Small businesses in Pacific countries – and elsewhere – often have difficulty raising funds for new projects or to expand and develop their present activities. Commercial banks often have strict collateral requirements that small businesses have difficulty meeting and may view small businesses as risky borrowers. An innovative approach to overcoming these barriers to business development was included in the Solomon Islands Rural Development Programme with its Supplemental Equity Fund which provided grants to small businesses active in rural areas or providing services to rural areas in order to facilitate their access to commercial bank loans. Grants, up to $50,000, from the SEF increased a business’ equity contribution and at the same time reduced risk for the commercial bank concerned by reducing the loan amount needed.
Businesses benefitting from the project are involved in agriculture, tourism, inter-island shipping, solar power, retail, training and rural infrastructure. As a result of receiving equity grants, many are now employing more people in rural areas or increasing their support for and purchases from farm households.
The strength of the SEF has been in its mode of delivery through the commercial banks. Business owners wishing to apply for a SEF grant had to do so through a participating bank as part of their loan application. In addition to meeting the criteria for SEF they had to meet all the bank’s normal criteria for lending. Furthermore, once a loan was made, the borrowers were subject to the usual follow up and monitoring by the bank to ensure the funds were used as intended and interest and loan repayments were made on schedule. SEF grants required that the businesses were able to operate successfully in a normal commercial discipline under the supervision of their bank. Out of 58 businesses involved in the programme during the course of the project only one business defaulted, two have ceased to operate because of the ill health of their owners and all the remainder continue to operate, on the whole successfully, providing services to rural communities.