CREDIT GUARANTEE SCHEME FOR MSMEs

#SME… 

A credit guarantee scheme is to bridge the gap between banks and SMEs by providing and/or reducing collateral for loan applications.

Credit Guarantee Scheme is to alleviate collateral headache for business owners: Banks are usually not willing to grant an uncollateralized loan to SMEs, and this has deterred them including some startup with a viable project from obtaining finance.

Information asymmetry. According to Jaffee and Hussell(1976), and Stigltz and Welbs(1981), and information asymmetry exist between the banks and the borrower for the supply(banks) it is more costly to obtain sufficient information on the risk and profitability of the project behind loan application. The public sector may introduce social/welfare objectives. Government support to the SME, using some form of palliative.

The government must take a deliberate effort to Fund SMEs since they constitute the backbone of any economy. An increase in Funding to SMEs businesses will increase the employment rate and improve government revenue through taxes. Banks are reluctant to finance SMEs for some reasons, which may include: Credit Bureau of promoters, Asymmetry factor, and inadequate record-keeping, accounting and corporate governance, high-interest rate. Therefore, it imperative that the system introduces the Credit Guarantee Scheme, which will make collateral-free for SMEs that will go a long way to support entrepreneurs post COVID-19.

As commercial banks are striving to keep down the NPLs and to ensure quality assets in the new business order, CGS will be a catalyst to MSMEs' financing gap in developing economies, it will play a key role in de-risking/or absorb the risk lending to entrepreneur. 

Forms of Credit Guarantee Scheme.

Public: this is a situation where the public sector provides the funding; it usually arises from government deliberate policy to support small business access to finance. This form of CGS is more prevalent in developing economies.

Private: it is a form of mutual guarantee scheme where the private sector/captain of industries jointly provide a guarantee to the individual member on loan taken from a bank.

The CGS Creation jobs

In November 2019, French Development and African Guarantee Fund for Small and Medium-Sized Enterprises (AGF) signed a sub-participation agreement of USD30millon. The agreement seeks to improve access to funding throughout the continent of Africa. The benefit is to a).assist PFIs scale up their SMEs lending activities. b) To improve solvency.(https://africanguaranteefund.com). It will in turn create job opportunities. 

According to Mr. Christopher Oisebe, Director Financial, and Sectoral Affairs-Kenya Credit Guarantee Company Ltd; CGS is to ensure that SMEs access quality credit schemes and further enhance their ability to create employment”. Small scale business is a vital aspect of the country’s economy given that SME weigh in with around 20% of the GDP, while also creating most of the employment opportunities. (https://kepsa.or.ke)

Well designed, well managed, and implemented CGS has boosted the SMEs sector in many countries by enhancing access to formal credit sector (Green 2003). A loan guarantee program can be an effective means of supporting start-up, growth, and survival of the small enterprise, and serve as an efficient means of job creation (Riding and Hanes, 2011).

Development Bank of Nigeria was established to alleviate the constraints faced by MSMEs and small corporate n Nigeria, through the provision of financing and partial credit guarantee. In Nigeria, there are over 37mllion MSME contributing to over 50% of Nigeria GDP. However, less than 5% of these businesses have access to credit in the financial system. (https://devbank.ng.com) .

Infra Credit Nigeria provides local currency guarantees to enhance the credit quality of debt instruments issued to finance creditworthy infrastructure assets. The company has recorded some remarkable success in sustainable infrastructure finance and the creation of both direct and indirect jobs, increase government revenue. Example: North-South Power Company has been able to access the domestic debt capital market and raise 15-years financing in local currency using green bond by issuing an N8.5b 15.60% senior green infrastructure bond due 2034.(https://afdb.org)  

Credit Guarantee Scheme during Financial Crises

The post-cold-19 era is likely to widen the financing gap for SMEs. The reasons for the decline in credit availability to the entrepreneur are as follow: a) decrease in the value of most collateral. A large number of assets for collateral will lose value during financial crises, since most general public experience a reduction in income.

b) Declining in the bank's capital and liquidity position. The liquidity of financial institutions affects the level of credit supply to the economy.

c) Uncertainty level during crises (pandemic). The fear of uncertainty in the future affects the bank's selection of lender criteria and it limits the credit availability to SMEs.

d) There is also a general decline in demand for credit during crises. Both demand and supply of credit facility to SME are adversely affected during economy downturn 

Improve CGS Program

1. Regulatory framework
2. Financial capacity of the banks
3. The position of borrowing firms
4. The demand and supply market
5. The objectives of CGS set up
6. Personnel( skilled in Market, credit risk, and SME finance)

References

ECA.2011. The audit of the SME Guarantee Facility, ECA Special Report #4, European Court of Audit

Pwc.com

https://www.cbn.gov.ng

https://www.devbank.ng.com