The Bank of Botswana and CEDA (Citizen Entrepreneurial Development Agency) could be headed for a fresh collision course after government took a decision to increase the CEDA upper ceiling loans from P2 million to P4m.
As with the loan amounts, CEDA has also increased the generosity of the terms under which the money is disbursed.
While in the past the money was to be repaid in 7 years, that time frame has now been increased to 15 years.
The interest remains the same, at 7.5%, with a grace period hiked from 2 years to 4 years.
This will certainly not go down well with the Central Bank which has in the past complained that CEDA was crowding out commercial banks.
In its 2006 Annual Report, the Central Bank spelt out the deficiencies of such schemes as CEDA.
Together with others like it, CEDA was created by government as part of the government’s broad initiatives to diversify the economy and empower citizens.
With specific reference to CEDA, the report said it was not helpful that borrowers are encouraged but not required to make equity contributions.
“While this arrangement is meant to ease the equity capital requirement constraint on small borrowers, there is an inherent moral hazard, possibly to the detriment of longer-term private sector development.”
The Bank said the absence of equity contribution in the CEDA framework could indirectly act as a disincentive for entrepreneurs to strive for the success of their businesses as there is no financial risk to them that is linked to failure of the businesses.
“The provision of loans on generous terms using government funds may also result in crowding out of the private financial sector in the credit market,” said the Bank of Botswana.
In a hard hitting report, the Central Bank said if the borrowing terms from CEDA are both easier and expose the lender to great risk relative to the borrower, then the latter has a clear incentive to borrow more from CEDA than from elsewhere.
“Thus it is possible for institutions such as commercial banks and non-governmental financial institutions to lose their potential customer base to government supported institutions.”
In defence of commercial Banks, the Bank of Botswana said although there are perceptions that commercial banks in Botswana are ill-equipped and often unwilling to provide funding for potentially risky business start-ups and expansions, “it is also likely that a proportion of the jobs ‘created’ by CEDA could also have been financed by private financial institutions, while the presence of CEDA-type institutions might obviate the need for private sector innovation to meet the apparent demand for start-up capital, especially among citizen entrepreneurs.”
As a parting shot in their diatribe against CEDA, the Bank of Botswana said private lenders are profit oriented and are, therefore, likely to have better skills and greater motivation to fully monitor projects to minimize default risk than is the case with Government.
“A more vigilant surveillance of borrowers by lenders can encourage entrepreneurs to ensure that their businesses succeed. Hence leaving the provision of investment funds to the private markets has the potential to enhance a more sustainable private sector.”
Predictably, these sweeping broadsides have irked the CEDA executive management.
This week when announcing the new reforms at his organisation, the CEDA Chief Executive, Dr. Thapelo Matsheka, reminded his audience that Bank of Botswana is better advised to stick to its mandate provided by the Bank of Botswana Act rather than trying to undermine other government policies that are meant to economically empower citizens.
“It is one thing to have GDP growth and quite another to have citizens watching all that from outside through the window,” said Matsheka contemptuously.
He said while as a country we may boast of growth, we must always pause and look back to asses the extent to which citizens are a part of that growth.
“After all, this is not the only economy to assist its citizens.”
Matsheka said while it was easy to criticise the CEDA type formations, Bank of Botswana should also explain the high number of bankruptcies and collapses of those companies that are financed by commercial banks.
He also said the commercial banks in Botswana are averse to assisting start up businesses as well as expansions as they are perceived to be high risk.
He was referring to recent incidents where commercial banks lost millions of money as a result of the businesses they financed going belly up.
“In one incident, a single company collapsed with more P100 million worth of loans from commercial banks. That is the money we give to more than 100 citizens,” said Dr. Matsheka.