Small- and medium-size enterprises (SMEs) make up the vast majority (99 per cent) of Jordanian firms; the most pressing challenge they face is lack of access to capital. However, there seems to be good news from the Jordan Enterprise Development Corporation (JEDCO) which, aided by the new $250 million fund from the Overseas Private Investment Corporation (OPIC) and other donors and partners, is championing the drive to remove this deficit.
SMEs in Jordan face a list of primary challenges when it comes to securing financing: 1) majority of formal financing comes from banks, which enables banks to maintain a strong hold on SMEs; 2) banks seem unable to speak the language of SMEs, they require paperwork that many times the latter are unfamiliar with; 3) banks ask for guarantees (mainly real estate) that far exceed the value of the loan(s); 4) banks have their own credit rating systems, do not have a unified system for rating borrowers and are less likely to share credit history or information; 5) the interest rate reaches as high as 11-12 per cent or more, which burdens starting SMEs; 6) the grace period is nonexistent or not in excess of six months; 7) the Jordan Loan Guarantee Corporation (JLGC), which guarantees part of the loans for applicants is owned and chaired by banks, which creates a conflict of interest (owners want more profit while the JLGC is a development-based corporation) and thus, loans go to highly secure and even larger corporations; 8) the payback period remains very short. In extreme cases it may reach five years, which is not enough for a business.
What JEDCO is doing using the OPIC fund and with the help of the European Investment Bank and others is admirable. It encourages the creation of two new venture capital funds with one solely focused on ICT; the credit application is being unified and JEDCO staff helps SMEs to complete their applications; OPIC funds are utilised to provide guarantees, thus reducing the level of credit guarantee required by banks; a standard credit report has been designed to be used by all banks and technical assistance is provided to SMEs to complete it; the interest rate is lowered to three-year treasury bill rate plus a margin, thus lowering the interest rate to SMEs to 7.5 per cent; the grace period is being increased to 2-3 years; the JLGC is offered some compensation reducing its exposure and thus accepting smaller profits; the loan period is expanded to 7-10 years.
The JEDCO management and team deserve praise for taking such a comprehensive approach to a multifaceted problem that hurdles the development of a vital component of Jordan's productive sector.
I do hope, however, that the government will provide it with additional financing. The JEDCO money is spent to create greater economic activity and hence more revenue for the government. This is the good governance that reform is about.
© Jordan Times 2011
