Optimal credit guarantee ratio for small and medium-sized enterprises’ financing: Evidence from Asia

By Naoyuki Yoshino, Farhad Taghizadeh‐Hesary. Economic Analysis and Policy, 2019

111 citations recorded by the source corpus.

Difficulty in accessing finance is one of the critical factors constraining the development of small and medium-sized enterprises (SMEs). Given their importance for national economies, it is imperative to find ways to provide SMEs with stable finance. One efficient way to promote SME financing is through credit guarantee schemes, by which the government guarantees a portion (ratio) of a loan provided by a bank to a SME. Due to asymmetry of information between banks and SMEs, total loans to SMEs are smaller than the desired level of SME loan demand. Therefore, providing credit guarantees reduces information asymmetry between SME and banks, which increases the amount of loans to SMEs. The ultimate goal of the government is to provide a desired level of loans to SMEs by reducing information asymmetry. This research provides a theoretical model and an empirical analysis of factors that determine an optimal credit guarantee ratio. The ratio should be at such a level that it achieves the government’s goal of minimizing banks’ nonperforming loans to SMEs, and at the same realize the government policy objective of supporting SMEs by reducing information asymmetry. Our results show that three factors determine the optimal credit guarantee ratio: (i) government policy, (ii) macroeconomic conditions, and (iii) the behavior of banks. To avoid moral hazard and ensure the stability of lending to SMEs, it is crucial for governments to set the optimal credit guarantee ratio based on macroeconomic conditions and vary it for each bank or each group of banks based on their soundness.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/af137c0dcd998a47481ff677de69e06464ad4990

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

In Finance

Citations in the corpus

Sustainable Solutions for Green Financing and Investment in Renewable Energy Projects (2020, background): “Using the same guarantee fee for all borrowers would create a moral hazard [23].”
Small and Medium-Sized Enterprises (SMEs): The Engine of Economic Growth through Investments and Innovation (2020, background): “SMEs are viewed as the backbone of an economy [8] since they exert a significant role in lessening poverty, employment creation, foreign trade promotion and technique innovation [9], also contributing meaningfully to the growth of developing economies [10].”