In 2009, the Bank of Thailand asked for the cooperation of 16 commercial banks to give additional loan of 100 billion Baht to Thai SMEs. In return, it offered a portfolio guarantee with an assured cap of 15.5% claim worth 30 billion Baht. Then, the Cabinet approved a subsidy to the Small Business Credit Guarantee (SBCG) of Thailand for a potential charge of 2 billion Baht against losses.

In the same year, Indonesia implemented the KUR Guarantee Program or “Kredit Usama Rakyat” for MSMEs. The KUR program was supported with government putting in additional shares of IDR 1.45 trillion to its guarantee corporation.

Similarly, Taiwan’s SMEG, their guarantee corporation, helped clients obtain NT$631.2 billion of loans, of which NT$ 475.2 billion was guaranteed. The SMEG continued to receive yearly “donations” from central and local government to pursue its mission.

Incidentally, in 2008, the Philippines passed the new Magna Carta for MSMEs which increased the authorized capitalization of the local guarantee corporation from P5 billion to P10 billion. The capital stock was raised on paper, and on paper alone, with no actual capital infusion and equity remaining at the 2001 level of less than P2.0 billion.

We could go on citing the measures taken in various economies to improve the funding for MSME credit assistance programs all over Asia. But one thing evidently stands out. While other governments put their money where their mouth is, so to speak, ours have been very risk averse, although some would some say “prudent” given our fiscal position. How can we be competitive against our neighbors if we are not prepared to make the necessary investment?. Our MSME finance support requires a strategic approach and firm commitment, not a half-hearted approach.

Even if most market-oriented economists believe that credit access will only improve with reforms that will reduce regulatory and institutional barriers, this process takes time. Thus, many transitional economies create specialized institutions that not only directly serve the MSME market, but also stimulate the participation by the commercial banking sector in MSME lending. Although there may be argument on whether or not it is needed, the increased competition benefit SMEs through improved access to loans and lower interest rates.

Credit guarantee schemes are a very useful approach because in contrast to a credit line or a rediscount system, credit guarantee schemes allow for leverage or a multiplier effect. The funding is ex post as a result of borrower default rather than ex ante from the rediscounting lines. As an ADB paper wrote, it is important that the objective of a credit guarantee scheme is an increased volume of guarantees and not maximizing investment income to show a profit. Leverage is the ratio of the amount of guarantees outstanding to the capital value of the fund.

Credit guarantee programs create additionality in the short or medium term, enabling banks to lend more which could otherwise be impossible without guarantees. And in the long-term, credit guarantees provide learning opportunity to make banks understand MSMEs better and give their confidence on the viability of an SME lending, even with the absence of guarantees.
The problem with the Philippine guarantee system is its weak structure in terms of policies on credit guarantee operations and the limited funding support by the national government for this type of MSME program.

Credit guarantees work because its users find it reliable, credible, and dependable, especially since it represents their second way out. Thus the guarantee fund must have enough muscle and be big enough to meet the default scenarios. In most economists the government gives its unconditional support through a sovereign cover. This not only assures the banks funds are there when needed, it also substantially reduces the risk weight of the loans.

In the Philippines, our major guarantee corporation for SMEs is not just undercapitalized, there is no sovereign cover. This situation forces a more conservative approach to the leverage objective.
Then, there is the issue of numbers and fragmentation. The Philippines has a PhilExim Agency which guarantees both small and large loans, although it is supposed to be export focused. There was Quedancor that is unfortunately in the rehabilitation stage. Small Business Corporation is the creation of the Magna Carta. There is the Industrial Guarantee and Loan Fund (IGLF) that is not even doing any guarantee work at the moment. In recent years, government created an agricultural guarantee fund which Land Bank of the Philippines has been asked to administer. And recently, the Bangko Sentral ng Pilipinas has been sponsoring small credit surety funds in cooperation with select local government units and some finance-oriented cooperatives.

The big question is – do we really need all of these? The successful guarantee programs have both size and scale, and the sooner policy makers realize this the better for our SMEs. A more rational and harmonized approach to the implementation of credit guarantees is what our country needs to make the credit access objective happen in a big way.

It is important to understand that guarantee programs are by nature “risk” programs, and their success depends on the extent to which the government is willing to give its support to keep it moving and to make it an attractive scheme to for the commercial banking sector. All over the world, guarantee programs depend on some form of subsidy. The most successful guarantee programs are at best break even operations. But if the program leads to additionality and economic benefits in terms of new jobs, taxes, profits, the support is well worth it. This is even much better than the cash transfer schemes at vogue at the moment. Political will is, thus, the key to this success.

Not only does the funding issue need the attention of our government, the regulatory environment must also be enlightened such that rules for regulating banks will be different from the rules in supervising guarantee corporations. A more conducive environment for guarantee operations must be created to entice banks to participate in this type of SME financing scheme.

In the end, our goal is to create a learning environment that will help make banks realize that indeed, SME lending is a profitable venture that no longer requires credit guarantees. But while our country has not yet established a legal and regulatory environment conducive to SME lending, credit guarantee programs will be beneficial to us, specially to the SME sector. We should work towards a well-developed financial system where a good credit information system also exists.

It all boils down to having a competitive mindset. Our neighbors are aggressively pursuing this tack. Can we afford to be left behind?
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( Mr. Benel P. Lagua is the President / COO of the Small Business Corporation. He is likewise an active member of FINEX. Feedback and comments are welcome at benellagua@alumni.ksg.harvard.edu).