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

Naoyuki Yoshino, Farhad Taghi Zadeh Hesary

    Research output: Contribution to journalArticle

    7 Citations (Scopus)

    Abstract

    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.

    Original languageEnglish
    JournalEconomic Analysis and Policy
    DOIs
    Publication statusAccepted/In press - 2018 Jan 1

    Fingerprint

    Financing
    Small and medium-sized enterprises
    Credit guarantee
    Asia
    Loans
    Information asymmetry
    Government
    Factors
    Government policy
    Macroeconomic conditions
    Finance
    Lending
    Non-performing loans
    Asymmetry of information
    Empirical analysis
    Critical factors
    Moral hazard
    Government guarantees
    National economy

    Keywords

    • Credit guarantee ratio
    • Credit guarantee scheme
    • Information asymmetry
    • Small and medium-sized enterprises

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Economics, Econometrics and Finance (miscellaneous)

    Cite this

    @article{4d6f120128754f829d23c89bf31fb0be,
    title = "Optimal credit guarantee ratio for small and medium-sized enterprises’ financing: Evidence from Asia",
    abstract = "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.",
    keywords = "Credit guarantee ratio, Credit guarantee scheme, Information asymmetry, Small and medium-sized enterprises",
    author = "Naoyuki Yoshino and {Taghi Zadeh Hesary}, Farhad",
    year = "2018",
    month = "1",
    day = "1",
    doi = "10.1016/j.eap.2018.09.011",
    language = "English",
    journal = "Economic Analysis and Policy",
    issn = "0313-5926",
    publisher = "Elsevier BV",

    }

    TY - JOUR

    T1 - Optimal credit guarantee ratio for small and medium-sized enterprises’ financing

    T2 - Evidence from Asia

    AU - Yoshino, Naoyuki

    AU - Taghi Zadeh Hesary, Farhad

    PY - 2018/1/1

    Y1 - 2018/1/1

    N2 - 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.

    AB - 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.

    KW - Credit guarantee ratio

    KW - Credit guarantee scheme

    KW - Information asymmetry

    KW - Small and medium-sized enterprises

    UR - http://www.scopus.com/inward/record.url?scp=85055038765&partnerID=8YFLogxK

    UR - http://www.scopus.com/inward/citedby.url?scp=85055038765&partnerID=8YFLogxK

    U2 - 10.1016/j.eap.2018.09.011

    DO - 10.1016/j.eap.2018.09.011

    M3 - Article

    AN - SCOPUS:85055038765

    JO - Economic Analysis and Policy

    JF - Economic Analysis and Policy

    SN - 0313-5926

    ER -