Credit Guarantee Institutions and SME Finance by Paola Leone, Gianfranco A. Vento

By Paola Leone, Gianfranco A. Vento

This book analyses and confronts the functioning of warrantly platforms for SMEs in nations the place those schemes had a tremendous development. The publication additionally highlights how the present monetary concern is editing the promises schemes, via coverage maker interventions.

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Example text

A high default rate may imply inefficiencies in the scheme that incentivize its use for poor credit propositions (Graham, 2004, p. 18). In addition, high rates (above 5 per cent default) on a large time span will lead to the depletion of the fund if it is not consistently supported through subsidies or sufficient income from investments (Jonsson, 2009). 25 Systems adopting the correct action to avoid moral hazard in risk sharing may reduce the default rate. In order to do so, the following conditions must be met: • the borrower contributes in kind towards the proposed project for which financing is requested; • the credit guarantee percentage for the unsecured part of the loan is set well below 100 per cent to ensure that the risk is correctly shared between the CGS and the participating bank.

39 per cent of banks in developing countries and 9 per cent in the most developed ones have put forward this issue to justify why they are reluctant to finance SMEs. 12. This occurs if the parties involved have diverging interests and the action taken by the agent cannot be monitored accurately. 13. Cowling and Mitchell (2003) demonstrate that the higher the total cost of a loan, the higher the default rate, confirming the hypothesis of moral hazard effects. 14. Pozzolo (2004) has shown that small firms are requested to pledge more than larger ones.

When risk is shared between the lender and the guarantee agency, certain functions such as the screening of borrowers and documentation may be duplicated unless responsibilities are clearly divided between the parties (Green, 2003, p. 19 Furthermore, the processing time for the loan may increase since the lender must wait for approval from the guaranteeing agency. The failure of many credit guarantee schemes in the 1980s and 90s, mainly in developing countries, also led to controversy about their sustainability and efficiency.

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