How can we improve access to credit for SMEs?

Small and medium-sized enterprises (SMEs) play a major role in most economies, particularly in developing countries. However, more than 50 percent of SMEs lack access to finance. Without it, many SMEs languish and stagnate. Credit markets for SMEs often don’t work.
A common form of intervention to improve access to finance for SMEs is a public credit guarantee scheme (CGS).

Credit guarantee schemes provide third-party credit risk mitigation to lenders by absorbing a portion of the losses on the loans made to SMEs in case of default, in return for a fee. CGS are popular partly because they combine a subsidy element with market-based arrangements for credit allocation. This allows less room for distortions in credit markets, unlike more direct forms of intervention, such as state-owned banks.

Credit guarantee schemes are present in more than half of developing countries. Their numbers are growing.

Governments have become interested in CGSs in the aftermath of the global financial crisis and amid the international community’s emphasis on SMEs as an engine for growth and job creation in developing countries. However, to be effective, CGSs need to be designed and implemented in a financially sustainable manner.

With this in mind, the World Bank Group and the FIRST Initiative convened a task force to design, implement and evaluate public credit guarantee schemes for SMEs.

The task force has prepared a draft report in which it has identified key principles on how to make public CGSs successful. They include legal and regulatory framework; corporate governance and risk management; operational framework; and monitoring and evaluation.

Now the draft report has been opened up for consultation. This is an opportunity for governments, CGSs, lenders and other interested stakeholders to share experiences, insights and thoughts on how to improve access to finance for SMEs.

The consultation period runs until August 31.

This post first appeared on The World Bank Private Sector Development Blog.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Pietro Calice is a Senior Financial Sector Specialist with the Finance & Markets Global Practice of the World Bank Group.

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