An Analysis of Credit Guarantee Schemes: Suggestions Provided by Literature

SMEs are the most widespread organizational form in the business world, accounting for an average of 90 to 99 per cent (OECD, 2006) of firms. Such is the contribution of SMEs to development of the economy, in term both of employment ensured and GDP produced, that they are frequently considered the backbone of the economy. However the lack of formal credit often hinders small firms from developing their potential. In fact, even in situation where loan and equity finance are plentiful and legal structures are well established, it is widely recognised that SMEs often have limited access to institutional financing. From the post-war period onwards - and with renewed interest in the second half of 1990s – governments have identified credit guarantee schemes as one of the most effective tools to helps SMEs integration in the credit markets and solve their financing problems (Arping et al. 2010). In fact, to correct market failures credit guarantee schemes (CGSs) appear more attractive for politicians wanting to promote private sector growth as compared to one-off grants or subsidies because of the important leverage offered, since the make it possible to bestow larger bank loan with the same budgetary resources. In fact, over 2250 CGS exist in almost 100 countries. This trends poses two important questions: are credit guarantees the solution to the financial problems of SME’? And, more specifically, are the CGSs a valuable support in this regard? After briefly outline the main reasons for SMEs’ limited access to bank credit, this chapter will highlight the main positions described in the most recent literature on the role of CGSs in alleviating financial constraints for SME, point out how to measure the potential benefits and costs of those schemes and looking for evidence to justify their existence.