The World Bank Group and the FIRST Initiative have led a global task force to identify and draft Principles for the design, implementation, and evaluation of public credit guarantee schemes (CGSs) to improve access to finance for small and medium enterprises (SMEs). The task force included delegates from the Arab Monetary Fund, the Asian Credit Supplementation Institution Confederation, the Association of African Development Finance Institutions, the European Association of Mutual Guarantee Societies, the Ibero-American Guarantee Network, and the Institute of International Finance.
The principles cover four key areas that are critical for the success of CGSs, namely: a) legal and regulatory framework; b) corporate governance and risk management; c) operational framework; and d) monitoring and evaluation. For each of these dimensions, the principles introduce a generally agreed set of good practices which, if implemented, are expected to improve the performance of CGSs.
Highlights – Credit guarantee schemes are a popular form of government intervention in SME credit markets
Access to finance for SMEs has moved up the global reform agenda and has become a topic of great interest for policy makers. For the World Bank Group, facilitating access to finance for SMEs is a high priority, given its potential to help achieve the twin goals of eradicating extreme poverty and promoting shared prosperity. It is widely recognized that access to finance for SMEs is associated with innovation, job creation, and economic growth. Yet, SMEs find it difficult to obtain finance, particularly credit. For example, in emerging markets, between 55 percent and 68 percent of formal SMEs are either unserved or underserved by financial institutions, with a total credit gap estimated in the range of US$0.9 trillion to US$1.1 trillion. To address this challenge many governments intervene in SME credit markets in various ways.
A common form of government intervention is CGSs. A CGS provides third-party credit risk mitigation to lenders by absorbing a portion of the lender’s losses on the loans made to SMEs in case of default, typically in return for a fee. The popularity of CGSs is partly due to the fact that they commonly combine a subsidy element with market-based arrangements for credit allocation, thereby leaving less room for distortions in credit markets.
CGSs can contribute to the expansion of SME finance. They may also generate positive externalities by encouraging banks and nonbank financial institutions to get into the SME market, thus improving the institutions’ lending technologies and risk management systems. However, CGSs may add limited value and may prove costly when they are not designed and implemented well. There have been efforts in recent years to identify good practices for CGSs, but the international community still lacks a common set of principles or standards that can help governments establish, operate, and evaluate CGSs for SMEs. The Principles are filling this gap.
The objective of the Principles is to provide a generally accepted set of good practices, which can serve as a global reference for the design, execution, and evaluation of public CGSs around the world. The Principles propose appropriate governance and risk management arrangements, as well as operational conduct rules for CGSs, which can lead to improved outreach and additionality along with financial sustainability. Developed through extensive consultations with stakeholders, the Principles draw from both the literature on good practices for CGSs and sound practices implemented by a number of successful CGSs.
The way forward
The Principles are intended to become the de facto standard for effectively and efficiently establishing and running public CGSs for SMEs around the world. To ensure a sound application of the Principles, the World Bank Group and the FIRST Initiative are planning to launch in January 2016 a global survey to assess CGSs’ adherence to the recommendations set in the Principles based on a self-assessment. The survey is expected to identify gaps in the existing framework and form the basis for remedial measures by country authorities.