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Underlying issue:

Access to finance: the place of credit guarantee schemes Bernd Balkenhol ILO www.ilo.org/socialfinance. Underlying issue:. Information asymmetry. Credit guarantee fund?. Public funded Separate entity or account Single service Risk sharing To the benefit of targeted clients

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Underlying issue:

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  1. Access to finance: the place of credit guarantee schemesBernd BalkenholILOwww.ilo.org/socialfinance

  2. Underlying issue: Information asymmetry

  3. 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

  4. Different approaches to information asymmetry: MF and CGF • External: third party of third party • Internal: collateral substitution

  5. Presence of guarantee funds: a function of SME density? • High income countries • Transition economies and post crisis • Low income economies

  6. Political economy of CGF • SMEs are backbone of economy • Organized lobby • CGF flag government commitment

  7. 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

  8. 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.

  9. 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.

  10. Rationale: why government? Information on default risk costly to generate and difficult to monopolize.

  11. Alternatives to address information asymmetries • Improve financial infrastructure • Modernize judicial system and property rights

  12. What makes a good credit guarantee fund: criteria • Cost effectiveness • Additionality • Sustainability • Systemic learning effects • Scale

  13. 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

  14. 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

  15. 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.

  16. 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

  17. 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%

  18. Design flaws • No incentives, no stakes for banks • Complicated procedures • Lack of credit awareness borrowers • Administrative interference • High delinquency • Pressure to disburse • Governance diffuse

  19. 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

  20. 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.

  21. ILO work on guarantee funds • Advise on design and management (Ministries of Labor managing social funds) • Staff training (Boulder) • Manual on CGF management • Audits

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