Half Title
 Front Matter
 Title Page
 Table of Contents
 List of Tables
 Criteria for granting loans
 Cost of loan evaluation
 Politics and the criteria

Group Title: MSU rural development series working paper
Title: Some problems in operating a loan program for craft and emerging small-scale non-farm enterprises in Jamaica
Full Citation
Permanent Link: http://ufdc.ufl.edu/UF00087128/00001
 Material Information
Title: Some problems in operating a loan program for craft and emerging small-scale non-farm enterprises in Jamaica
Series Title: MSU rural development series working paper
Physical Description: iv, 39 p. : ; 28 cm.
Language: English
Creator: Wilson, Middleton
Publisher: Dept. of Agricultural Economics, Michigan State University
Place of Publication: East Lansing Mich
Publication Date: 1981
Subject: Credit -- Jamaica   ( lcsh )
Small business -- Jamaica   ( lcsh )
Handicraft -- Jamaica   ( lcsh )
Industries -- Jamaica   ( lcsh )
Genre: government publication (state, provincial, terriorial, dependent)   ( marcgt )
bibliography   ( marcgt )
non-fiction   ( marcgt )
Spatial Coverage: Jamaica
Bibliography: Includes bibliographical references (p. iii-iv, p. 39).
Statement of Responsibility: by Middleton Wilson.
 Record Information
Bibliographic ID: UF00087128
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 08298803

Table of Contents
    Half Title
        Half Title 1
        Half Title 2
    Front Matter
        Front Matter 1
        Front Matter 2
    Title Page
        Title Page
    Table of Contents
        Page i
    List of Tables
        Page ii
        Page iii
        Page iv
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
    Criteria for granting loans
        Page 8
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
        Page 21
        Page 22
        Page 23
        Page 24
        Page 25
        Page 26
        Page 27
        Page 28
        Page 29
        Page 30
    Cost of loan evaluation
        Page 31
        Page 32
        Page 33
        Page 34
        Page 35
    Politics and the criteria
        Page 36
        Page 37
        Page 38
        Page 39
Full Text



Department of Agricultural Economics
Michigan State University
East Lansing, Michigan 48824



Middleton Wilson

Working Paper No. 15



Carl K. Eicher and Carl Liedholm, Co-editors

The MSU Rural Development Working Papers series is designed to report

the preliminary results of comparative studies of rural development in Africa,

Latin America, Asia, and the Near East. The papers will report research

findings on community development and rural development in historical per-

spective as well as studies of contemporary rural development programs. The

series will include papers on a wide range of topics such as alternative

rural development strategies; off-farm employment and small-scale industry;

alternative farming systems; marketing problems of small farmers; agricultural

extension; interrelationships between technology, employment and income dis-

tribution; and evaluation of rural development projects.

The papers are aimed at teachers, researchers, policymakers, donor

agencies and rural development practitioners. Libraries, individuals, and

institutions may obtain single copies of the MSU papers free of charge and

may request their names be placed on a mailing list for periodic notifications

of published papers by writing to:

MSU Rural Development Working Papers
Department of Agricultural Economics
206 International Center
Michigan State University
East Lansing, Michigan 48824



Middleton Wilson**

*This paper has been published as part of Michigan State University's
Off-Farm Employment Project, which is financed by the Office of Rural
Development and Development Administration, Development Support Bureau,
U.S. Agency for International Development (AID/ta-CA-2). Funding for
this paper was provided by this project. The assistance of Peter Kilby,
who read earlier drafts and made valuable comments that improved the
paper, is gratefully acknowledged.

**The author was Managing Director, Small Enterprise Development Corporation,
Ltd. (SEDCO), Government of Jamaica, 1977-79. An economist by training,
he is presently a graduate student in Finance, The Business School,
Michigan State University, East Lansing, Michigan.




List of Tables . . . . . . . . . . . . ii

Forward . . . . . . . . . . . . . iii

Introduction . . . . . . . . . . . . 1

Criteria for Granting Loans . . . . . . . . 8
Definitional Criteria . . . . . . . . . 8
Evaluative Criteria . . . . . . . . . 14
Collateral . . . . . . . . . . 17
Interest Rate . . . . . . . . . 22
Information Requirements . . . . . . . 24

Cost of Loan Evaluation . . . . . . . . . 31

Politics and the Criteria . . . . . . . . . 36

Conclusion . . . . . . . . . . . . 37

References . . . . . . . . . . . . 39



Table 1. Project Proposals Before Application of
Criteria . . . . . . . . . . 10

Table 2. Sectoral Analysis After Application of
Criteria . . . . . . . . . . 11

Table 3. SEDCO: Loan Evaluation Costs (Labor Only)
by Size of Loan Application . . . . . 32


This paper is one of a series of reports produced by Michigan State

University's Off-Farm Employment Project. The project, which is funded by

the Office of Rural Development and Development Administration, Development

Support Bureau, U.S. Agency for International Development, has the basic

purpose of enhancing the ability of AID missions and host country institu-

tions to identify and implement programs and policies that generate off-farm

employment and income opportunities benefiting the rural poor. One of the

major components of the project is the generation of new knowledge relating

to off-farm activities. In collaboration with host country institutions

and AID missions, detailed field surveys of small-scale enterprises are

currently being conducted in Bangladesh, Jamaica, Honduras, and Thailand;

the results of these studies will be published in this series. A second

component of the project involves the marshalling and dissemination of

existing knowledge of off-farm activities. A state-of-the-art paper and

special studies relating to off-farm activities will also appear in this

series. Previously completed studies in this area, currently available

through the Off-Farm Employment Project, include:

1. Carl Liedholm, "Research on Employment in the Rural Non-farm

Sector in Africa," African Rural Employment Paper No. 5, 1973.

2. Carl Liedholm and Enyinna Chuta, "The Economics of Rural and Urban

Small-Scale Industries in Sierra Leone," African Rural Employment Paper No. 14,


3. Enyinna Chuta, "The Economics of the Gara (Tie-Dye) Cloth Industry

in Sierra Leone," African Rural Economy Working Paper No. 25, 1978.

4. Adewale Mabowonku, "An Economic Evaluation of Apprenticeship

Training in Western Nigerian Small-Scale Industry," African Rural Employment

Paper No. 17, 1979.

5. Steve Haggblade, J. Defay and Bob Pitman, "Small Manufacturing

and Repair Enterprises in Haiti: Survey Results," Michigan State University

Rural Development Series, Working Paper No. 4, 1979.

6. Enyinna Chuta and Carl Liedholm, "Rural Non-Farm Employment: A

Review of the State-of-the-Art," Michigan State University Rural Development

Papers, Paper No. 4, 1979.

7. Omar Davies, Yacob Fisseha and Claremont Kirton, "Small-Scale

Enterprises in Jamaica: Initial Survey Results," Michigan State University

Rural Development Series, Working Paper No. 8, 1979.

8. Enyinna Chuta, "Techniques of Production, Efficiency and Profitability

in the Sierra Leone Clothing Industry," African Rural Employment Paper No. 30,


Copies of these papers as well as additional information on the Off-Farm

Employment Project can be obtained by writing:

Carl Liedholm
Off-Farm Employment Project
Department of Agricultural Economics
202 Center for International Programs
Michigan State University
East Lansing, Michigan 48824


This paper examines the problems of operating a loan program for

craft and emerging small-scale (non-farm) enterprises. The classification

of small businesses into a category called "craft and emerging small-scale

enterprises" was proposed by the World Bank. The Bank will consider funding

projects of all sizes in this subsector as long as they meet certain estab-

lished Bank criteria.

This paper reflects the experience of the author in the craft and

emerging small-scale enterprise component operated through the Small Enterprise

Development Corporation Limited (SEDCO), a company wholly owned by the Govern-

ment of Jamaica (GOJ) and established to:

(a) provide management and technical services; and

(b) finance craft and emerging small-scale non-farm enterprises
in that country.

We shall look at the criteria set by the World Bank (hereinafter referred to

as the Bank) on the projects submitted for funding within this subsector,

the effects of those criteria in one specific instance, and the implications

of such criteria for other small-scale enterprises.

Jamaica, like other developing countries, has emphasized the small-scale

non-farm subsector and particularly the craft and emerging small-scale segment

as one of great importance in planning economic policy for the 1980's. This

fact is emphasized in the Policy Papers (Government of Jamaica, 1977a) of the

Government of Jamaica and the policy statements made by the Prime Minister in

his Budget Addresses for the fiscal years 1978-79 and 1979-80 (Government of

Jamaica, 1978 and 1979). Even though it is only in the most recent years


that the policy of the Government of Jamaica has reflected the importance

of the subsector, several government agencies had been created to deal

with various ailments of the subsector since 1956. The earliest efforts

were initiated to solve problems by developing institutions rather than by

emphasizing the role the subsector could play in contributing to the overall

economic growth of the country (Government of Jamaica, 1962). An immediate

problem that the subsector sought to address was unemployment. Since

the end of World War II, Jamaica has had a high level of unemployment -- an

estimated 26% of the labor force in late 1979.

During 1976, the Government sought the assistance of the IBRD (World

Bank) in devising a program to reduce the high rate of urban unemployment.

The Bank responded by supporting the Government's proposals for a Small-Scale

Enterprise Program comprised of two components: (a) the Craft and Emerging

Small-Scale Enterprises, and (b) the Modern Small-Scale Enterprise Development

Project. In the former case, the Bank would provide loans and technical

assistance to applicants with net fixed assets of not more than J$25,000

(U.S.$14,045)*; in the latter case, it would underwrite loans from commerical

banks for applicants whose net fixed assets did not exceed J$178,000

(U.S.$100,000). SEDCO was created to deal with applications falling under

the first component; Premier Investment Corporation (PIC), a subsidiary of

the Bank of Jamaica (Central Bank), was to deal with the second.

Prior to the establishment of both SEDCO and PIC, five other institu-

tions were dealing with a variety of needs of the subsector. The request of

the GOJ to the Bank indicated that the former was concerned that the needs

of the subsector were not being met adequately, economically and positively.

*Rate of exchange: J$1.78 = U.S.$1.00 (1979).

The Bank had categorized the needs of the subsector into three categories:

(a) raw materials;

(b) working capital financing; and

(c) technical assistance.

Yet the broad needs listed above did not adequately reflect all the needs of

the subsector in Jamaica at the time the Bank and GOJ agreed to establish

SEDCO. SEDCO's subsequent experience revealed that a majority of the island's

small enterprises suffered other disabilities. Whether the latter were of a

nature and magnitude sufficient to prevent SEDCO from effectively serving

very small enterprises is a question we address later.

In June 1977, SEDCO was legally registered. Its two essential functions

in the area of craft and emerging small-scale non-farm enterprise were:

(a) to provide loans not in excess of J$40,000 (U.S.$22,742)
to enterprises with fixed capital not exceeding J$25,000

(b) to provide management and technical services as required
by individuals or firms within the sector.

The World Bank made a loan of J$3.5 million (U.S.$2 million) to the

GOJ for lending to SEDCO to lend, in turn, to the subsector (World Bank, 1978).

The GOJ was to provide additional loan funds in the amount of J$22 million

(U.S.$12.4 million) over five years as follows:
J$ Millions U.S.$ Millions

1978 3.0 1.7

1979 3.0 1.7

1980 4.5 2.5

1981 5.5 3.1

1982 6.0 3.4

The GOJ and the Bank agreed that the first ten (Free Limit) projects, which

SEDCO would normally approve, should be sent to Washington for approval.

Subsequent approvals would be made by SEDCO but the supporting documents

would be vetted by the Bank. SEDCO would make the loan from the funds at

its disposal and then apply to the Bank for reimbursement.

At the subcommittee stage of the discussion for establishment of

SEDCO, it was proposed that a subsidiary of SEDCO purchase raw materials.

This was not encouraged locally as it was felt that this could best be done


Because of its financial input, and as proof of its support of the

project, the Bank maintained close supervision by the following processes:

(a) establishing criteria for evaluation;

(b) requiring that the first ten (Free Limit) loans under the
program be submitted for the approval of the Bank; and

(c) requesting quarterly reports from SEDCO to demonstrate that
criteria were being maintained.

Whether or not a loan was refundable from the Bank's funds did not matter;

the criteria of evaluation specified by the Bank still held.

Additionally, the Bank determined that the loans provided by SEDCO

could be used for:

(a) the purchase and/or installation of machinery and equipment;

(b) the purchase, construction, reconstruction, addition or
expansion of industrial buildings and the installation of

(c) the investments needed to maintain or expand production levels
through financing of working capital (of the first 50 loans
made by SEDCO at least 30% of the total value was for working

(d) the hiring of technical assistance and the preparation of
feasibility and market studies, accounting services and
training programs for managers and workers.

Three other criteria were established:

(a) *SEDCO could not normally finance more than 75% of the project
costs of an enterprise except when the credit worthiness (of
the enterprises) justified this;


(b) SEDCO could not lend more than 10% of its equity to any one
firm or group of firms; and

(c) for both new and existing enterprises, SEDCO would not normally
provide financing that would raise the debt/equity ratio of the
client above 3 to 1. (This became one of the evaluative criteria
and was strictly applied in accordance with the supervision
enforced by the Bank.)

The Bank wanted SEDCO to operate as a commercial bank. Since the insti-

tution had to operate in a politically sensitive sector, it would initially

be caught in a conflict between economic and political realities in considering

loans for the small-scale non-farm sector. While the political directorate

was aware of the criteria laid down by the Bank and the purposes for which

such criteria were established, the directorate was, nevertheless, extremely

sensitive to the demands of the electorate, of which the small-scale subsector

was a very vocal segment. SEDCO had a need to deliver "good loans" and to

develop a system of acceptable criteria so that both local and foreign funds

would be attracted to finance the subsector, given that the political directorate

had sought to use this institution as a method of tackling urban unemployment.

On the other hand, many of the applicants were of the view that SEDCO should

operate less like a commercial bank and should assume more risks and be more

sensitive to the needs of the clientele for whom it was designed. The argument

for this view was that the Jamaica Development Bank (JDB) had financed loan

projects that more appropriately should have been funded by a commercial

bank, while projects which SEDCO would fund were often less bankable yet would

be subjected to commercial banking criteria. The problem here was that the

staff of the Bank, having no supervisory responsibility for SEDCO, saw it as

simply another commercial bank which provided certain advantages to the small-

scale subsector that could not be obtained from a commerical bank. Needless

to say, this philosophical dichotomy plagued SEDCO's operations and performance.

The establishment of SEDCO was enthusiastically received by the sub-

sector, especially as many of those whom it would serve believed that it

would provide an easier and quicker source of loan funds. Many mistakenly

thought that SEDCO would supplement the lending functions of the Small

Business Loan Board (SBLB), its predecessor. Those who had such expectations

were not aware that the institution had been designed to operate on lines

much more stringent than those on which SBLB had operated. Also, the entire

slant of SEDCO was different in the sense that, for the first time, an insti-

tution in the subsector was designed to be financially self-supporting -- a

goal to be achieved in its third year of operations.

Because of the time taken to prepare the institution for operations,

and the rigor which went into establishing the criteria and standards, loans

were not made until eight months after SEDCO was established. The delay,

added to the uncertain future which SBLB faced at that time, made loan

applicants somewhat anxious.

In spite of these difficulties, however, SEDCO received a certain

amount of understanding and goodwill from such organizations as the Small

Business Association (SBA), and the Small Business Development Centre

(SBDC), an organization devoted to training small business personnel.

But when the foreign exchange shortage began to plaque the economy,

followed by a scarcity of raw materials, the small business community

began to complain. Complaints related to the delays, the inability

of SEDCO to "deliver" loans and even the possibility that SEDCO

would not be making loans for which it was designed. In the interval

SEDCO tried to carry out some of its other functions, such as training

and seeking wider exposure and markets for the clientele it served. It

is possible that the criticisms of SEDCO, while sometimes justified, were

part of the general criticisms leveled at the Government for the deteriora-

tion in the economy which occurred from 1976 1979.

The stringency of the controls imposed by the Bank must be seen not only

as the usual Bank safeguards, but must also be seen against the background

of the operations of the SBLB.

The SBLB was established in 1956, under the Loans to Small Business

Act, for the purposes of:

(a) granting loans not exceeding a prescribed amount for any one
business . as the Board may see fit (this amount changed
on two occasions and was eventually less than the loan limit of
J$40,000 [U.S.$22,471] set for SEDCO);

(b) guaranteeing loans not exceeding the prescribed amount where
the purpose of the loan is one for which the Board may make a

(c) purchasing . equipment, plant, tools and other articles
necessary for establishing or carrying on such businesses; and

(d) giving financial assistance to Co-operative Societies (Govern-
ment of Jamaica, 1956).

Source: Government of Jamaica, 1956

Because only a small number of officers were assigned duties such

as taking applications, interviewing clients, visiting projects, assessing

projects, defending projects at Board meetings, collecting the repayments,

and initiating legal actions when and where this had to be done, other aspects

of the operations, usually the collection of repayments or the overseeing of

projects, were neglected. It is understandable in these circumstances that

the Bank would require a different type of institution to carry out all

those functions if Bank funds were to be involved. The SBLB had been opera-

tional for 22 years; in 1978 borrowers owed J$9,000,000 (U.S.$5,056,000),

of which approximately 40% was deemed uncollectable by the Auditors.*

*Capleton Jones and Company

Under the Loan Agreement between the Government of Jamaica and the World

Bank, SEDCO would take over the good loans from that portfolio and would

undertake the collection of others on a collection fee basis. Up to the end

of 1979, efforts were being made to collect as much as possible of the out-

standing balances. The experience of the Small Business Loan Board was there

as a model against which to judge SEDCO but not to be copied by it.


Through Steering Committee Meetings held prior to May 1977, the World

Bank and the Government of Jamaica agreed upon the criteria for defining

those firms or persons who could be granted loans or provided with management

and technical services. (The Steering Committee which set the definitional

criteria was established after the Government of Jamaica requested help

from the Bank in developing a small enterprise corporation.) We shall refer

to such criteria as definitional criteria, because it is on the basis of such

criteria that a project proposal from a person, firm, or organization would

be considered as viable and could then be submitted to the project group for

evaluation. The proposal would then be assessed by means of evaluative

criteria. We make this observation because we need to distinguish between

administrative criteria and technical criteria; the Definitional Criteria

were of the former type while the Evaluative Criteria were of the latter type.

Definitional Criteria

The first definitional criterion specified that an application could

be considered by SEDCO if it fell into one of the following categories:

(a) building materials and construction equipment for small

(b) crafts;

(c) food processing;

(d) footwear manufacturing;

(e) garments;

(f) light metals fabrication;

(g) small contractors -- financing of construction;

(h) toy manufacturing;

(i) woodworking -- furniture and woodwork other than furniture.

Small garages manufacturing automobile parts form fiberglass were subse-

quently added to the list.

The definitional criteria related only to manufacturing because the

assumption was made that manufacturing would provide an increase in employ-

ment -- the primary concern of the Government of Jamaica. Manufacturing

is defined here as the conversion of any type of raw material into a viable

finished product, and this definition may vary from that used by the Department

of Statistics for the Census of Manufacturing. As it turned out, the number

of new jobs to be created, frequently one or two, was quite marginal (see

Tables 1 and 2).

The definitional criteria excluded services related to the repair and

maintenance of equipment and machinery. It would seem logical, in an economy

as highly inflationary as Jamaica (inflation increased 64% between 1977 and

1978 and 40% between 1978 and 1979), that the Steering Committee would have

recognized the existing need for good repair facilities for a miscellany of

equipment and machinery. Indeed, the problem worsened with the continuing

foreign exchange crisis which had plagued the economy for the last 7 years.

In such circumstances, financing of repair and maintenance activities could

have been considered by SEDCO.

Table 1


Date Number of Values Total Average Job Cost Per Job
Projects (J$) Employment Per Project (approx.)

May 1978 737 5,260,781 3700 5 1400

August 1978 105 934,000 409 4 2300

December 1978* 242 2,547,536 726 3 3500

January 1979* 173 2,153,868 580 3.5 3700


Source: Sub-Sector Analyses, Working Papers SEDCO

*Includes new applications

Table 2


Aggregate of Loan Average Employment Costs Per Job
Applications Per Project
Sectors August January August January August January
1978 1979 1978 1979 1978 1979

Garment 266,350 592,925 3 2.5 2,300 3,000

Footwear 70,500 236,245 3.3 2.75 2,500 4,000

Furniture 310,168 701,908 4 3.5 3,000 4,000

Metal Fabrication 20,000 89,000 4 4 2,500 2,700

Crafts 33,000 58,430 6 4 1,000 1,900

Food Processing 14,000 125,000 4 3.5 800 3,400

Garages 45,360 101,360 4 3 3,750 8,000

Construction 38,000 179,000 9.8 10.4 700 25,000

Subtotal 797,370 2,083,668

Total J$2,881,038

Source: Subsector Analyses -- Working Papers, SEDCO

The second definitional criterion specified that SEDCO should promote

only "small productive enterprises," which meant only those activities

classified as manufacturing. According to the definitional criterion stated

above a householder who made preserves or did canning for retail purposes

could be included but a restauranteur could not. We have used the example of

a restaurant because both the restaurant and the domestic cannery:

(a) converted raw materials into finished products;

(b) worked with the same raw materials (e.g., ackees);

(c) catered to various markets -- the restaurant to markets such
as airlines and business houses, the domestic cannery to a
more limited retail market.

The Bank advanced the argument that restaurants were only providing a

service, yet the restaurants were providing a high level of employment in a

society with a high and increasing level of unemployment (26% in December

1979). Few, if any, well-run and properly managed restaurants closed down

during the period of grave economic crisis from 1976 to 1979, while large

manufacturing plants and some service-oriented businesses closed for a variety

of reasons. The lack of financing was not among the most important reasons

for these closures. Besides, from the applications submitted to SEDCO, 43

requested funding for restaurants at a total cost of J$409,800 (U.S.$230,225).

It was estimated that the job creation potential was 6 per application at a

cost of J$1,500 (U.S.$843) per job. A comparison of the average number of

jobs created per application and the costs per job created are shown in

Table 2.

The Board of Directors was very concerned that no arrangements were made

to finance the catering trade, as was done by SBLB. Since SEDCO was to take

over the funds of SBLB, the Board felt that it was necessary that SEDCO also

lend to the same clients to whom SBLB had been lending.

We recognize the fact that some viewed manufacturing as the area in

which the greatest potential existed for increasing the number of jobs in the

economy. However, other areas existed in which the potential increase may

have been less expensive per job created. While the institution was established

to deal with manufacturing only, we should nevertheless be aware of such areas.

The third definitional criterion was that equity investments not be

permitted -- the rationale being that an investor ought to have a financial

stake in whatever project he was undertaking. This restriction originally

posed a hardship for the Community Enterprise Organization, which became a

significant feature of the Government's program to assist communities.

The Community Enterprise Organization is an example of an economic

organization, community-based and often community-organized, that has begun to

emerge in some developing countries following a socialist philosophy (e.g.,

Tanzania and Jamaica). In this type of organization citizens of a village or

district or members of a group get together and, very often possessing nothing

more than their skills, design an industrial or agricultural project for financing.

(The U.S. version of this activity is a community project funded partly by the

state and partly through loans from the SBA.) This type of activity was new

not only to the Jamaican government, but also to the commercial banks operating

there. In many instances CEO's lack a clearly identifiable agent or core

which could support an application for credit to a commercial bank. Because

of the equity criteria established by the Bank, the CEO project, without equity,

had to apply to the Jamaica National Investment Company Ltd. -- another government

owned company, and only when the equity funding had been made available to the

project could it then apply to SEDCO for loan financing. This elaborate

process of literally taking money from the same pocket -- the taxpayer's --

meant that many such projects never did reach SEDCO. In fact, only one CEO

project was submitted to SEDCO by the end of 1979.

We have dealt at length with the matter of the CEO only because, at

the community level, the GOJ saw the CEO as a useful organization for imple-

menting government promises to community groups to speed up economic development.

The government, therefore, needed a vehicle to finance the CEO. But SEDCO was

designed to operate along strictly commercial lines and could not consider

such proposals unless they met the criteria in the first place.

The fourth definitional criterion was that loans should not exceed

J$40,000 (U.S.$22,471). While the ceiling seemed adequate for the many

loans which ranged from J$5,000 $10,000, some projects, which in combination

could provide a larger number of jobs than those in Tables 1 and 2, had to

be excluded because of the criteria.

Evaluative Criteria

Before considering this type of criterion, let us look at the informa-

tion that was required from each applicant. As stated in the Loan Agreement

between the Government of Jamaica and the Bank, loan applications submitted

to SEDCO had to provide the following information:

(a) a general description of the project;

(b) a description of the market for the borrower's products,
competition to be encountered, and distribution strategies;

(c) a list of the major capital items to be acquired, their cost,
and a report as to their suitability for the project.

(d) a detailed estimate of development expenses;

(e) an estimate of total capital requirements, including a
realistic margin for contingencies and cost overruns;

(f) an estimate of working capital requirements;

(g) the proposed financial structure of the borrower and
related financial arrangements;

(h) an estimated drawdown of funds;

(i) the projected financial statements, including balance sheets,
profit and loss accounts, cash flows for the period of the
loan and details of the assumptions used in their preparation;

(j) a list of the key personnel and their experience in the line
of business; and

(k) the collateral being offered.

The stages to be followed in the processing of an application are shown


Steps in Processing Applications

(Required primarily because of implementation criteria.)


1 Discussing application withapplicant (usually requiring more than
one visit to office by applicant) -- Evaluation Officer;

2 Placing application on worksheet and ascertaining what else is
required from applicant -- Evaluation Officer;

3 Checking information supplied by applicant -- Registry Clerk and
Evaluation Officer;

4 Visiting project -- Evaluation Officer;

5 Submitting application to Head, Management and Technical Services
Department for distribution;

6 Discussing application with Technical Officer, Extension Officer,
Management Accountant, Marketing Officer;

7 Reevaluating application -- Head, Management and Technical Services

8 Checking computations, preparing financial and economic analysis --
Evaluation Officer (possible return to Marketing Department if
Marketing report needs further work);

9 Discussing results of computation and marketing analysis with
Head, Evaluation Department -- Evaluation Officer;

10 Recalculating computations -- Evaluation Officer;

11 Discussing state of application and any changes with applicant --
Evaluation Officer;

12 Correlating marketing and technical reports;

13 Checking credit and other references;

14 Submitting final draft to Head -- Evaluation Department;

15 Typing (and correcting where necessary);

16 Submitting to Managing Director for approval and for presentation
to Loans Committee or Evaluation Committee or Board of Directors;

17 Submitting to approvals authority for approval or refusal;

18 Notifying of Secretary/Legal Officer.

Explanation of Significant Blocks of Time in Processing

Max. Time

3 hours

1 hour

4 hours

4 hours

1 hour

80 hours

1. Discussion of application with applicant -- Evaluation
Officer (this includes total time spent with applicant
on more than one visit to office);

2. Preparation of application in form and then ascertaining
additional information -- Evaluation Officer;

3. Visit to Project by Evaluation Officer, including travel
time (average of travel time to rural as well as urban
area clients);

4. Development of project profile by Evaluation Officer for
Management and Technical Services;

5. Submission of application to Head, Management and Technical
Services Department; discussion with Extension Officer,
Management Accountant, Marketing Services, Engineering

6. Action by Marketing and Technical Officers, including:
4 hours visit to project
66 hours price checking, market surveying or sampling,
customer contacts
6 hours draft report including typing
4 hours discussion with Head, Management and Technical
Services draft report and findings;

Max. Time

8 hours 7. Computing financial and economic analyses after report
from Marketing -- Evaluation Officer;

4 hours 8. Discussion of results of computations and Marketing
reports with Head, Evaluation Division;

3 hours 9. Discussion of state of application and any changes
necessary (usually some changes had to be made in the
project) with applicant;

4 hours 10. Preparation of final application based on findings,
corrections, amendments, additions or changes, further
discussions with Marketing, or Extension Services, or
Head of the Evaluation Department -- Evaluation Officer;

16 hours 11. Preparation of appropriate documentation for signature
of applicant, inspection of collateral where provided,
searching of public records for liens, etc. (most of
time spent searching at Public Records office) -- Legal

The criteria as given by the Bank and the Points System as developed

by SEDCO and amended by the Bank are listed below. We also show proposed

marginal changes which, while facilitating some of the applications, did not

substantially alter the fact that the criteria became an obstacle to a number

of applications being processed. The criteria also became the basis for an

attack on SEDCO by both politicians and a number of businessmen from the sub-

sector who felt that the organization had not helped the craft and emerging

small-scale non-farm subsector.

Three elements in the loan process are of particular interest: collateral,

the interest rate charged and the information requirements that the borrower

must meet.


The evaluative criteria specified that an applicant should provide

100% collateral for any loan granted to him. Furthermore, in the points

system developed for the evaluation process, the Bank made it explicit

that an application had to earn the full 7 points for collateral; no

Criteria and Prnier~ EvaluationPoints S stem

Old Criteria (Bank's)

1. Management
Technical ability
Past performance
Knowledge of marketing

II. Finance
Internal Rate of Return
(if over JS20,000)
Payback period/break even
(if under JS20,000)
Debt Service Ratio (2:1)
Debt Equity
Interest Cover Ratio (3:1)

III. Economic
Foreign Exchange Earned/
Employment generated or
closure prevented which
would have resulted in
Local raw materials used
Underutilized capacity

IV. Others
Impact on community/training

Criteria as Modified by SEDCO in Accord with the Bank

points (20)

I. Management
Technical competence
Management competence (past
performance or knowledge of
(Minimum points required 15)

points (40) II. Finance
*Internal Rate of Return or
12 payback period
or Break even Analysis
12 **Oebt Service Ratio
(not lower than 2:1)

points (20)
0 10
0 10

points (20)
0 10

0 10
0 10

*The internal rate of return should not be lower
than a rate equal to the interest rate plus 3.

**Minimum debt service ratio should be 2:1.
(Mimimum points required 20)

points (30) III.


points (10) IV.

Foreign Exchange Earned/
Employment generated or
closure prevented which
would have resulted in

Demand for end product
Pricing considerations
(Minimum points required

- 10)

V. Technical
Introduction of new
process or technology
Underutilized capacity
(Minimum points required

VI. Others
Impact on community

points (15)
0 10

0 5

points (15)
0 10

0 5

points .15)
0 10

0 -

points (0 5)

Criteria and Proiect

Criteria and Proj t

Evaluation Points System

situation existed in which there could be less than 7 points; either

there was or there was not full coverage by collateral. Collateral included

all machinery and equipment to be purchased, as well as any held by the

applicant .which did not carry a mortgage.

Collateral became a contentious issue within and outside of SEDCO.

While the arguments against the provision of collateral by a borrower

were either political or emotional in nature, they nevertheless recognized:

(a) the deteriorating economic position of the country and its
impact on the small business sector;

(b) the lack of satisfactory collateral of many small businesses;

(c) the fact that in many instances much of the collateral would
have been pledged previously.

Furthermore, the issue of collateral had been a sore problem between the

small business sector and the commercial banks. This problem was recognized

as one of the reasons why an organization such as SEDCO had been established.

Many persons were of the view than in order to circumvent the lack of collateral

by an applicant, the Government had to provide an organization that would make

loans with minimal emphasis on collateral.

Within SEDCO, efforts were subsequently made to effect a compromise in

the interest of the borrowers by allocating proportions of the 7 points.

These proportions were based on the type and value of the collateral offered.

SEDCO's efforts did not lead to a worsening of the loan portfolio or a

deterioration in the evaluation process. Despite the fact that efforts

were made within SEDCO to adjust the 7 points within the overall constraints

imposed by the Bank in order to facilitate borrowing, opposition remained

both within and outside SEDCO. The opposition was more political than economic

and was concerned not only with the fact that small-scale businesses were

being asked to provide collateral but also with the fact that collateral

played such a prominent part in the evaluation process.

In order to understand the background of this matter and the

attitude adopted, we refer in particular to the Small Business Loan

Board (SBLB), a government-owned organization established in 1956 for

the purpose of providing loans to small-scale enterprises. The SBLB

loans were not as restricted as SEDCO laons; the SBLB had lent for such

diverse purposes as purchasing fishing boats and taxi meters. While

SEDCO incensed applicants by emphasizing the need for collateral, such

collateral as required by SBLB could vary in size or was not required,

and it played a less important role in the decision of whether or not to

grant a loan. The emphasis on collateral was seen as a feature of

commercial banking, used especially where and when the Bank did not want

to grant a loan. Against the above background, the problem of collateral

assumed more serious proportions than necessary; it was seen as more than

simply a precaution taken by a lender against the risk of loss stemming

from a failure of the borrower.

SEDCO continued to seek ways to lessen the severity of the collateral

requirement without endangering the loan portfolio. Eventually it operated

on the principle that collateral would be crucial only in borderline cases

and more so where the entire loan was to be made for working capital

purposes. This did not, up to the time of writing, affect the repayment


At the heart of the collateral issue was the proposition that SEDCO

should have been more like a development bank than a commercial bank. In

our view, a development bank is more concerned with the earning capacity of

a project and less with the security of the funds advanced. The view that

SEDCO should have operated more like a development bank rather than a

commercial bank confused many of the discussions about SEDCO in forums

outside of the institution and partly made the difference between what

type of institution was needed and what was supplied. Commercial banks

are primarily lenders of short-term funds. They have no special interest

in a project.other than the repayment and the rate of interest that the

project can pay on its borrowings. A development bank -- such as SEDCO

should have been -- is interested in the project as a means of economic

development, particularly in areas in which there is little or no economic


Had SEDCO been established less like a commercial bank, then the

terms and conditions on which financial assistance could be offered would

have been different and accommodation could have been offered to some of

the "politically" espoused projects that were viable but lacked sufficient

requirements to meet the criteria laid down by the Bank.

It would be true to say that there was no dearth of commercial banks

in Jamaica from which financing could be obtained for any business venture

able to meet the criteria stipulated by the commercial banking sector.

Unfortunately, the craft and emerging small-scale sector could not meet

all the criteria and had, from time to time, experienced serious problems

in obtaining funds from commercial banks. This did not mean, however,

that the craft and emerging small-scale subsector should be ignored. A

proper analysis of the subsector was necessary in order to assess:

(a) the extent to which obtaining financial assistance was a

(b) the real requirements and needs of the subsector;

(c) the type of funding institution that could best serve the

Interest Rate

While the question of collateral remained primary and created much

controversy, the question of the rate of interest passed almost unnoticed.

Since its inception in 1956, the SBLB had made loans to the subsector at

7%. Because of continued inflation in Jamaica for over 22 years, inflation

which had accelerated even more rapidly since 1973, the Government was in

reality subsidizing many of the small-scale enterprises that had obtained

loans from the SBLB. When SEDCO and the Bank signed the Loan Agreement,

SEDCO was charged (through GOJ) a rate of 7% and was instructed to lend at

11% per annum. Before the matter was approved by the Cabinet, it was

feared that it would create a controversy when the borrowing public

was made aware of the rate, but this did not occur. Bank employees argued

that the rate of interest had to be measured against the 14% charged by the

commercial banks and 13% to be charged by the Premier Investment Corporation,

the other component of the Loan Agreement. Those who had borrowed from SBLB

previously and had applied to SEDCO did not seem concerned with the change

in the rate. For a very short while, persons who applied to SBLB while SEDCO

was operational continued to be charged the 7% rate of interest.

The Bank staff, believing the 11% rate of interest was justifiable, was

also of the opinion that political reasons kept the prevailing interest

rate for very small-scale enterprises at the excessively low level of 71

per annum. SEDCO's original policy statement had not specified the rate

to be charged, but the Bank saw to it that the Government of Jamaica accepted

the 11%. In support of its stand on the matter of interest rate, the

Bank staff decided that while the GOJ would resist SEDCO's charging the

weighted commercial rate (13%) to very small-scale enterprises, government

officials would accept 11% per annum as an interest rate adequate to cover

SEDCO's cost of lending operations (including provisions against losses)

after the first two years. The minimum rate was considered acceptable


(a) it was a substantial increase over SBLB's 7% rate; and

(b) it exceeded substantially the maximum bank deposit rate of
7% and Government Bond yield of 8%.

Questions asked by borrowers about the 11% rate of interest focused

primarily on the reason for the increase above that usually charged by

SBLB. No one refused to pay the rate charged; no one questioned how

the rate was calculated. It is doubtful, in fact, that many borrowers were

fully aware that SEDCO was charging interest on the amount borrowed and not

the reducing balance. Even if someone did raise the question, the fact

that he could obtain a loan at a rate lower than that charged by the

commercial banks was a factor in SEDCO's favor.

At the time this paper is being written, insufficient information on

repayment schedules prevents us from saying categorically that the rate

of interest did or did not constitute a burden on borrowers. We believe

that the state of the economy was more of a factor to be reckoned with in

this regard. Some may think that a rate of interest of 11% could be

punitive in the situation, but, again, we have no record of this being

so because the matter was explained at length to the borrower when his

repayment schedule was presented to him. There had been no open demurral

on the subject. Probably the collection system which SEDCO had instituted

took care of any potential default caused by the burden of the high interest

rate. We should also refer to the preliminary results of the Small-Scale

Enterprise Survey which sought to ascertain, among other things, the

problems which confronted the small businessman. While interviewees

mentioned working capital as one important problem, no one indicated that

the rate of interest was creating a burden. Given the rate of interest which

SEDCO was required to charge, and the way the interest rate was computed,

SEDCO could have been self-sufficient after three years of operations.

Information Requirements

The effective market demand, as given by the applicant, was often

difficult to assess with little supporting information; verifying information

concerning the applicant's past market performance was also difficult. Both

required the scrutiny of financial records where they existed, and in many

instances there were none at all or those that existed were very sketchy.

This meant interviewing, where possible, customers who had conducted large

volumes of business with the applicant. In addition to the lack of basic

information, there was often a lack of cooperation from sources able to

validate the information, or frequently the applicant relied upon a mixture

of conjecture and memory in giving information. Valid and acceptable

records were available in many instances, however, as evidenced in

the comparison of application processing costs. The applications for which

little information existed or could be verified required a great deal of

data reconstruction -- a time consuming and, therefore, expensive process.

One other feature of the market analysis or the effective demand for

the product must be mentioned. In many instances applicants were involved

in several business activities difficult to separate into distinct categories

on the application form. It was not easy to separate out the financial

data in which one was interested. In many cases, when a loan was granted,

the applicant was required to keep an order book which would be available to

SEDCO's staff when required.

The difficulty in the development of marketing information was most

apparent in the case of craft manufacturers on the North Coast and western

part of the island who sold as itinerants in the tourist areas. We can

readily appreciate the difficulty by first looking at how the tourist industry

in Jamaica has changed over the years. Currently more tourists are coming

to Jamaica as packaged tour visitors and this means that all the basic

expenses -- hotel, local tour fees, airfares, etc. -- have been included

in the packaged cost. Experience has demonstrated that these visitors do

not arrive with much discretionary income to spend on non-packaged items.

Bank of Jamaica statistics have shown that between 1975 and 1977 the

number of tourists declined and then rose again between 1978 and 1979 (Bank

of Jamaica, 1975-78a, b). Parallel to this change was a similar fluctuation

in the receipt of foreign exchange from tourists, especially in the area of

expenditure on local items and activities not included in the pre-packaged

expenses. The manufacturers and vendors of craft products in the tourist

areas have faced more extensive competition from tour operators, restaurants,

operators of entertainment ventures, etc. for the reduced level of tourist


As Jamaica has experienced grave foreign exchange difficulties since

1973, the criteria concerning foreign exchange earned/saved assumed major

importance in the valuation procedure. It posed certain practical difficulties

for evaluation. Jamaica's known natural resources -- bauxite, cane sugar,

beaches and clear water for tourism -- are few in number and where they

enter into the economic system they are exploited on a much larger scale

than that operable by units in the subsector under consideration. Most of

the raw materials used in the non-farm small-scale subsector are imported,

e.g., cloth, leather, aluminium sheeting, plyboard, plastic, etc. It becomes

difficult, therefore, to ascribe a positive contribution made by a unit in

the subsector to the overall economy when it is recognized that:

(a) raw materials have to be imported;

(b) most sales are domestic and thus generate little non-foreign
exchange earnings;

(c) small-scale non-farm subsector enterprises usually must
purchase their raw materials through a distribution system
which has a built-in mark-up of 20 to 50 percent.

An analysis of the foreign exchange component of unit production costs

showed the extent to which imported raw materials are used in the production

Item Import Component

Clothing 33 1/3%

Food 33 1/3%, based on packaging costs

Woodwork 60% (lumber)

Metalwork 100%

Garages 100%

Footwear 66 2/3%

Toys 100%
Source: Government of Jamaica, 1977b

On the whole, the subsector was a net consumer of foreign exchange and

showed less potential for earning foreign exchange because of the cost

structure than did larger firms which might also have been net consumers.

This imbalance would continue either until substitution could be found for

the imported raw materials, and this would be externally decided (by

purchasers in foreign markets), or until production costs could be made

competitive in overseas markets.

The above criteria created controversy among the applicants; they

believed that information was required which, in most instances, they did

not possess and which they regarded as irrelevant in their circumstances.

It should be remembered that SEDCO was also attempting to improve the record

keeping skills of these businessmen, a skill which was absent in many cases.

Employees of SEDCO, many of whom were required to evaluate projects, believed

they should have been given some discretionary authority to determine the

number and types of documents required from an applicant. The view was also

expressed that for a loan of $500 or less the loan evaluation was not

worthwhile, as time spent to process the loan, and often to acquire information

from the applicant, was a cost to him (he often had to employ accountants,

etc. to provide the information in the form in which it was required). The

cost of processing a loan is revealed in the steps required to process a loan.

Many of these steps had to be repeated while processing each application.

Even where a check list was provided that clearly pointed out the infor-

mation required, the information supplied was often either incomplete, offered

in a piece-meal fashion, or it took a long time to produce; the need for what

seemed a long list of things induced frustration and irritation among many

of the applicants. In a commercial bank, on the other hand, applications

for personal loans, which is what many of these were, usually required less

information than that requested from a large business. In SEDCO's case

there was no distinction between a loan to an individual and one to an

unincorporated business. The need for such a large amount of information,

which is normal in commercial banking transactions involving large but not

necessarily small businesses, was seen as creating difficulties for the small

businessman. This must be seen in light of the expectation by the Government

that SEDCO would:

(a) speed up the processing of applications;

(b) operate less like a commercial bank in its relationship
with borrowers; and

(c) provide ,less bureaucracy in the processing of loans.

The criteria described above were those used to assess the applications

which had survived the definitional criteria. Even among these, serious

deficiencies were noted in record keeping, demonstrated technical knowledge

and modern (formal) management practices. It was obvious, however, that

in many instances loan applicants were willing and able to invest personal

or borrowed funds in a venture.

Two points should be emphasized here. The first, as learned through

experiences of SBLB and SEDCO, is that two types of loan applicants existed

in the subsector:

(a) the small businessman who needed modest financing "to bootstrap"
himself; and

(b) the political "hanger-on" who wanted a loan because he was a
supporter of the Government and felt that the Government was
obligated to him.

Both types had applied to SEDCO, and in many instances, after judging the

proposals only on the basis of "papers" submitted, SEDCO would have granted

loans to both. However, SEDCO had a system whereby its field officers

not only visited with the applicants but also made the usual discreet

inquiries and did other cross-checking to ensure that a genuine project

existed for which an application had been submitted. From the list and

quality of loans approved, SEDCO can claim some success here.

The second point involves the classification of ownership or types of

investors. At least 75% of the applications which reached the evaluative

criteria stage were from persons who had an identifiable legal, physical

and on-going structure; the other 25% were from backyard operators and

single operators involved in essentially one-man operations.* In many

*SEDCO would eventually cater to anything from a one-man backyard
(primitive) non-traditional activity to the well organized and properly
managed enterprise with an unlimited number of employees. At first, it
was proposed to define a small enterprise activity as one which offered
employment to a maximum of one hundred persons per enterprise, but this
was dropped.

instances they were unemployed persons, according to the classification of

the unemployed as laid down by the Department of Statistics, or they were

craft manufacturers and vendors primarily dependent on itinerancy or tourism

for distribution of their wares. Many of them followed no disciplined in-shop

production practices; they often produced when and where feasible, as well as

if and when raw materials were available.

SEDCO found other deficiencies that were most persistent, even

intractable in some cases, and which pointed to the type of institution

that should have been established. These deficiencies were:

(a) illiteracy and lack of numeracy skills among applicants;

(b) lack of knowledge about the bureaucratic procedure in
establishing a business;
(c) lack of basic training in any definable skill;

(d) unfamiliarity with requirements of the government departments
which regulated, supported and controlled businesses;

(e) lack of basic money management skills and ability to deal
separately with personal and business funds;

(f) difficulty in purchasing small and even insignificant
quantities, especially in overseas markets;

(g) lack of clear marketing strategies, especially to sell in
the protected CARICOM (Caribbean Common Market);

(h) inability in most cases to assess specific markets, although
the Jamaican market for most of the products of small businesses
was protected in their favor;

(i) inability to deal with competition from CARICOM and even larger

(j) insufficient information given by loan applicants in response
to inappropriate criteria established by financial institutions
(although there were several institutions offering adequate
financial aid to the subsector).

In the light of the deficiencies listed above, and given the expectations of

the small business subsector, it becomes apparent that the Government could

have developed a more appropriate institution. Such an institution could

be (a) subsidized by the Government if some of the segments of the criteria

were to become less stringent or (b) operated as a development bank with

possible 'hard' and 'soft' windows. One could not reasonably expect a

commercial bank-type institution to provide help in addressing the problems

listed above without compensation.

In many instances production ventures, even well-established ones,

revealed certain management deficiencies, which ranged from illiteracy of

the proprietor to absence of financial records. Many loan applicants were

unable to understand and apply meaningful bookkeeping methods; sometimes

they relied on memory, often defective, to store financial information.

In some cases there may have been a greater need for management assistance

than financing. Where financial assistance was a clearly established need,

the project then had to demonstrate that an effective demand for the product

existed, either on the basis of data from past production and sales or from

market research done by SEDCO. Frequently the records of past performance

were either non-existent or insufficient to support the projected demand

and production. Occasionally, the in-house knowledge of operations by SEDCO

employees yielded a more realistic forecast which was often non-supportive

of the application. While the in-house forecaster was always willing to

facilitate the application, even to the extent of proposing changes in the

amount of loan or managerial assistance required, the applicant remained

disappointed at not being able to obtain any amount or the specific amount

requested. Often he had to recast the application to reflect real facts as

distinct from presumptions. This disappointment was voiced to others and

was reflected in questions which politicians asked about the applications.

Given the complicated nature of the evaluative criteria, the organi-

zation had to do more than simply grant loans. SEDCO had to reconstruct

many applications into a form acceptable for evaluation anywhere. This was

done by introducing a system for extracting both formal and informal infor-

mation which was then translated into an acceptable format. From this format

examination of the applicant's proposal could be considered.


Before evaluation operations began in June 1978, SEDCO decided to

establish a roster of projects from which loan applications could be selected.

In the first three months of evaluations 737 applications were submitted

covering a wide range of activities both within and outside of the cate-

gories specified under the definitional criteria. The 737 loan requests

totaled J$5,260,781 (U.S.$3,480,791); of this, the amount considered
acceptable totaled J$797,390 (U.S.$447,972); the loan requests submitted

between December 1978 and June 1979 totaled J$4,701,404 (U.S.$2,641,262);

the amount approved was J$2,083,668 (U.S.$1,173,676).* One-third of these

loan applications had been submitted to commercial banks previous to June

1978 and had either been refused or withdrawn.

Readers should be reminded that commercial banks have not been eager

to finance projects with guaranteed government loans to small business ventures

because of the high real cost -- often unrecoverable -- of making such loans.

Such was the experience in Jamaica. The crux of the matter in granting

loans to the subsector with which we are dealing is that the Benefit/Cost

is less than one when all the hidden costs are summed. As shown in Table 3,

it costs more to make a loan of J$500 (U.S.$280) than to make one of J$10,000

(U.S.$5,617) or J$40,000 (U.S.$22,471).

*See Tables 1 and 2.

Table 3


Officers Involved Loans Up To Loans Loans
Officers involved $500 $500 15,000 $15,000 40,000

Evaluation Officer
(1 week of actual time)

Marketing Officer
(2 weeks of actual time)

Legal Officer, Head Loan
Department, Accounting Clerk
(2 days)*
(S50 $75)

Extension Officer,
Management Accountant,
Head Management and
Technical Services

Search and credit check,

(1 day)

Accounts Clerk*

Technical Officer
(1 day)

Registry Clerk
(2 half days each-1 day total)

Head Evaluation Department

Evaluation Committee
(three members)





TOTAL $1,376 $1,235 5963

NOTE: Additional costs included machine time, machine operator, stationery, cards, receipt
books, payment books, stamping documents, evaluation of equipment by independent
valuator, miscellaneous, telephone calls, unscheduled visits, immediate payment of
insurance on equipment defrayed on annual basis, and assessment by Managing Director.

*Clerks usually help applicants for smaller loan to sort out and obtain information.

**Sent to Board of Directors directly. Members of the Board were not remunerated.


Loans at the lower end of the scale J$1 $1,000 (U.S.$0.56 $561)

cost more to process (because of the criteria) than loans at the top end

of the scale J$20 $40,000 (U.S.$11 $22,471). By virtue of the time

required to obtain all the information, to pay the required visits to

the production area, to inquire about the market and to receive approval

by all appropriate authorities,a loan of J$500 (U.S.$280) could cost as much

as J$1,500 (U.S.$843). From SEDCO's point of view, it was better financially --

although not politically acceptable -- to make only loans which ranged from

J$10 $40,000 (U.S.$6 $22,471). Yet the majority of applications were

in the range of J$1 $5,000 (U.S.$0.56 $2,808), and fewer were in the

J$10 $40,000 (U.S.$6 $22,471) range.

The larger loans invariably took less time in preparation; the

smaller loans usually began with insufficient and even inappropriate informa-

tion and hence required a great deal of processing time. In some instances,

the application remained in SEDCO for a longer period of time because the

applicant never returned to complete it. We have not calculated in monetary

terms the costs of processing such applications. The Evaluation Officer had

to reprocess an application more often for a small loan that a large one.

Usually the applicant for the larger amount brought with him the required

documents, and often was a person who had "been through the ropes" of applying

for loans. From the time the application was submitted until the check or

checks were drawn, a period as long as three months could have elapsed if

vital information was missing from the initial application. To illustrate

this matter of the deficiency of information and its impact on the waiting

time of the applicant, we refer to a case with which we are familiar and

which befittingly describes the commonplace.

Satisfactory footwear in Jamaica, especially women's footwear, was

a scarce commodity. While local producers of good footwear did exist,

and they partially met the demand and received a reasonable rate of return,

their volumes of production were not large. Good shoes were usually im-

ported and those which came in through devious means were especially ex-

pensive. Thus, there seemed to be an obvious market for locally made

footwear. Yet it was an agonizing effort to get applications from footwear

producers into an acceptable form, for most of them did not exceed $500.

In many instances, a professional auditor would find an examination of

their books fascinating, perhaps, but unrewarding. In some cases there

was a minimum of record-keeping, in others none at all. Such reconstruction

as was required to support the claim of successful past operations or to

chart the path for future operations was left entirely to the staff of the

loan granting organization.

Two separate assessments were made of the costs involved in making

loans. In the first instance, an Evaluation Officer was especially commis-

sioned to assess the time and costs involved. The officer was to look at the

loans already made, reconstructing where necessary the steps taken and the

time spent on each step by the officer involved. Next he was to follow up

the loans currently being processed. All the divisions involved provided

him with their financial costs of each application. The officer assessed three

sizes of loans, (a) $500 and below, (b) $10,000 $20,000, (c) $40,000, as

these were the most frequently requested amounts. He then followed each loan

through the processing procedure set out by the Head of the Project Evaluation

Department (an Adviser provided under Technical Assistance from the World

Bank but recruited by and answerable to the Board of Directors of SEDCO).

In addition to this, the officer studied worksheets of the Evaluation

Officers as well as record books which tracked the movement of an appli-

cation between divisions and among officers. Consultations on progress

and general discussions were held with the Head of the Project Evaluation

Department. Costs were based on:

(a) emoluments of the officers involved; and

(b) actual traveling expenses reflected in travel claims.

Where costs had to be allocated, they were prorated on the basis of time

spent and/or materials used.

This procedure was initiated because some laons were three months in

the processing. The other check was done by the Managing Director who kept

an extract of the time an application arrived, to whom it was sent for what

action, the number of visits required of an applicant and the amount of time

each division spent on visits to the projects. In addition to this, he

maintained a personal interest in the progress of several applications through

the "pipeline," and by direct contacts not only with the various Heads of

Divisions but also with the officers working on the particular application.

Most of the first one hundred applicants to SEDCO met with the Managing

Director first. Some parts of the application were usually completed in

his presence, or he gave advice to the client as to how to go about applying

for the loan he required.

Often applicants would approach the Managing Director in the hope that

he would speed up the processing of applications. This was born of the

belief that to get approval quickly.you see the Head of the organization, not

an uncommon attitude in Jamaica, where many persons seeking help, particularly

in the realm of politics, try to see the appropriate Minister in the Government.

This feature, however, in no way influenced the way SEDCO set out to do its

business. The point to be made is that the Managing Director was always aware

of the times, the costs, the progress and the obstacles involved in processing

each application. His cost information was based not only on the logs kept

in each division but also on other costs, e.g., travel expenses, machine time,

and work of the non-professional staff.

The crucial problem, as the evaluation staff discovered, is that the

smaller loan requested, the greater the difficulties encountered. There are

some particular points we would like to share regarding difficulties with

small projects:

(a) Any person with a good small project would, in most circumstances,
be able to obtain a personal loan from any commercial bank with
proper security. Hence, it is our view that loans not necessarily
acceptable to commercial banks or small loans which would extend
over a long period of time should be submitted to SEDCO. This
problem reflected the state of the business.

(b) Regardless of whether the loan request was for used equipment,
new equipment or whatever, the experience was that invariably
one had to meet with the applicant more than once to double
check background, prices and credit references. This consumed
a great deal of time. It was usually easier, however, to obtain
relevant information for new equipment, whether for a smaller or
large item. Assessing costs of second-hand equipment was more
difficult and many small loan customers were purchasing such items.

Politics and the Criteria

Apart from the objectivity and impersonality which they impart to the

evaluation process, the criteria had the unspoken advantage of excluding

political patronage and political decision-making in granting an individual

loan. Whereas in Jamaica's case there was no overt political directive or

interference, there were covert efforts, either by individual politicians or

members of the Board of Directors. The latter group continually voiced

objections to the stringency of the criteria and suggested that this was a

subtle control over them by an international lending institution. Apart

from their political considerations -- most of the members of the Board

were either active politicians or supportive of the Government in power --

members of the Board were very concerned about the close control the Bank

exerted over SEDCO. Added to all this was the failure by the political

directorate to understand the hybrid organization that it had soawned.

What seemed obvious is that while the management tried to operate the

institution with objective criteria laid down by the Bank, small business

groups within the economy saw SEDCO operating as just another commercial bank

and inappropriately so. Caught between these two opposing views, the organi-

zation was "strait jacketed" and received little consideration or goodwill

from the political powers. To submit to the incessant pressure from politically

inspired groups and persons, in the form of granting more loans than was

feasible at that stage, would have been an invitation to disaster for the

organization. Because of pressures exerted both internally and externally,

and because of the Bank's recognition that loans were not being made at the

volume predicted, SEDCO not only had a rough passage but was often bewildered

by the convergence of forces, especially those that set operational limits.


Although the record is yet to come in on the success of most SEDCO

loans, two things are reasonably clear. First, within the context of

existing operational procedures, overly narrow definitional criteria --

particularly those excluding the service sector -- may have unnecessarily

limited the population of borrowers. Second, the experience of SEDCO

indicates that any conventional lending program which attempts to evaluate,

in a meaningful way, the economic or financial merit of loan applications

of very small enterprises can only survive by continuous subvention: to

cover costs may be difficult, if not impossible, at existing interest rate

The analysis of SEDCO's operations reinforces what has been learned

in similar lending schemes elsewhere (see, for example, Kilby [1981] for

Kenya and Anderson [1980] for the Philippines). Namely, it is the nature

of very small enterprises that those operating them do not possess the precise

information that will allow a determination of creditworthiness. For con-

ventional lending programs to develop such information is extremely costly

and will normally reduce the benefit-cost ratio to less than one, especially

when the expense of evaluating unsuccessful applications is added in. The

situation is made more difficult by the fact that Jamaican small enterprises

appear to suffer from more than just financial constraints; consequently

there may not be just a single "missing component," which Kilby (1978) has

tentatively identified as a prerequisite for successful assistance programs.


Anderson, Dennis. 1980. "Small Enterprises and Development Policy in the
Philippines, A Case Study," World Bank Studies in Employment and Rural
Development #66. Washington, D.C.: World Bank.

Bank of Jamaica. 1975-1978a. Annual Reports. Kingston: Bank of Jamaica.

1975-1978b. Quarterly Bulletins. Kingston: Bank of Jamaica.

Diamond, William. 1957. Development Banks. Baltimore: John Hopkins Press.

Jamaica, Government of. 1956. Loan to Small Business Act. (16 February 1956).
Kingston: Government Printers.

1962. Five Year Independence Plan, 1963-1968. Kingston:
Government Printers.

1977a. Green Paper on Industrial Development Programme, 1975-
1980. Kingston: Government Printers.

1977b. Trade Statistics Information, Trade. Administrator's
Department. Kingston: Government Printers.

1978, 1979. Hansard's Parliamentary Debates (House of Repre-
sentatives), Budget 1978 and 1979. Kingston: Government Printers.

Kilby, Peter. 1979. "Evaluating Technical Assistance," World Development,

1981. "Small Scale Industry in Kenya," Michigan State University
Rural Development Working Paper (forthcoming).

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