MS Siddiqui

Most small and medium enterprises (SMEs) have encountered poor access to finance globally. Adequate access to finance is crucial for the survival and growth of SMEs. SMEs often lack the collateral for loans from financial institutions (FIs). Adequate financing of SMEs is often constrained by their relatively high credit risk and the conservatism of FIs. As a result, credit guarantee institutions established in many other countries to help enterprises obtain funds from banks.

According to a survey in some countries, 80 per cent to 90 per cent of companies would not have been able to access credit without a guarantee.

In the absence of credit from FIs, SMEs borrow from informal private lenders and small investment companies at a very high-interest rate. In a situation where the FIs was reluctant to lend money to SMEs, credit guarantees contributed in a very significant way to ensure that credit financing was channelled to the real economy.

Credit guarantee contracts require the issuer to make specified payments to reimburse the holder for a loss when a debtor fails to make payment when due. Credit guarantee schemes facilitate access to credit for SMEs that would otherwise be unable to obtain it, transforming the role of these players from ‘risk mitigators’, which reduce the banking system’s information asymmetries, to ‘risk underwriters’.

Governments around the world have taken initiatives to establish credit guarantee schemes (CGSs) for SMEs, to help them absorb/share the associated risk and reduce the dependence on collateral. These schemes encourage FIs to lend more to SMEs and at a competitive rate. The guarantee is provided at a cost, but the cost of the guarantee is relatively lower than the private credit services. CGSs also include other services to promote SMEs.

The operating structures through which credit guarantee institutions do business around the world are quite diverse. There are players with widespread regional networks and those with a single centralised office, which relies on the operating structures of the promoting entities or partners (banks, trade associations, SMEs, member and approved bodies) for their sales activities.

Most of the guarantee providers in a perfectly-designed CGS operate as state and publicly held companies, mainly through public capital or central bank of the countries. A few of the CGS operate at a national level and, in some cases, at a regional level. In addition to the government, some FIs, chambers of commerce and, in some cases, state-owned funds may come up with the guarantee. The governments of those countries are, therefore, act as a regulator of such a scheme. There are a few players that are privately held, and public bodies might hold only minimum or residual interests.

These guarantee providers have an internal network regionally having associations mainly located in Europe, Asia and South America. They include AECM (Association Européenne du Cautionnement Mutuel) operating in 18 European countries; ACSIC (Asian Credit Supplementation Institution Confederation) operating in 11 Asian countries; REGAR (Red Iberoamericana de Garantìas) operating in 22 countries, mainly South American but also European; and ALIGA (Asociaciòn Latinoamericana de Instituscionès de Garantìa), which operates at a regional level and includes countries in South America.

They have an inter-organisation relationship and exchange idea and experience to upgrade their services to SMEs.

The relationship between banks and guarantee provider is apparently very close. For the banking system, these players are important intermediaries, not only because of their role as guarantors but also because of their relationships with the SMEs’ network. They can bridge the information gap and the trust gap.

CGSs are for SMEs, but not all SMEs are eligible for the guarantee scheme. Therefore, the customer selection process is very crucial. Institutions gather information and gain experience of the region, market and entrepreneurs. They provide training for some particular business, support them with a guaranteed source of raw materials, and help market finished products at a reasonable price.