Sparks fly over Jordan's SME programme
Stakeholders in a programme to facilitate lending to small- and medium-sized enterprises (SMEs)[in Jordan] are trading blame over low demand for capital and high borrowing costs.
In spring last year, authorities and the US Overseas Private Investment Corporation (OPIC) launched a $250 million loan guarantee programme to ease access to capital for SMEs, as the funds would cover 75 per cent of the loan value in order to encourage local banks to extend easier and lower cost credit to entrepreneurs, particularly in the governorates.
But according to official figures, only JD3 million, about $4.2 million, worth of loans have been extended to SMEs since the launch of the scheme.
Official figures indicate that over 95 per cent of businesses in Jordan are SMEs, which account for over 55 per cent of domestic exports and contribute around 50 per cent to the gross domestic product.
SMEs provide nearly 70 per cent of jobs, according to official data.
In remarks to the press on Tuesday, Minister of Planning and International Cooperation Jafar Hassan attributed the low demand for credit to the fact that banks prefer to extend risk-free loans to the government rather than lending to small- and medium-sized businesses.
The solution to render the programme a success, Hassan said, is that the government has to stop competing with the private sector on credit facilities by cutting down its borrowing from local financial institutions through securing lower-cost loans in external markets.
But Nadia Al Saeed, vice chairman of the Association of Banks in Jordan, countered Hassan’s remarks by saying that banks are willing to expand lending to small and medium businesses and start-ups, adding that several banks have designed special programmes to facilitate credit to this sector.
On high interest rates charged by banks on credit extended to SMEs under the loan guarantee programme (around 11 per cent), Saeed indicated that fees charged by OPIC for running the programme has pushed up the interest rates on beneficiaries.
She added that although there is pressure on banks’ liquidity due to government borrowing, there is an uptrend in lending to SMEs.
However, Yarub Qudah, chief executive officer of the Jordan Enterprise Development Corporation (JEDCO), the government entity in charge of implementing the loan guarantee programme, countered Saeed’s argument, saying that although loans directed to SMEs are covered by 75 per cent, banks are still reluctant to lend these businesses at reasonable interest rates.
Qudah said that OPIC charges only 1.1 per cent of the value of the loan as fees, a figure he described as too insignificant to push up the interest rate charged by banks, which he said reached 11 per cent.
“Banks still consider loans to SMEs as risky despite the fact that the programme is covering 75 per cent of the credit value,” he told The Jordan Times over the phone Wednesday.
As currently the interest rate on government bonds is around 8.6 per cent, this makes the government the banks’ best client.
According to Qudah, the interest rate on loans to SMEs should be between 8.5 per cent and 9 per cent.
Asked if non-Jordanians have benefited from the loan guarantee programme, Qudah said that credit is directed to Jordanian business entities regardless of the owner as long as these businesses aim at launching development projects in governorates that would employ Jordanian labour.