Dedicated
Sometime in the not too distant future, the Institute for Private Enterprise Development (IPED) will hold its 26th Annual General Meeting to discuss the performance of the organization over the last year, and most likely attend to other housekeeping matters. The information that it will share with the public this time around is unlikely to be as impressive as in previous years considering what the Bank of Guyana had to say about the performance of these important providers of credit in its third quarter report of 2011. With 99 percent of their loans going to the micro and small business sector, lenders like IPED, Small Business Development Finance Trust Inc (SBDF) and Develop-ment Finance Limited of South America Incorporated (DFLSA) are truly dedicated to serving the micro and small scale entrepreneur.
IPED is the largest of the three organizations that have a full time mandate of lending to micro and small businesses in Guyana. Its coverage is extensive with activities in all regions of the country and with deep penetration in the commercial and productive activities of the country. Thus, what the BOG’s report says about micro financing can be taken as overwhelmingly talking about what IPED has done. The year-on-year difference in performance is striking and the story that IPED will tell in its upcoming annual report about the decline in demand for micro credit in 2011 might contain important lessons for the Guyana economy going forward. The upcoming IPED annual report will probably not analyze the decline, but it would certainly have to ponder the effectiveness of the organization’s current business model in serving the micro credit market.
Ownership Test
As most people know, the small business economy is a substantial part of the Guyana economic world. Yet, discussions about small businesses generally lead many to wonder what qualifies as a small business in Guyana. At least since 2004, there is a basis for determining which business qualifies as a small business and which does not. According to the Small Business Act, a small business could be an incorporated or unincorporated business. Thus, the law allows sole proprietors, partnerships, cooperative societies and incorporated businesses to function as a small business as long as, in the case of the incorporated entity, it is not an affiliate or subsidiary of a larger entity. But even if an entity met the business organization test, it would also have to meet the size test at the same time to qualify as a small business.
Size Test
An entity has three ways in which to meet the size test. One way is through a measure of its sales and staff strength. Under this test, an entity that has sales of no more than G$60 million and a payroll with no more than 25 persons on it is regarded as a small business. Another way to meet the size test is for an entity to have sales of no more than G$60 million and assets of no more than G$20 million. The third way combines assets and staff strength. By this measure, an enterprise that has assets of no more than G$20 million and a payroll with no more than 25 persons on it also qualifies as a small business. Any combination of size and any form of ownership described above will entitle a business to be treated as a small business. However, a small business that has sales of less than G$10 million is considered a micro business.
While organically a business that meets the criteria discussed above could consider itself small or micro, that designation however has to be conferred on it by whichever Minister has responsibility for small business in Guyana. Getting the blessing of the Minister first requires a recommendation from the Small Business Council. Otherwise, an entity would be ineligible to receive benefits under the Small Business Act.
Current Data
IPED caters to both types of business, those classified as micro enterprises and those classified as small enterprises. The bulk of its loans, nearly 86 percent, go to those in the small category, while the rest goes predominantly towards micro credit. As the data on its 2011 activities are being finalized by the professionals and luminaries of the organization, the information in the third quarter report of the Bank of Guyana heightens interest in what the organization might have to say for itself. Based on current data, the lending activities of the institution had suffered a severe decline by the end of September last year. The number of loans that IPED and the other two micro finance lenders had issued was down by 27 percent, even though the total value of the loans disbursed went up by close to nine percent.
Fluctuated
The loan portfolio of these micro finance entities has fluctuated in the past but it has not seen in the last five years a decrease as large as that witnessed in 2011. With a smaller number of applicants seeking loans at a time when the economy is exhibiting growth, it causes one to wonder what is happening in the small business sector in Guyana. Moreover, the change would have occurred during a period when special government programmes were being advanced by the previous administration through IPED and other entities. While one cannot rule out the possibility that the small businesses might be obtaining their financing from other sources, that such a large number of applicants, over 1,300, would be flocking to a new source of funding, would in itself have been news long before now.
Downsizing
It is interesting to note as well that the decline in micro loans did not lead to an increase in loans to the small and medium enterprise category. Such a shift might have indicated that an increasing number of micro enterprises were growing up and were qualifying for loans as small businesses. The numbers do not give much credence to that point of view. Without such a transformation, the shift clearly reflects a downsizing of the overall portfolio. With the absence of any kind of substitution effect, it is also reasonable to wonder if small businesses are finding the environment much more competitive. If micro enterprises are dropping out of the race, the evidence most likely will show up in the loss provision column of the annual report.
One other possibility might be resource allocation. Many of the small-scale entrepreneurs might have traded their independence for much higher returns. The gold and diamond industry has been attracting many newcomers to its side on account of the extraordinarily high prices for gold. Maybe, small business owners might have decided to work for some other person or some company and earn a lucrative return much faster. It would indeed be wonderful if IPED could indicate the likely cause of the decline in loan applicants so that Guyanese could understand better some of the dynamics of the economy at a time of expanded interest in the country’s natural resources.
The Vision
Even if IPED does not want to examine the implications of the change for the Guyana economy, it would certainly need to do it for its own welfare. IPED has set itself a goal of counting at least 7,500 enterprises as customers of its own by the end of 2015. With four years to go and an estimated 4,153 customers at present, the last thing that IPED wants is to see its market share eroded. Each year that happens puts its vision out of reach and makes its longer term goal of 15,000 customers by 2020 even more remote. Clearly current conditions challenge the business model in use by IPED. There is a general tendency for the annual reports to talk more about the amounts of loans made and the size of the loans made instead of the metrics for growth. It is not unreasonable to imagine that in its next annual report, IPED will share with the general public how it intends to reach its goal of nearly doubling its market size by 2015.
