THE PRESENTATIONS

KEYNOTE SPEECH: THE ROLE OF THE INSTITUTION

M.F. DEJONG Head SSE Department Netherlands Development Finance Company (FMO) The Netherlands

INTRODUCTION

Concern with finance for small enterprise may appear to be a rather recent phenomenon, but in many ways it is not. It is possible to put the issue in a historical perspective and to compare what is happening in developing countries with The Netherlands, although not in every way. We can contrast, for instance, the success of the Marshall plan in rebuilding industrial Europe after the Second World War, with the industrial policies which have been adopted by so many developing countries in the hope that something similar would happen there as well.

It appears that, in part at any rate, these policies were not successful because of a lack of a tradition of entrepreneurship in developing countries. In addition to the more commonly used justifications for stimulating the development of small enterprises, such as the creation and distribution of income and jobs, the utilization of local resources and avoidance of capital intensity, the promotion of entrepreneurship and local management skills is a critical element in the development process. In the task of stimulating the development of small enterprises the quality of the responsible agencies is possibly the most important factor in determining failure or success.

There are a number of reasons why longer established financial institutions are not always in the best position to assist in the development of small enterprises. For that reason, it is sometimes necessary to create new specialist organizations; for convenience, these are grouped under the general term of Small-Scale Enterprise Development Finance Institutions, or SSE-DFIs.

Because subsidized seed capital and finance may be needed to start and run an SSE-DFI donor funds may be essential. Not all types of such funds are equally appropriate for building a strong SSE-DFI. Everyone working on the development of small enterprises, on a donor or developing country side, should treat the development of effective institutions of this type as a matter of highest priority. In the long run, small enterprises and donors will be best served by viable and effective financing institutions.

A HISTORIAL PERSPECTIVE

Industrial development policies in most developing countries during the 20 years following the Second World War paid little attention to local entrepreneurs. Industrial development meant the development of large-scale industry: government policies resulted in the development of a small number of capital intensive and import-dependent industries. In many countries such policies are still effectively in force.

The main financial institutions were for some years commercial banks of which many were foreign owned, specializing mainly in the financing of import and export trade. The financial sector was gradually expanded by the establishment of national development finance companies. Multilateral and bilateral donors played an important role in the establishment of these finance companies and their major role was to provide the long-term foreign exchange which was needed for investment in the new large-scale industries. The majority of their clients were these larger companies which were initially intended to substitute for imports and have more recently been targeted towards export markets.

It was perhaps to be expected that the need to stimulate local entrepreneurship should first have been recognized in Gandhi's India. The issue of small enterprise, as far as we know, was first discussed at an international level during the Asian Regional Conference in 1957 in New Delhi. In 1961 the International Labour Office first demonstrated its interest in this field by publishing Services for Small Scale Industries, and the UN Industrial Development Organization followed in 1969 with the monograph entitled Small Scale Industry.

The World Bank, which had been instrumental in the establishment of most of the development finance companies, was the first financial donor agency to take a special interest in the development of small enterprise. Two small loans related to this field were made to Pakistan, and in 1973 the World Bank made a US$ 30 million loan to a development finance company in India, for on-lending to small enterprises. In 1975 the World Bank officially recognized small enterprises as a major element in industrial development. It is thus true to say that the issue of finance for small enterprise in developing countries has only recently gained recognition, at least among international donors.

In industrialized countries, however, institutional finance for small enterprise has a far longer history. In the Netherlands a number of small private banks were started in various regional centres in the nineteenth century and they provided, among other services, credit to small businesses. These banks appear to have been effective and profitable because they knew their clients well and ownership of the banks themselves passed from father to son. The banks' main criterion for lending money was their intimate knowledge of the entrepreneur: the appraisal and monitoring procedures used today were virtually unknown.

In 1927 the government of the Netherlands was instrumental in amalgamating 25 of these smaller banks to form the Netherlands Bank for Small and Medium Business (NMB). The government has remained the major shareholder, but is at present considering disposing of its 16 per cent shareholding in the NMB. This demonstrates that small enterprise financing requires special treatment everywhere.

The promotion of small enterprises in developing countries is thus of concern to governments, industry associations, trade unions, banks and donors. Governments have too often paid only lip-service to the stimulation of local business and have relied on cheap credit alone to perform the task. Chambers of Commerce, Employers Federations and other associations have too often failed to include small enterprises in their membership. Trade Unions have rarely been represented amongst the employees of small enterprises and banks have often been ill-equipped, or not interested, to make very small, high risk and unsecured loans. Donors also have their problems and are searching for ways and means to assist in the process of stimulating small enterprise.

There are, however, many difficulties; small enterprises are not a homogenous group and, unlike farmers, it is difficult to generalize about them. The very definition of what...