POLICIES AND INSTITUTIONS SUPPORTING SMALL AND …libvolume3.xyz/electrical/btech/semester5/managementand... · The Private Sector Organization of Jamaica (PSOJ): • Micro enterprises

POLICIES AND INSTITUTIONS SUPPORTING SMALL AND MEDIUM

SCALE ENTERPRISES (SMEs) IN JAMAICA

POLICIES AND INSTITUTIONS SUPPORTING SMALL AND MEDIUM SCALE

ENTERPRISES (SMEs) IN JAMAICA

•REPORT SUBMITTED TO THE UNITED NATIONS ECONOMIC COMMISSION ON LATIN AMERICA

AND THE CARIBBEAN (UNECLAC)

CLAREMONT KIRTON AND DAVID TENNANTFebruary 16, 2008

DEFINITION OF SMALL AND MEDIUM SCALE ENTERPRISES (SMEs) IN JAMAICA

Limited availability of data on criteria used to measure size ofbusiness.

Inability to distinguish between micro, small and medium scale enterprises.

Ignore distinction between micro, small and medium scale enterpises.

Data not collected on regular basis.

DEFINITION OF SMALL AND MEDIUM SCALE ENTERPRISES (SMEs) IN JAMAICAMinistry of Industry, Commerce and Technology (MICT)Paper (2001) - characteristics of small businesses:

- employment of 4 to 10 persons (medium scale >10 to 49 persons)

– Average loan size of approximately J$450,000 (US$10,000)– Total assets, excluding land and buildings, approximately J$4.5m

(US$100,000)– Usually operate formally– Typically can provide collateral for loans– Very sensitive to high interest rates.

DEFINITION OF SMALL AND MEDIUM SCALE ENTERPRISES (SMEs) IN JAMAICAThe Private Sector Organization of Jamaica (PSOJ):

• Micro enterprises - gross sales revenues of up to J$10 million (US$160,000).

• Small enterprises - gross revenues between J$11million (US$176,000) and J$30 million (US$480,000).

• Medium scale enterprises - gross revenues between J$30 million (US$480,000) and J$99 million (US$1.59 million).

• Large scale enterprises - gross revenues of over J$100 million (US$1.60 million).

Jamaica: data

Most recently available and relatively comprehensive data on small scale enterprises in Jamaica:

Consultancy report prepared for Inter American Development Bank (IADB) by the Group of Analysis for Development (GRADE) in 2004.

Jamaica: Macroeconomic background

The GRADE survey:

– sample of 1226 firms - 37% micro enterprises (2 – 4 workers) and 11% small scale (5 – 20 workers).

– average micro-entrepreneur monthly income J$57,000 (US$ 979); small scale firm J$900,000 (US$15,470).

– over 1/2 small scale firms located in large metropolitan areas of Jamaica which are the capital city – Kingston (9.3%), St. Andrew -the major metropolitan parish (37.1%), and St. Catherine - the largest parish (24.3%).


As reported by GRADE (2004):• 40% of the small enterprises involved in wholesale and

retail trading • another 26% engaged in “education, social work and

other personal services”• manufacturing and “hotels and restaurants” and

“transport, storage and communications” less important accounting for 9%, 9% and 7%, respectively

• almost four-fifths (79%) were males• average age of the small entrepreneur was 46 years • Over two-thirds (72%) of these business persons reported

that they are married or in a common law relationship


GRADE Report (2004):• small firms sell over 4/5 (83.5%) of their commodities and

services to individual customers locally, with only 14% of their customers being other firms.

• small firms identify their main competitors as other small enterprises (57%) and micro-enterprises (35%).

• large percentage (79%) of competitors are located in the same area where the small firm operates, representing strong competitive markets among these enterprises.


The GRADE (2004) survey on finance:• About ¼ (23%) of small firms report having no bank account. • Under 1/5 (18%) of small firms applied for loans in year preceding

survey, and 15% obtained such loans. • Contrast with about 1/3 (33.3%) who stated that they needed loans. • Just over two-thirds (66.7%) of loans received by small firms were

obtained through commercial banks; family/friends and informal financial institutions accounted for almost 20% of loans obtained.

• Most (60%) of these loans used for working capital purposes, with 30% allocated to purchases of fixed assets.

• 38% of small firms report defaulting on loan repayments, with almost two-thirds (62.5%) citing cash flow problems as the reason.

Strategic Priorities of the GOJ

• Vision 2030 seeks to place Jamaica on a path towards achieving developed country status by 2030.

• ‘…the plan is based on a comprehensive vision to make Jamaica the place of choice to live, work, raise families, and do business.’

• Stated guiding principle is to ‘put people at the center of Jamaica’s transformation.’


GOJ has not yet finalized Vision 2030 process; strategic policy in which SMEs now operates taken from National Industrial Policy (NIP), was developed in 1996.

Main focus of NIP:1. macroeconomic policy2. industrial strategy3. social policy4. and environmental policy.


The GOJ’s strategies in key areas affecting SME development are highlighted under the following headings:

1.Macroeconomic Policies and Outlook2. Industrial and Trade Policies

INSTRUMENTS AND INSTITUTIONS USED TO SUPPORT SME

DEVELOMENT IN JAMAICA

GOJ National Industrial Policy (NIP) 1996 notes that:‘the development process in Jamaica is likely to be driven significantly by the activities of small business. The National Industrial Policy seeks to affirm the importance of this sector of the economy and to integrate the productive elements of the sector into the overall development process. The key concern is to enhance the ability of the sector to contribute to the national development goals of growth with social equity and conservation of the environment.’

Background

NIP identified planned initiatives that would address challenges faced by micro and small enterprises arising particularly from their small scale,limited capital and skills. Planned initiatives included:

• Incorporating MSEs in the national export promotion drive by increasing their productivity and efficiency, upgrading skills and management capabilities, improving access to credit, providing marketing support, and simplifying the process of business registration;

• Developing targeted industrial space for small businesses;• Encouraging the efforts to link small businesses and larger firms

through sub-contracting relationships;• Increasing the emphasis given to training in entrepreneurship and

small business management; and• Establishing a Micro and Small Enterprise Coordinating Bureau to

provide strategic direction to the sector’s development.

Background

These initiatives not effectively implemented by end 2006.Government noted that major challenges facing Jamaican MSEs were:• un-competitiveness • lack of access to credit• high unit costs of production and poor quality products• low levels of technology and technical skills• weak business and management skills• financial market perceived risk of MSEs and lack of

appropriate collateral.

Background

• GoJ has not formulated a comprehensive document outlining a revised plan for the further development of the sector.

• Stand-alone small business plan is currently being developed by the Ministry responsible for SMEs.

• Policy currently being prepared.

INSTRUMENTS/INSTITUTIONS USED TO SUPPORT JAMAICAN SMEs

• Will now highlight and assess GOJ’s support to SMEs through these initiatives and related institutional arrangements.

• Initiatives will be outlined in accordance with the government’s strategic focus areas of:– Financial services– Business development services– Institutional support.

Financial services - wholesale

Development Bank of Jamaica (DBJ)• Provides loans to small, medium, and large scale

businesses through approved financial institutions (AFIs) including credit unions, commercial banks and the NDFJ.

• Provides assistance to wide ranging productive enterprises in various sectors, including the broiler industry, block making, agriculture, agro-industry, and the music industry.

• Does not lend directly to the promoter of the project; typically channels funds through Approved Financial Institutions (AFI’s) which provide the initial credit evaluation and the loan supervision.


The National Export-Import Bank Small Business Discount Facility (EX-IM SBDF)• Wholesales funds for disbursement to micro and small enterprises

which produce for domestic and/or export markets • Funds disbursed through commercial banks and other AFIs. • Considers direct applications for loans from small businesses on a

case-by-case basis • Funded areas of trade, services, manufacturing and mining• Reduced interest rates offered to encourage increased numbers of

micro and small businesses to utilize the credit offered. – Interest rates around 12% per annum on the reducing balance.

• Maximum loan amounts J$7.5m (US$100,000) (for non-exporting entities and J$10m (US$133,000) (for exporting entities). Maximum repayment period is four years, inclusive of a moratorium of up to six months on principal payment.


Government of Jamaica/Trafalgar Development Bank/Pan Caribbean Financial Services Ltd.(PCFSL) Micro and Small Enterprise Credit Scheme• Under GOJ/EU Small and Micro Enterprise Scheme, GOJ

appoints a wholesale agent to administer Scheme • Current wholesaling agent is Pan Caribbean Financial Services

Limited (PCFSL) • GOJ provides funds to PCFSL for wholesaling to accredited

participating credit institutions (PCIs) such as National Development Foundation of Jamaica (NDFJ) and the credit unions

• PCIs lend the funds to the final borrowers


The Government of Jamaica / USAID / Jamaica NationalSmall Business Loans Limited (JNSBL• JNSBL is a non-profit subsidiary of Jamaica National

Building Society (JNBS) • JNBS operates Representative Offices in UK, USA and

Canada. • Wholesales funds and lends directly to micro and small

enterprises• Loan amounts range from J$5,000 to J$300,000, and

repayment periods range from 10 to 50 weeks• Interest rate typically 1% per week

Financial services - retail

The National Insurance Fund Credit Facility for Small and MediumEnterprises (NIF/CF/SME)• NIF/CF/SME is credit facility established by GOJ in 2007 to provide

support to small and medium sized enterprises. • Wholesaling scheme - funds are disbursed to participating financial

institutions (PFIs) for on-lending to SMEs.– funds made available to PFIs at 4% on the reducing balance – maximum retail rate set at 10% on reducing balance

• Loan limit for any one enterprise is J$5m, and maximum repaymentperiod is four years.

• Loans are made to existing enterprises with an established business performance history, and new businesses will receive funding only if stringent requirements are met.


The Self-Start Fund (SSF)• Created in 1983 - main objective to promote entrepreneurship and

employment opportunities in the private sector.• Retail institution lending directly to both microenterprises and small

businesses.• Initially financed by USAID CBI funds reflow; received loans from

GOJ/ Government of the Netherlands agreement, as well as from Micro Investment Development Agency (MIDA).

• Loans granted to applicants whose assets, excluding land and buildings, do not exceed J$1,000,000 (US$13,000).

• Loans made for purpose of acquiring basic tools, implements of trade, equipment, raw material and services.

• Offers small business loans with limit of J$1,500,000 (US$20,000) and maximum term of three years.


The National Development Foundation of Jamaica (NDFJ)

• Major retailer of funds to micro and small entrepreneurs involved in activities such as manufacturing, agriculture and services.

• Loan amounts for manufacturing projects range from J$20,000 to J$3.5m.

• Interest rates range from 33% to 34%.


Credit Union League

Credit Unions serve as important private sector retailers of funds to micro and small enterprises.

• COK Credit Union – one of the largest credit unions has played a prominent role in this respect, but the role played by other institutions in the League should not be ignored.


National Commercial Bank (NCB) SME Financial ServicesIn 2004 NCB SME Financial Services launched a loan facility which

issues loans to small and medium sized enterprises. • The receivables financing facility is a line of unsecured credit for the

financing of working capital requirements of SMEs pending collection of outstanding receivables from approved paying companies – allows the small businesses to fill cash flow gaps by providing

immediate cash amounting to a maximum of 75% of the receivable

– Amounts range from J$100,000 (US$2,000) to J$10m (US$150,000), interest rate ranging from 21% (or 11% on USD loans) for NCB depositors, and 22% (or 12% on USD loans) for businesses that do not have their main operating account with NCB.

Business Development Services (BDS)

Jamaica Business Development Center (JBDC)

• JBDC provide business and technical support to MSMEs in various areas of their business development

• Facilitating business start-ups, consultancy services for established business enterprises

• Over 4,000 businesses request various services supplied by JBDC.


The Jamaica Business Development Center (JBDC)• The support provided to SMEs by JBDC can be

disaggregated into four categories:– Information– Training– Marketing assistance– Technical assistance.

• It seeks to fulfill its mission through various activities, including: – Organizing training and sensitization sessions on various aspects

of business development – Providing technical support and business development services – Providing strategic coordination of the support systems and

institutions aimed at strengthening MSMEs


EU/GOJ Private Sector Development Programme (PSDP)• The PSDP seeks to serve MSMEs by:

– Financing activities that foster improved competitiveness through cost sharing grants of up to J$3.6m;

– Providing direct support programmes to individual firms or groups of businesses through market penetration activities, export centers, cluster and sector initiatives, and consortia business development services;

– Providing financial planning advice through a corporate finance broker, created to enhance MSMEs’ success in securing appropriate and affordable financing; and

– Facilitating research and lobby initiatives to reduce bottlenecks impeding the development of small businesses in Jamaica (MICT 2007).


BSJ/JBDC Product Development for SMEs Programme

The Bureau of Standards Jamaica (BSJ) and the JBDC have signed amemorandum of understanding which ‘seeks to provide technical assistance to small and medium-sized enterprises (SMEs) through the provision of information and technical support to comply with the required standards for products, packaging and labeling’ (MICT 2006).

The achievements under this programme include:• ‘Development of manufacturing instructions, quality assurance

procedures and a technical information manual in respect of to herbal tea blends;

• Development and production for commercial sale of mini replicas of the statue located at the Emancipation Park; and

• Labeling of food products such as gizzadas, coconut drops and grater cakes’ (MICT 2006).


The Jamaica Exporters Association (JEA) Business Technology Services Programme (Biz Tech)

This World Bank funded project was aimed at allowing the JEA to provide technical support to its members. The objectives included:

• Providing technical support to 34 SMEs;• Providing IT support to firms in the process of

computerization;• Providing market outlook and commercial investment

reports;• Conducting HACCP quality and productivity training;• Undertaking business planning and IT interventions; and • Providing relevant training to JEA staff.

Institutional Support

• A challenge faced by retailers of credit to SMEs is the fact that funds borrowed through Government or donor-supported programmes are traditionally viewed as soft loans.

• They are consequently plagued by high levels of arrears and non-repayment.

• This not only affects the sustainability of these programmes, but is also a major deterrent to the inflow of new funds to the sector.

• The fundamental problem of increasing SMEs’ access to credit will therefore not be solved until the creditworthiness of SME borrowers can be properly assessed.

• A number of the retail lending agencies and the MICT have thus spearheaded the preparatory work involved in creating a specialist MSE credit bureau.

Evaluation of effectiveness and efficiency of instruments and institutions used to

support SME DevelopmentQuantity/cost of funds available:* Real Value of funds disbursed by wholesale agencies increased significantly over review period.• Fluctuations due to variability in supply of funds.• Supply of funds by retailers relative to wholesalers

experienced slow growth over review period.• SMEs receiving less funds (in real terms) from

retailers• Retailing activities increasingly becoming dominated

by one lender.


support SME Development

Sustainability of credit schemes:

• Supply of funds erratic – concerns about sustainability.

• Increased flows of wholesale funds have not been available to SMEs – concerns here about efficiency of retail process

• Need to identify stable funding sources


support SME Development

Number of loans issued:

Significant increases in number of loans issued – number ofloans more than doubled.

Dominance of one financial institution

Assessment of the Performance of Financing Initiatives

Number of Jobs Created

• Data indicate that between 2002 and 2005, 43,839 new temporary and permanent jobs were created through these agencies.

• Most jobs were created through the USAID/ Union Bank/ JNSBL credit facility (average over 7,000 per year between 2002 and 2005)

• Two other agencies each facilitated the creation of more than 1,000 jobs per annum during the period.


Efficiency of the Job Creation Process

• In order for one job to be created, loans with average real values ranging from J$44,174 (US$883) to J$226,372 (US$4527) must be disbursed.

• The Development Bank of Jamaica (DBJ) and the National Development Foundation of Jamaica (NDFJ) were the least cost effective in this respect, with average values of loans disbursed per job created of J$226,372 (US$4527) and J$141,850(US$2837), respectively.

• The Self Start Fund was most cost effective at J$44,174 (US$883)per job.


Average Size of Loans Issued

• Credit unions - average loan size of $74,409 (US$1488) in 2001, and the USAID/ Union Bank/ JNSBL credit facility had average loan sizes ranging from J$28,940 (US$5788) in 2001 to J$22,390 (US$4478) in2003.

• The Self Start Fund similarly had an average loan size of $129,151.30 (US$2583) in 2001, which exceeded the typical upper bound for microenterprises, but which was much smaller than the normal loan size for small businesses.

• The average loan size of the Self Start Fund declined in 2002 and 2003 (to J$59,750 (US$1195) and J$72,391 (US$1448), respectively) to fall within the typical value of loans for microenterprises.

• The National Development Foundation of Jamaica (NDFJ), had an average loan size of J$527,108 (US$10542) in 2003 which is just above the J$450,000 (US$9000) benchmark highlighted for loans tosmall businesses.


Cost of Funds• The figures indicate that although the Jamaican lending

rate decreased significantly from 39.83% in 1996 to 17.64% in 2006, it was significantly higher than that of a sample of CARICOM countries in the years reviewed.

• In 2006, commercial bank lending rates for Barbados, Trinidad and Guyana were 10.29%, 10.92% and 14.54%, respectively. For the decade from 1996 to 2006, the Jamaican rate averaged 24.16%, more than doubling that of Barbados (9.41%), and almost doubling that of Trinidad (13.69%).


Cost of Funds• At the wholesaling level in Jamaica, funds are provided at

subsidized interest rates. – The Development Bank of Jamaica lends to AFIs at 10%, and

mandates that these funds cannot be on-lent at more than 13% and that the rates should be fixed for the life of the loan.

– National Insurance Fund Credit Facility for SMEs lends to retailers at 4%, and sets the maximum retail rate at 10%.

• The GOJ/PCFSL Micro and Small Enterprise Credit Scheme is more flexible, as funds are lent to retailers at below market rates, but the rates at which funds are on–lent to small businesses are not prescribed.

Assessment of the Performance of BDS Initiatives

Accessibility of BDS Programmes• Accessibility is most reliably assessed by examining the

number of firms assisted as a proportion of the total number of firms in the SME sector. – Half (50.4%) of the small businesses surveyed did not know any

BDS providers, and only 26.7% used their services (IDB study)– Most popular are private companies (28.1%) and independent

professionals (26.7%).– Public sector providers of BDS are mentioned far less frequently,

with all categories of public providers (including public universities) being identified by a total of 8.1% of the respondents.

Assessment of the Performance of BDS Initiatives

Usefulness of BDS Initiatives• Small businesses surveyed indicate that 77% did not keep simple

accounting records, – 79% did not have any management plans for their business, – 75% did not spend any time making improvements to their business or

developing new products or services, – 75% had not executed a quality control of their products and services,

and 79% did not train their workers. • Majority of small businesses surveyed know about (45.9%) and use

(24.4%) primarily those services related to accounting and taxes. • Very low levels of knowledge and usage of BDS in the areas of

management (23.7% and 2.2%, respectively), training (24.4% and 2.2%, respectively), innovation and technology (23% and 1.5%, respectively), and marketing (25.2% and 1.5%, respectively).

Doing business in Jamaica

• World Bank Data (2007):

• Time period (workdays) taken to establish a business, Jamaica is worse than international best practice country (Australia – 2 days) as it requires at least 8 days to establish a business.

Jamaica ranks higher than most other Caribbean countries which require, on average, at least, 12 days.


• In terms of dealing with licences:

– In the best practice economies like South Korea, this procedure takes 34 days;

– in Jamaica, the number of days required is 236, making the country the worst in the Caribbean.

• Registering property in Jamaica takes, on average, 54 days with the Jamaican situation worsening recently: – Time period for Jamaica is higher than most Caribbean countries and

way above international best practice of 2 days (New Zealand).


• Obtaining credit – Over the last year, Jamaica’s ranking in this area has declined. In

the absence of credit bureaux in Jamaica which significantly limit credit information sharing, the country has a very low rating in this area.

• Protection of investors– Jamaica’s score of 5.3 is lower than the Caribbean average of 6.3

(from 0 to 10, with higher values indicating better investor protection),

– Recent decline in this index for Jamaica in 2008 over 2007. • Tax payment ratings have worsened for Jamaica, with

Jamaica having one of the highest tax rates (51.3%) in the Caribbean.

Financing of SMEs

• Senior officials in Government expressed concerns with the regularity of funds supplied to wholesaling agencies by GOJ and donor agencies.

• Concern is substantiated by the large annual fluctuations in real funds disbursed by wholesalers, many of which disburse absolutely no funds in some years.

• Caused by supply-side constraints than by deficiencies in demand for funds.

Financing of SMEs

• Private commercial banks and NBFIs should consider extending their role from simply wholesaling or retailing funds provided by the government or donor agencies, to independently providing loanable funds.

• Policy proposal which GOJ can implement is to fast-track establishment of the MSME Credit Bureau;conceptualized, but not created.

– Credit Bureaux are critical since they can reduce information asymmetry constraints and may impact both small and medium scale firms positively.

Financing of SMEs

• The efficiency and efficacy of the entire lending process is area of concern, especially role of retailers.

• Some specific proposals are presented as follows:– intensive research on operations of wholesaling and retailing

agencies is required; emphasis to be placed on the identification of bottlenecks and cost excesses.

– qualifying conditions for loans from different types of retailing agencies (private, public and NGO) should be compared to determine whether unduly onerous qualifying conditions are restricting the disbursement of funds to SMEs.

– research results to be used to guide GOJ in its plan to developclear directives with respect to governing the operations of wholesaling and retailing agencies, and formulate parameters forinteractions with small businesses or stakeholders.

Financing of SMEs

• The cost of funds available to SMEs is a major challenge, yet to be adequately addressed by GOJ. – Financing initiatives outlined above are useful as they allow SMEs

to access funds at lower than the market rate. – Even though the rates offered by the retailing agencies may be

lower than the Jamaican market rate, they are still higher than lending rates charges in other Caribbean countries.

– Context of CSME, this may place SMEs at a disadvantage in the regional market.

– When CARICOM Financial Services Agreement and CARICOM Investment Code become fully operational, access to funds across the region will increase, thus allowing SMEs to access the cheapest sources of funds.

Provision of Business Development Services to SMEs

• Many Jamaican SMEs are either not aware of the BDS services available to them, or are not aware as to how such services can benefit their businesses.

• SMEs are also concerned about the cost of BDS. Provision of subsidized BDS programmes very important. Very few SMEs aware of these programmes.


• To address this, the GOJ (possibly with the assistance of donor funding) should:– Develop a central depository of information on available services,

which is easily accessible to SMEs island-wide. JBDC’s mobile business clinic idea can be further developed to disseminate information through seminars and discussion forums at the community level

– Carefully designed public education programme should be launched

– Greater coordination of government/donor sponsored BDS should be carefully considered. Although a number of agencies have taken measures to reduce the duplication of effort, some initiatives are not included in these measures. Greater coordination could facilitate more focused and strategic interventions in key areas.


• Most Jamaican SMEs only use BDS in areas that are absolutely needed to meet legal requirements, which in turn constrains growth and development of SMEs, as internal capacities and competitive advantages are not built.

• GOJ interventions must not simply respond to extant demand, but should strategically lead the market in areas critical to SME development. Consideration must be given not only to the breadth of easily accessible services, but also to the depth of the services that are offered.

• If most of the services or training programmes are offered at only a basic level, this will impede the competitiveness of Jamaican SMEs on the international market, as their efficiency and the quality of their products will not be comparable with the more advanced countries.


• Small and medium enterprises seldom have the capacity to influence policy making and as such, there is a critical role for SMEs to develop effective representative organizations. – These organizations play a key role in areas such as advocacy,

research and information sharing, links with various organiz-ations, and policy dialogue and implementation.

• Measures to strengthen the stakeholders in the Small Business Association of Jamaica (SBAJ) and encourage increased membership should be investigated.

• Consider to begiven to measures to incentivize membership ; for example, providing tax benefits or special tax compliance measures to members of the SBAJ or other clusters of small businesses.

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