The FINANCIAL — The World Bank Group and the FIRST Initiative announced on December 14 the launch of a new tool to help governments implement public credit guarantee schemes (CGS). These schemes are a common form of government intervention to unlock finance for small and medium enterprises (SMEs). The World Bank Group estimates that up to 68 percent of formal SMEs in emerging markets are either unserved or underserved by financial institutions, with a resulting credit gap estimated to be close to $1 trillion.
A CGS provides third-party credit risk mitigation to lenders by absorbing a portion of the lender’s losses on loans made to SMEs in case of default, typically in return for a fee. These schemes are gaining popularity because they usually combine a subsidy element with market-based arrangements for credit allocation, thereby leaving less room for distortions in credit markets, according to the World Bank.
However, CGSs may add limited value and be costly when they are not designed and implemented well. Until now, the international community has not had a common set of principles or standards that can help governments establish, operate, and evaluate CGSs for SMEs.
The principles launched today by the World Bank Group and FIRST Initiative provide a generally accepted set of good practices that 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 increase their effectiveness and 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.
“We all recognize that SMEs spur innovation, job creation, and economic growth. Yet, SMEs find it difficult to obtain finance, particularly since the global financial crisis,” Gloria Grandolini, Senior Director of Finance and Markets Global Practice at the World Bank Group. “CGSs are one way governments are supporting SME credit markets to address a huge financing gap. We hope these principles will help governments effectively and efficiently establish and run public CGSs for SMEs.”