DFL's development bank returns
Stabroek News
April 16, 2004
A development bank for Guyana is once again on the cards which would provide long-term borrowing in US dollars to businesses at interest rates pegged against the US ten-year Treasury Bill's rate (currently 4%).
The Guyana government last month issued a five-year waiver on withholding and advance corporation taxes to Development Finance Limi-ted (DFL) of Trinidad to facilitate that investment. DFL had shelved plans to establish a development bank in Guyana in 2002 after the government had failed to deliver on those waivers and had announced a relocation of that investment to Suriname.
However, Geoffrey DaSilva, head of the Guyana Office for Investment (Go-Invest), made a pitch in April 2003 for the return of that investment at DFL's launch of its private equity arm in Guyana, DevCap. "Go-Invest would do what it has to do to make it happen.... whatever has happened in the past is water under the bridge...let us move from here now," DaSilva had urged DFL's Managing Director, Gerard Pemberton and Chairman Audley Walker.
In January of this year, DFL's board approved of the relocation of the investment to Guyana and in February discussions resumed with the government on the investment, and the letters granting the waivers were received in March. DFL officials are keeping the Bank of Guyana abreast of the developments and its plans so as to expedite the processing of its banking licenses as a non-depository institution once an application is made. A banking licence has to be processed within three months.
Prakash Dhanrajh, General Manager of DFL, was in Guyana earlier this week with two Multilateral Investment Fund (the grant window of the International American Bank) officials to evaluate the need for a Small and Medium Enterprise (SME) or development bank adviser for Guyana.
Prakash Dhanrajh
"We are cautious at this stage.... I do not believe there are any deal breakers but until we see the licences.... nothing is finalised until it is finalised," Dhanrajh told Stabroek Business in an interview Monday evening when asked how soon he expects to see the bank operational.
The actual opening of the bank could take a few months, as DFL is still to sign off on its agreement with the European Investment Bank (EIB), apply and be granted a banking licence and incorporate the bank locally.
A location has been found in central Georgetown and the rent is being negotiated. Dhanrajh says when the details are firmed up with the EIB, which is backing the project, an application would be made for the banking licence.
DFL had earlier reached agreement with the EIB on the establishment of DFL South America (DFLSA), which will offer the services of a development bank and micro enterprise financing to Guyana and Suriname. However, some of the issues are being revisited by the EIB and Dhanrajh hopes signing between DFL and the EIB would be in a matter of weeks.
DFL South
America (DFLSA)
DFLSA would be incorporated in Guyana as a development bank and micro credit institution once its by-laws are finalised and signing with the EIB takes place. It will have a paid-up share capital of US$3.125M of which US$1.875M would be ordinary shares and US$1.250M would be preference shares. In 2006, DFLSA total assets are projected at US$9.6M, to be financed 25.4% by DFL, 34.5% by the EIB, 39.7% by other international financial institutions and 0.4% by others. The total assets are then projected to increase to US$19.4 million in 2008 with the local capital market providing 20.6% of this by the issue of bonds, and other long term instruments, DFL 16.4%, EIB 32.2% other IFIs 28.4% and others 2.3%.
It will have a staff of about eight initially which will increase to about 15 by year five. The development bank operation, to be called SME Finance, would have a manager, a business analyst and an administration & accounting assistant while the micro finance arm, MICROFIN, would have a manager and a micro finance credit and administration staff.
"The development bank is very much on the cards. One of the things we would be introducing is not just bringing money to the table but to have an SME adviser to work with companies, which is an important ingredient as we are looking to get involved with businesses that are expanding in terms of capacity and export oriented growth. We want to provide access to someone with a working knowledge of businesses to allow potential borrowers to get another view. The SME adviser will have a network of foreign consultants in terms of market connection and equipment and technology suppliers," Dhanrajh said.
DFL expects to have this SME advisor here for three years after which local capacity would have to take over. MIF is expected to fund the SME position while the MIF, EIB and DFL would be putting up the capital for the development bank's portfolio.
In the case of micro enterprise financing, DFL will be contracting out the management of this service to Accion for two years. The management contract team would be based in Suriname.
Under the current scheme, micro businesses would be eligible for funding between US$300-US$5000 while small and medium size enterprise can qualify for loans between US$100,000 (G$20M) and US$600,000 (G$120M), subject to conditions.
Credit under MICROFIN would be available in Guyanese dollars and the rate of interest is expected to be competitive and lower than that offered by existing micro-credit institutions and based on a declining balance. Financing would be available for standard micro finance products as well as small emerging enterprises which can receive between US$5,000 to US$100,000 in credit. DFL hopes to service 2500 clients in Guyana and Suriname in the first five years.
In the case of the development bank, credit would be in US dollars but applicants must be an exporting company and must be generating sufficient cash flow to meet the debt obligations. Dhanrajh says each investment opportunity would be evaluated on its own merit and the rate of interest would be competitive and priced against the ten-year US Treasury bill. Minimum loan size would be US$100,000, a maximum of US$600,000 but a maximum group would be US$950 000. DFLSA would offer an interest rebate of one per cent per annum for prompt monthly payment of interest and principal.
SME Finance would also provide export financing for raw materials and maybe receivable discounting; enterprise development services and would also provide co-financing and syndications with DFL Caribbean. DFL hopes to be able to create, develop and expand at least 30 SMEs in Guyana in its first five years of operation in manufacturing and agro industry, mining and tourism, information technology, industrial and commercial services and private health and education.
Dhanrajh says DFLSA would fill a clearly needed gap in Guyana's financial system as well as in Suriname and has wide experience in the area. He notes the absence of long-term financing and the dearth in US dollar lending (only available to businesses with a proven track record). He also notes that DFL is taking a holistic approach to development finance with international agencies and is not just looking at financing but at market potential, equipment and technological use.
DFLSA would have non-financial loan conditions which include conformity with environmental safety and good practices and corporate governance practices; a review of internal controls every two years and have certified financial statements available semi annually.
The mission of DFLSA would be "to provide financing and management development services to create and maintain successful micro, small and medium-sized enterprises in Guyana - in partnership with international development institutions". It is proposed to have a board of seven including a Guyanese and Surinamese professional or businessperson on board.