Session 3: Sustainable Credit Guarantee Business for SMEs and Innovation

Abstract The Role of Credit Guarantee Systems and Mutual Guarantee Societies in Supporting Finance to SMEs
Lucia Cusmano, Senior Economist, OECD Centre for Entrepreneurship, SMEs and Local Development, lucia.cusmano@oecd.org
In many countries, Credit Guarantee Schemes (CGSs) represent a key policy tool to address the SME financing gap, while limiting the burden on public finances. The use of Public Guarantee Schemes (PGSs) is widespread across OECD and non-OECD economies, as a direct policy tool to alleviate financial distress by SMEs. The design and delivery mechanisms of public schemes are rather heterogeneous, however. Privately funded schemes and mixed models, which are characterised by the direct participation of the private sector, SME organisations and banks in the funding and management of the scheme, are significantly more developed in OECD countries than in non-OECD economies, and may take different organisational forms. In particular, Mutual Guarantee Schemes (MGSs) are private societies created by borrowers in order to improve their access to finance, developed mainly in areas characterised by economic specialisation, highly interconnected SMEs and mature local institutions. Taking advantage of their specific knowledge about member firms and their economic environment, and unlike many PGSs, MGSs participate actively in the process of credit risk assessment and lending decisions. The peer review process acts as a powerful mechanism for controlling risk and limiting opportunistic behaviour. In some OECD countries, CGSs have been an instrument of choice for policy makers to improve SME access to finance in the recent global financial crisis. In several non-OECD countries, CGSs have also developed rapidly as a mechanism to expand credit markets and improve financial inclusion. The expansion of public guarantee instruments, as well as the increased support to private guarantee schemes, through funding or co-guarantees, has triggered greater demand for monitoring and evaluation. The design of CGSs is crucial for their effectiveness and sustainability. Target population, coverage ratio, credit risk management and fee structure should ensure additionality, that is, support access to finance of viable enterprises that face limitations in financial markets. An appropriate design is also crucial to ensure financial sustainability, taking into account on the one hand the need to limit default rates and cover the operating costs, and, on the other hand, the implications that coverage ratio and fees have on the type of applicants. Also, supervision, transparency and certainty about contract enforcement are crucial for the development and sustainability of guarantee systems. Most existing studies provide positive evidence of the financial additionality of guarantee schemes; however, measuring economic additionality has proven more difficult, in part due to data and methodological limitations. In particular, MGSs appear to be an effective instrument to ease access to finance for viable SMEs, although some studies indicate that this has been the case mainly for established sectors and firms. For some of the mutual schemes, however, the countercyclical expansion has brought about an important change in scale and greater exposure to risk. This change is taking place in conjunction with the on-going transformation induced by regulatory reforms. The greater complexity of the environment has further increased the need to upgrade the organisational efficiency and the skill level of schemes. Assessment evidence on CGSs in general, and MGSs in particular, is rather scarce. There is a need for more in-depth evaluation at the micro and macro levels, to assess the overall welfare implications of guarantee systems. More investigation is needed on the multi-dimensional aspects of credit guarantee systems, which take into account direct and indirect costs and benefits. Full-fledged assessment demands that financial sustainability and additionality are jointly taken into account, and that CGSs are evaluated against alternative policy instruments. For this purpose, it is necessary to improve financial reporting at the level of the scheme and availability of data on beneficiary firms. 1