Business Page – December 8th, 2002

Introduction

Established in 1985 as a non-profit, tax-exempt organisation to promote growth and development through the provision of business guidance, technical assistance and non-traditional credit facilities to small and medium-sized entrepreneurs and groups, the Institute of Private Enterprise Development (IPED) has developed into the country’s leading micro-finance organisation. Its policy is to support and encourage the development and growth of all other economic activities designed to improve the social and economic welfare of Guyanese.

This week’s Business Page examines the performance and achievements of the company as recorded in its sixteenth Annual Report presented to its members at the company’s annual general meeting on December 2, 2002. Once again, we see another of our companies failing to meet the statutory deadline of six months to present its financial statements.

Average value per loan in 2001 was $153,900 compared with $135,600 in 2000, while the average number of jobs per loan remained just below two. The administrative cost per loan increased by 40% from $14,811 in 2000 to $20,701 in 2001 which may be accounted for by the decline in the number of loans granted as compared to the previous year.

Job creation continues to be a major focus of IPED, and the projects and businesses it has funded have helped to create and sustain employment for a considerable number of persons. According to the Annual Report, the number of jobs created as a result of loans in 2001 was 7,113, a decline of 2,567 jobs over the previous year. Indeed, job creation is a key performance-indicator used by IPED although the term ‘jobs created/sustained’ is really quite confusing and does invite more careful analysis.

Since its inception, IPED has disbursed 29,908 loans with 27.7% going to men, 45.6% to women and 26.7% jointly to men and women. Interestingly, since 1996, women’s access to IPED’s Micro Loan facility has far outweighed the yearly percentage of total loans that are grant ed to men. The number of loans granted to women was 4 times the number granted to men in 2000 but this had a marked decline to 1.3 times in 2001.

According to the Report, “the sum of net profit generated and wages paid out by loan beneficiaries was $4.6B or 4.1% of GDP” Last year the Report referred to “clients’ contribution to GDP at the current market prices” as 1.38% of GDP. This “contribution” to GDP has to be viewed with considerable skepticism and is at best a very rough if not unscientific calculation of numbers. Given the decrease in the number of loans granted and the performance of the national economy this is a bit surprising.

Average interest earned on loans was 22.9% compared with 20% in the previous year. Interest expense on the other band averaged 4%, making it by far the highest interest spread among all financial houses in Guyana. By comparison, NBS, which also enjoys tax-free exemptions, average interest earned on loans is 10.82% while interest paid on deposits is 7.9 percent.

Notwithstanding the larger net interest income (NII), NBS pays out 31.8% of NII in staff costs compared with 24% at IPED. While NBS discloses information to allow for the cost per employee (as required under International Accounting Standards) to be computed, this is not possible for IPED.

Expenses

Operating expense is made up of interest of $22.6M paid on total loans outstanding, salaries and allowances of $40.8M, while the provision for doubtful debts increased from $47.5M to $98.5M. The second largest expenditure item shown in the financial statement is other expenses of $45.5M for which no information is provided. Why the company would disclose as a separate line item printing and stationery of $3.8M while not offering a breakdown of others is puzzling.

In spite of the increase in income, the company was only able to achieve a net surplus of income after expenses of $47.4M, a 47.3% decrease over 2000. Income generated from earning assets fell from 10.98% in 2000 to 10.34% in 2001. The return on the Institute’s assets showed a decrease from 5.5% in 2000 to 2.72% in 2001.

Other operating income to total assets showed a small increase of 0.71 percent. The share of interest income used up in staff cost increased by 1.86 percent.

The income and expenditure account indicates that only interest on PL 480 loans is recognised in the financial statements despite the fact that the IDB loans attract a commission of 1% and the EIB loan, interest at the rate of 2 percent The Report offers no indication for this non-recognition.

Risks

The increase in the number of loans granted to an average of 4,955 in the last three years over the 1995 number of 3,029, the continuing poor performance of the economy and the increase in the value of its loan portfolio has increased the risk associated with IPED’s operations. The effects can be seen from the chairman’s statement that the main reason for the decline in the surplus was the need to substantially increase the provision for doubtful debts because of the slow­down of economic activities.

Non-performing loans increased from $86M in 2000 to $193.8M in 2001, while the provision for bad debts increased from $64.9M in 2000 to $162.9M in 2001. Loan provision as a percentage of total loans show a clear increase from 7% in 2000 to 18% in 200l and as a percentage of non-performing loans it is 84 percent.

A somewhat puzzling comment in the chairman’s report was the intention of IPED to increase provisions to 25% within the next two years. This is a staggering $63.5M and if this was recognised in the current year, the surplus of $47.4M would have been wiped out. If the conditions that have triggered the chairman’s statement exist now, one wonders why the provision was not recognised in its entirety.

Like the New Building Society, IPED is an extremely liquid company with liquid assets of $903M out of total current assets of $1.5B. $50.8M is in cash and bank balances, while $459.5M is held as fixed deposits and $392M is held as a short-term investment. Despite the significance of this amount, no details are given of the investment except to say that it “represents monies held for repayment of loans”

Loans payable during 2002 are shown at $221M. The liabilities side of the balance sheet continues to reflect large balances of loans and other payables within one year but for the past several years these amounts are not shown as paid in the cash flow statement leaving one to ask about the arrangements under which the Institute has been able to borrow PL480 and other funds.

Related Party Relationships

IPED has a related party relationship with Demerara Distillers Limited and Demerara Bank Limited by virtue of some directorship in common. Accounting Standards require that since a related party relationship could have an effect on the financial position and operating results of the reporting enterprise, then transactions between related parties should be disclosed. Indeed, the operating results and financial position of an enterprise may be affected by a related party relationship even if transactions do not take place between them since the mere existence of a relationship may be sufficient to affect the transactions of the reporting enterprise with other parties.

IPED has liquidated its entire holding of treasury bills and put all into bank deposits which at December 31, 2001 amounted to $460M, in addition to short term investments (also in bank deposits) of $392M.

Status

Like NBS, IPED clearly falls to be licensed under the Financial Institutions Act but for reasons which are not apparent, the Bank of Guyana has been slow to move to license these institutions. Given the bank’s stringent requirements on provisioning, the results of institutions can be significantly different if other provisioning standards apply, and comparisons with licensed financial institutions may not in that case be entirely reliable.

Conclusion

On November 15, 2002, Development Finance Limited diverted its operations to Suriname following what President of the Guyana Maufacturers Association, Ramesh Dookhoo. called “pressures from financiers to start moving.” On the brighter side, the formation of Small Business Development Finance whose managing director previously worked with IPED and the Small Enterprise Development Bill expected to be tabled in Parliament early next year, will contribute to IPED’s drive to promote growth and development