High interest rates on loans ‘killing’ small businesses

Jan 31, 2023 News

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– IDB says as it pours $147M to train 300 micro business owners

Kaieteur News – The Inter-American Development Bank (IDB) is expected to provide Guyana with US$700,000 ($147M) to help support the growth of 300 microenterprises across the country via the delivery of skills training and mentorship. It will also include the provision of reimbursable grant resources of up to US$5,000 for 145 of these businesses to catalyse and finance their growth.

It should be noted that a private Guyanese firm dubbed the Economic Development Fund Inc. (EDF), will be complementing the IDB’s efforts with US$1,074,979 ($225.7M). This brings the total investment for this project to $372.7M.

It is expected that the combination of capacity building and financial support will provide an impetus for the microenterprises that have been assessed as having growth potential to achieve enhanced performance in terms of market reach, increased sales and profitability, and higher levels of business resilience.

Kaieteur News understands that the model is structured to include three key components: (i) piloting of a system of reimbursable grants for high growth potential microenterprises; (ii) training, coaching and mentorship of micro-entrepreneurs via a business acceleration programme; and (iii) creation and dissemination of knowledge on the results and impact of the model as a platform for scaling.

At the outcome level, the project is expected to deliver an innovative model for financing growth of microenterprises in Guyana that is piloted in Guyana. Importantly, US$725,000 is to be invested in reimbursable grant financing for microenterprises by the Economic Development Fund Inc.

This newspaper understands that EDF is a Guyana-based business accelerator that, since 2019, has provided training, technical support and coaching from international experts, as well as capital, to support the scaling of high growth potential start-ups and microenterprises in Guyana. The organization is an awardee of a USAID grant and also receives financing from GTT, the country’s largest telecommunications provider.

The EDF was established on July 29, 2019 in Guyana and its headquarters is located at Lot 2 Soesdyke East Bank Demerara. EDF, through its programming, has helped launch eight successful Guyanese agricultural-technology start-ups working in sectors addressing food loss, agricultural waste management, crop health, and natural medicinal skin treatments. Additionally, since 2021, EDF has supported the growth and development of 30 Guyanese agro-processors.

EDF’s beneficiaries includes finalists and winners of the Guyana Innovation Prize, a pre-seed grant to commercialize breakthrough research in agro-processing that is combined with technical support from faculty, students, and alumni of Guyana’s tertiary educational institutions.

PROBLEM AT HAND

According to the IDB, the problem that is being addressed with this project is the financial exclusion of microenterprises in Guyana.

It pointed out that a major hindrance is access to credit. The IDB said access to loans in Guyana is weak compared to the region. While the number of loans per 1,000 adults in Guyana increased from 42 in 2005 to 89 in 2018, the bank said the regions’ averages were 328 per 1,000 adults in 2005 and 540 in 2018.

Currently, microenterprises can seek access to funding via Guyana’s Small Business Bureau (SBB), which provides one time only non-reimbursable grants of up to USD 2,500 for business development, or the Institute for Private Enterprise Development (IPED), the country’s largest microfinance institution, for loans of up to USD 3,750.

The IDB noted that data from 2020 reveals that Guyana’s largest microfinance institution IPED and SBB are reaching less than 1% of Guyana’s micro enterprises with micro loans and grants. The IDB said the financial exclusion and associated stagnation of Guyana’s microenterprise sector are attributable to a range of interrelated factors, but most significantly is the fact that interest rates charged by lenders are high due to operational costs and the absence of easily converted collateral/security in most microenterprise loan transactions. Another factor is that microenterprise business owners demonstrate low levels of formal business skills, which in turn increase lenders’ risk perceptions and pricing.

Whereas most microfinance institutions in the region charge interest rates of between 20 and 45%, the IDB said IPED as the largest microfinance institution in Guyana offers unsecured working capital financing (up to USD3,750) at interest rates that are as high as 52%. The bank said this is a barrier to many microenterprises seeking finance for business growth.

It was further noted that high interest rates and the resulting low levels of lending in Guyana are tied to lenders’ perceptions of the likelihood of micro and small business failure and microenterprises’ lack of adequate collateral.

Kaieteur News understands that the high interest rates charged by microfinance and other lenders in Guyana are further driven by high operating costs, expected loan losses (credit and operational risks), a desire for a determined level of profit, borrowers’ low levels of education and business-know how; and lack of adequate collateral and substitutes.

The IDB project hopes to improve this state of affairs.

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• businesses, Economic Development Fund Inc. (EDF, Inter-American Development Bank (IDB), interest, loans

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