Download - Underlying issue:
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Access to finance: the place of credit guarantee schemes
Bernd BalkenholILO
www.ilo.org/socialfinance
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Underlying issue:
Information asymmetry
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Credit guarantee fund?
• Public funded
• Separate entity or account
• Single service
• Risk sharing
• To the benefit of targeted clients
• Settlement of bank claims on certain conditions
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Different approaches to information asymmetry: MF and CGF
• External: third party of third party
• Internal: collateral substitution
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Presence of guarantee funds: a function of SME density?
• High income countries
• Transition economies and post crisis
• Low income economies
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Political economy of CGF
• SMEs are backbone of economy
• Organized lobby
• CGF flag government commitment
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How do CGFs function?
• Referral bank to GF
• Appraisal guarantee worthiness
• Appraisal credit worthiness
• If default, bank turns against GF
• GF checks and settles
• GF tries to recover from debtor
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Why would a bank play along?
• In theory, the default coverage assumed by GF turns a loss making proposition into a profitable operation (taking into account administrative costs involved)
• In practice, it’s more complicated.
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GFs and MGAs
• Mutual guarantee associations are single product financial cooperatives.
• Member-based.
• Idea is that professionals know viability, risk and return of a loan application, better than administrations and banks.
• Otherwise very similar, even here much government involvement.
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Rationale: why government?
Information on default risk costly to
generate and difficult to monopolize.
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Alternatives to address information asymmetries
• Improve financial infrastructure
• Modernize judicial system and property rights
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What makes a good credit guarantee fund: criteria
• Cost effectiveness
• Additionality
• Sustainability
• Systemic learning effects
• Scale
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Why would ownership of the credit guarantee mechanism matter?
• Mutual type: information advantages, proximity, but also moral hazard and collusion
• Public type: size and diversification potential, revenue generation, but also adverse selection, lack of familiarity
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Comparative performance
• Public type: more leverage, more outreach, but subsidy dependent (except SBLA in Canada)
• Mutual type: scope for additional collateral
• Otherwise: not much difference in performance; what matters more is scale advantages, design, competition in local financial market
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A case
• Government goal: self employment for hundreds of thousands of laid off workers by 2010
• Challenge: microfinance not authorized. Need to involve local banks. Solution adopted by Government: set up thousands of credit guarantee schemes to facilitate access to bank credit.
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Design of the credit guarantee schemes
• Max loan amount $ 2500
• Max maturity: 2 years
• Interest rate: fully subsidized and subject to control by central bank
• Max guarantee fee: 1%
• Risk sharing: 0% on the bank, 100% on CGS
• Max leverage: 1 : 5
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Status of CGS (ILO evaluation)
• Guarantee capital average: $ 127,000
• Loans guaranteed in 3 years: from 662 to 7812 per scheme
• Target group precision: 82% to 89% LOW
• Average loan amount: $ 2150 – 6300
• RoA: - 33% to 1,2%
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Design flaws
• No incentives, no stakes for banks
• Complicated procedures
• Lack of credit awareness borrowers
• Administrative interference
• High delinquency
• Pressure to disburse
• Governance diffuse
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Lessons 1
• CGF need to be independent and professionally managed
• Credit risk must be shared
• Bank must do it own appraisal
• Set adequate guarantee level
• Qualified staff
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Lessons 2
• Budget surpluses weaken considerations for sustainability.
• Short term policy emergencies overshadow legitimate longer term goals to ease market access problems.
• Excessive targeting and absent incentives produce lukewarm bank involvement.
• Under these circumstances it is a challenge to advise on better policy, but still necessary.
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ILO work on guarantee funds
• Advise on design and management (Ministries of Labor managing social funds)
• Staff training (Boulder)
• Manual on CGF management
• Audits