Do Credit Guarantee Schemes encourage banks to lend to SMEs?

Wednesday, August 9, 2017

Countries everywhere are focused on supporting Small and Medium Enterprises (SMEs).  From successive G20 presidencies (Turkey, China, Germany) to many of our emerging country clients, supporting SMEs has become a clarion call.  While this support appears to be largely driven by the global unemployment crisis (particularly among the youth) SMEs contribute much more than just jobs, including exports, production, innovation, diversification, geographic dispersion, and opportunities for women and youth entrepreneurs.

A lack of access to adequate finance is one of the biggest constraints SMEs face worldwide.  It is estimated that between 50% to 70% of SMEs in emerging markets are either not funded or under funded by the formal financial sector.

If SMEs are responsible for delivering so many economic benefits – why are banks so reluctant to lend to them?  Clearly there are problems of information asymmetries – weak accounting data provided by SMEs, a tendency to produce multiple books of accounts (where accounts even exist), poor information on their overall activities, badly designed business plans and loan applications and, possibly most importantly, a lack of the types of collateral generally demanded by banks (fixed assets – land and buildings).

Source: World Bank (link opens in a new window)