Under the Act, there are three new bodies to be formed: a Small Business Council (SBC), a Small Business Bureau (SBB) and a Small Business Development Fund (SBDF).
The eleven-member SBC will, among other areas, prepare annual reports on small businesses in Guyana and supervise/manage the SBB.
The SBB will be the secretariat of the SBC and is to be housed at the Ministry of Tourism, Industry and Commerce.
The SBDF has a double function, in that, it has to finance the SBB, the SBC and also provide loan guarantees for small businesses.
One source of finance for the SBDF will be the money budgeted annually by the government; but apart from the government funds, money will also be sourced from returns on investments made by the SBDF; by funds from the SBC for services rendered; and from grants made to the fund.
Loan guarantees
The Act states that the SBDF will provide loan guarantees for small businesses which qualify. Only small businesses which are incorporated, contribute to 'Pay As You Earn (PAYE)'and to the National Insurance Scheme, are eligible.
A small business, according to the Act, cannot have more than 25 employees and not have gross annual revenues more than $60M or total assets of not more than $20M.
Nadir explains that in relation to the amount of money that will be set aside for loan guarantees, the SBC will recommend the amount and after consultations with the Finance Minister a decision will be made, as to the final amount. The Bill stipulates that laws can be sanctioned by parliament, with regard to the use of the funds.
How IPED might fit in
"If the government is going to give this loan guarantee... we will access it," says Dr. Leslie Chin, a director at the Institute of Private Enterprise Development (IPED). IPED is the biggest lender in the micro and small business categories funding 4,784 entrepreneurs during 2002 with loans worth $720M.
However, repayments on small loans have been a problem for all lending agencies.
Chin says a common belief in the business community backed up by many examples, is that when persons borrow and the government is involved the money is not paid back.
Chin says it would not be wise for the government to give guarantees on the full amount of the loan. For example, he notes that if the loan is not repaid and it was 50% guaranteed then both parties would be set to lose the same amount.
The Act has stipulated that part or full loans can be available to small businesses.
Chin suggests that strong procedures must be put in place that cause people to repay, and he cautions that the loan guarantee should not develop into a lending programme.
"What I would not like to see is the business development fund (SBDF) start providing loans at special rates of interest."
He says if this is ever done it could destroy the small loan market and shut out institutions such as IPED.
The government should not be in the business of giving loans, he says, because they do not have the infrastructure to do so. "It is a case of making sure that when you intervene you do not disturb the market."
Nadir makes it clear that the SBDF is not a loan scheme and is only stipulated to provide loan guarantees for businesses which apply to financial institutions for loans but do not have the required security.
Chin also warns that if the SMC and SBC become centrally directed, it might sway the decision-making. As it stands the structure of the Act gives considerable authority to the Minister of Tourism, Industry and Commerce with, among other things, the ministry having to approve dismissals.
Among other things the Bill enables the provision of support and access to financing and non-financial services to improve productivity and competitiveness.
These are similar to those already provided by IPED which also helps with market facilitation.
One example of this is in the area of passion fruit and cherry farmers who have received loans from IPED. These farmers were able, with IPED's support, to sell to Demerara Distillers Ltd(DDL), and in return DDL pays their loan obligations directly to IPED.
Chin explains that in certain areas where there is a lot of risk, for example now that IPED is in Region Nine, the loan guarantees could help a lot.
A representative from a lending institution is to sit on the SMC, according to the Act.
One member of the SMC board is to come from a banking institution.
But in the event IPED is selected, then the government should not guarantee loans from IPED, says Chin, who warns this would be a conflict of interest.
Patrick Zephyr, president of the Guyana Small Business Association(GSBA) believes that in light of all the obligatory financing that the SBDF will have to undertake a start up sum of US$100,000 for the loan programme is not too much to ask for.
It was the GSBA which took the lead initiative to get an Act on the agenda with the first draft of the bill submitted to the president some years ago by the association.
For the association, the timing could not be better since it coincides with a $5M government grant it received on March 5.
Zephyr notes that the money will be used in part to rent a building for the GSBA.