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Session 3: Sustainable Credit Guarantee Business for SMEs and Innovation

Abstract

Credit Guarantee Systems for SMEs in Asia

Shigehiro Shinozaki, Financial Sector Specialist (SME Finance)

Office of Regional Economic Integration

Asian Development Bank, sshinozaki@adb.org

In Asia, credit guarantees are a popular tool to improve the access of small and medium-sized enterprises

(SMEs) to finance in line with national SME development policies and poverty reduction strategies. In

general, credit guarantees in Asia are provided by specialized institutions—either partially sponsored or

fully owned by the government—and target micro, small, and medium-sized enterprises (MSMEs),

including female entrepreneurs and agro-businesses.

Various guarantee products have been developed in Asia in response to specific country needs, with risk-

sharing arrangements between guarantee institutions and financial institutions being relatively well

established. Credit guarantee systems have been centralized in most Asian economies, while some

countries such as Indonesia are seeking to develop regional guarantee systems through newly establishing

local guarantee institutions, given the guarantee benefits effectively reaching to rural SMEs. At present,

re-guarantee (credit insurance) systems have yet to be established in emerging Asia.

Credit guarantees are expected to (i) fill the supply–demand gap in SME finance, (ii) lower funding costs

for SMEs, (iii) alleviate financing constraints for SMEs by partially or fully releasing them from collateral

requirements, and (iv) respond in a timely fashion to external shocks such as a financial crisis. In addition,

credit guarantees can reduce social opportunity costs—by increasing outreach to the underserved—and

contribute to (i) mobilizing SMEs’ savings for investment, (ii) increasing SMEs’ survival rate,

(iii) providing growth opportunities, and (iv) promoting a resilient national economic foundation.

However, there are potential negative effects of credit guarantee systems: (i) the Basel Capital Accord’s

risk weighting system may drive banks to increase guaranteed SME lending but reduce unsecured SME

lending to strengthen their capital adequacy ratios; (ii) the increased risk of adverse selection and moral

hazard as credit guarantees may tempt malicious SME borrowers and discourage financial institutions

from closely monitoring borrowers, resulting in the use of funds inconsistent with loan objectives; (iii) the

life of poorly performing SMEs can be prolonged; (iv) less incentive to improve SME management if

guarantees do not include any collateral requirements because owner assets are not at risk in the case of

default; and (v) the increased risk of bloated national budgets and the crowding out of private businesses

since credit guarantee institutions are mostly public entities in Asia.

To diminish the negative aspects of credit guarantee schemes, four key issues should be addressed: (i)

business sustainability, shifting from a public-dependent to private-led business model so as to effectively

deliver the guarantee benefits to SMEs; (ii) risk-conscious arrangements, developing re-guarantee, partial

guarantee, and second credit screenings to hedge against risks associated with the guarantee business;

(iii) decentralization, promoting regional guarantee schemes with a proper regulatory and supervisory

framework to expand guarantee availability for SMEs; and (iv) credit infrastructure (credit risk database).

Although there is no universal prescription for increasing SMEs’ access to finance, credit guarantees are

playing an important role in filling the SME financing gap in Asia. At the same time, credit guarantees

open the door for a debate on potentially negative effects. Due to their strong public nature, business

sustainability is a critical concern in credit guarantees. Balancing government intervention with a private-

led guarantee industry is needed. Innovation and technology are key to developing demand-driven and

risk-based credit guarantee products. SME data infrastructure is also crucial to establish a sustainable

credit guarantee system at the national level. Such data infrastructure will support credit guarantee

institutions in proper pricing and risk-based management. Promoting credit guarantee literacy for all

stakeholders is a necessary component of the development of a national credit guarantee industry.