Debt relief critical to survive crisis, report finds

The Development Bank of Samoa (D.B.S.) and South Pacific Business Development (S.P.B.D.) loan clients should keep getting debt repayment assistance for another three months.

That's a recommendation by a joint Central Bank of Samoa and United Nations report into how micro, small and medium enterprises (M.S.M.E.) can survive, as COVID-19 continues to wreck damage on not only global health but also the economy. 

Their study, which investigated how well M.S.M.E.’s can access finance, found only 50 per cent of these businesses had managed to access commercial finance, which is a “considerable unmet demand,” according to the Executive Secretary of a U.N. agency behind the study, Judith Karl.

Small and medium enterprises make up an estimated 88 per cent of all businesses in Samoa, and many are facing declining sales, cash flow challenges, and staff layoffs amid the COVID-19 pandemic.

“Support measures to help S.M.E.s survive, restructure their debt obligations, and resume operations as soon as possible are a top priority,” the report states.

“The Government of Samoa has been quick to introduce practical immediate measures to assist the private sector to weather the current economic turmoil. 

“However, mid to long-term support measures that address the key hurdles barring the re-emergence of a vibrant M.S.M.E.s sector also need to be considered.”

In the report on the financial impacts of COVID-19 on Samoa’s MSME’s, a series of recommendations are put forward, building on a more general study on MSME’s access to finance in Samoa.

Immediate support measures that could be rolled out to help M.S.M.E.s affected by COVID-19 include not only maintaining their debt relief for another three months but also to prepare for the Government to offer highly concessional loans.

The report also suggests DBS and SPBD should get financial support to deliver its microfinance scheme further across Samoa. DBS needs more capital to help absorb small businesses with repayment holidays and debt restructuring, while the latter should get a concessional loan to extend their credit lines to small women-owned businesses.

“The bank’s existing non-performing loan portfolio in the tourism sector has had a negative impact on its balance sheet and additional funds will be required to support interest/principal repayment holidays and debt restructuring,” the report says.

Other commercial banks, which have already offered significant debt repayment holidays to businesses affected by the economic downturn, may not be able to offer this long term.

“If the situation persists, banks will have to tighten credit controls and this could result in S.M.E.s foreclosures, unless alternative refinancing options are available. 

To help banks “be patient with non-performing loans,” CBS and the U.N. recommend the banks either get a concessional loan to then on-lend to businesses, or that CBS temporarily reduce the banks’ reserve requirements.

“It may prove necessary for struggling S.M.E.s to secure a re-financing package and D.B.S. would be the likely option.

“Technical support will also assist D.B.S. to eventually restructure its overall non-performing loan portfolio and to minimise the incidence of non-performing loans in the future.”

There also needs to be a partial guarantee in place to help credit providers take on the additional risk of lending during a global pandemic.

Using a collateral shortfall partial guarantee that will cost $3.6 million, the report proposes women-owned businesses should provide 40 per cent of their requirement collateral with the guarantee scheme taking on 95 per cent of the shortfall, with other businesses providing 50 per cent.

The report also recommends that in order for these businesses to get independent and trustworthy guidance on reorganising their businesses, remaining funds from the Asian Development Bank Agribusiness Support programme should be used for other businesses, outside of agriculture.

One key tool to leverage is the Samoa Business Hub, that despite having its own “resource challenges” can respond quickly to the current crisis.

The study recommends S.B.H. continue to provide small business loans and matching training courses and to guarantee loans to commercial banks for their clients. It also suggests S.B.H. provide more tailored support for women-owned businesses, including 100 per cent guarantees for loans in some cases.

The Central Bank of Samoa (C.B.S.), United Nations Economic and Social Commission for Asia and the Pacific (E.S.C.A.P.), and the U.N. Capital Development Fund (U.N.C.D.F.) conducted the study, with funding from the Government of Canada.

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