A different 'bank' for third world's small businesses

Perla Padilla's knitting has not lost a stitch since she turned her hobby into a business. The Filipino woman, married 16 years ago in the Philippine city of Davao, decided to make sweaters and dresses to sell in nearby villages while her husband was away working as a government clerk.

She took the business, Perla's Knitting Choice, as far as she could on her own money. By 1977 it expanded to six knitting machines and 10 workers. Then she ran into a financial wall that many entrepreneurs in poor nations hit: Few commercial banks will lend large sums of money for a small business that has only long-term potential payoff.

Enter a development finance institution, or DFI. These quasi-public banks pick up slightly riskier and longer-range projects - from mangoes to minerals - than more short-sighted bankers would often touch. They also sell loans at 3 and 5 percent below market interest rates.

Mrs. Padilla was able to receive a $6,500 loan to buy four more knitting machines and to have a kitty of working capital. A later loan allowed her to buy a Toyota truck to travel to more distant markets. Another $6,000 loan came last year. Now she has 15 machines and 25 operators. Soon she hopes to export her wares and help create more jobs in her country.

The DFI in this case was the Private Development Corporation of the Philippines. Its chairman, Vicente R. Jayme, also serves as head of the Association of Development Financing Institutions in Asia and the Pacific, with 47 members. Almost all nations have DFIs. India, for istance, has three. They receive both national and international support.

''DFIs are at the cutting edge of development,'' Mr. Jayme says, ''We figure that each $2,500 in loans creates a new job.''

Loans are almost always medium to long term: three to 15 years. And about 30 percent of loans go for expansion of existing businesses. Although DFIs account for only a small portion of loans in developing countries (about 20 percent in the Philippines), the catalytic role they provide for new companies is considered invaluable.

By definition, a DFI fits under the broad umbrella of government goals in a developing country. This usually means helping businesses that create jobs, especially in rural areas, tapping basic resurces, such as coconuts or metals, and aiming for overseas exports. About 60 percent of DFIs in Asia are directly government controlled, Mr. Jayme says, but all DFI loans are government guaranteed.

DFIs walk on the edge of a sword: On one side are the political and social aims of the government officials, and on the other is a free-market economy in which the financier is expected to make money.

''Many of us feel in developing countries that it is not always true that if you have a totally free-market approach, you have a high level of efficiency,'' Jayme says. ''Sometimes the will to develop is strong enough that a firm will do well without a lot of pressure or competition.''

At present, DFIs are under extreme pressure in Asia. Many DFI officials say the World Bank, under its new president, A.W. (Tom) Clausen, has lessened its support for DFIs, even though the bank helped launch them back in the 1960s by providing cheap lines of credit. Mr. Clausen, former chairman of the Bank of America, prefers that new businesses in poor countries seek commercial loans when possible.

Another pressure is the high number of wobbly loans caused by the world recession. Normally, a DFI can live with about 10 percent of its loans in trouble. The rate is up to about 40 percent, according to Robert Bakley, head of the Asian Development Bank's industry and development department.

Unlike commercial banks, where a loan would usually be written off as a loss or rolled over into a new loan, the DFIs are more likely to help nurse a troubled business back to health. This requires a staff with analytical skills and a great deal of patience to work with management. In some cases, a DFI will turn a loan into capital stock, a risky but morale-boosting step for a budding company.

''DFIs are getting more involved with corporate strategy to beter manage a firm's account,'' says Mr. Jayme. One shoe manufacturer on the books of his institution, for instance, was asked to set up employee quality circles when wages began to rise and productivity was falling.

Pressure by government officials can sometimes be extreme, but DFI officials say they can always say ''no'' to a bad project. ''We can always talk to the press,''says Zafar Iqball, chairman of the National Development Finance Corporation in Karachi, Pakistan.

DFIs serve as a quick conduit for aid to a nation. The Asian Development Bank (ADB), for instance, devotes 13 percent of all its lending to DFIs.This year the bank begins direct equity investment in new companies, sometimes working with a DFI.

An estimated $10 million will be spent the first year by the ADB, although it is authorized for $230 million. Ideas for projects include the restoration of the famous Hotel Queens in th old Sri Lankan mountain capital of Kandy, manufacturing axle rods in the Philippines, and building a polyester plant in Bangladesh in conjunction with an American investor.

The ADB also advises DFIs on projects. In Burma, for instance, the government wanted to start up a window-frame manufacturing company. But the bank persuaded officials not to do it - plenty of window frames were already being built by entrepreneurs in backyard shops. The development bank, like many DFIs, looks to fill the gaps of free enterprise, not to compete with it.