Lu Wei

Research Report No 160, 2000

Difficulties in fund-raising by small and medium-sized enterprises (“SMEs”) are a universal problem in the world. The objective reasons for such a situation include the following: First, some of these enterprises do not have sufficient mortgages, so extending of loans to them would involve comparatively big risks. Second, the loans they borrow are usually small in size. This results in higher costs in per-unit deals compared with large firms and damps the enthusiasm of banks. Third, most of the businesses undertaken by these enterprises are of a competitive character, in which bankruptcy ratio and big risks in fund-raising are comparatively high, but returns are comparatively small. For these reasons, the governments of many countries have formulated corresponding policies to solve the problem of difficulties haunting SMEs in fund-raising.

To provide credit guarantee is a method for solving the difficulties of SMEs in fund-raising. There are many kinds of methods for providing credit guarantee to SMEs, including credit guarantee with government participation, mutual guarantee between SMEs themselves, and guarantee by commercial institutions. At present, the governments of many countries and regions have taken the establishment of a credit guarantee system for SMEs with government participation as an important policy to support SMEs, and have developed much mature experience for us to borrow.

I. Characteristics of the Credit Guarantee Systems for SMEs in the United States, Japan and Taiwan Province of China

The United States, Japan and Taiwan have all established comparatively complete credit guarantee systems for SMEs. Their systems fall, however, into three different types. We will analyze the differences and similarities of these three guarantee systems to reveal the characteristics of the credit guarantee systems.

1. The basic framework of the credit guarantee system for SMEs with government participation

(1). With governments as the major sources of funds and a diversification of composition. The funds for providing credit guarantee to SMEs are totally composed of government allocations, or supplied by governments, financial institutions, or social bodies. For instance, the funds earmarked for Small Business Credit Guarantee Program in the United States are provided directly by the federal government and come from budgetary appropriations from the Congress. In Japan, the capital funds of the coffers of credit insurance for SMEs is composed of financial appropriations by the central government. The funds of local credit guarantee associations come partially from the financial coffers of SMEs, local governments, and donations from public bodies and financial institutions. Of these, the donations from financial institutions constitute a comparatively big proportion. Another part of these are borrowed funds mainly from the credit insurance coffers or local treasuries at a low interest rate. The credit guarantee funds for SMEs in Taiwan Province are composed of donations from the government, banks, and financial institutions, with government donations accounting for 80 per cent of the total.

(2). It is not a necessity that all guarantee institutions funded by the government must be operated directly by government departments. For instance, the funds of the Small Business Credit Guarantee Program initiated by the federal government of the United States come exclusively from appropriations of the federal government but are executed and managed by the Small Business Administration, an agency of the federal government. In Japan and Taiwan Province, the funds come from their respective governments, but are actually operated by associations, funds and other specialized organizations, under the supervision of government administrations.

(3). The guarantee systems with government participation have various kinds of structures. For instance, in the United States and Taiwan Province, the system of one-tier guarantee institutions with local branches has been introduced, while in Japan, the system of multi-tier guarantee has been installed: guarantee from the credit insurance coffers at the central level and from credit guarantee associations at the local level. The credit insurance coffers of the central government provide reinsurance to local credit guarantee associations, with the reinsurance ratio standing at 70-80 per cent.

(4). The forms of replenishment of government guarantee funds can be regular or irregular. The United States and the Japanese governments both have a regular financial appropriations to replenish the credit guarantee funds for SMEs, with compensations for guarantee losses being covered jointly by guarantee funds and guarantee fees. For instance, the federal government of the United States makes budgetary appropriations to its Small Business Credit Guarantee Program every year. The credit guarantee funds of Taiwan Province, however, have an irregular source of fund replenishment, although they have been replenished since their creation. In order to prevent guarantee funds from decreasing, therefore, compensations for guarantee losses are made mainly with incomes of guarantee fees and interests.

2. Policy objectives of credit guarantees for SMEs with government participation

All the projects of credit guarantees for SMEs with government participation have clear-cut policy objectives. In the first place, government guarantee programs all contain clear-cut requirement on the sizes and characters of the objects of guarantee, and all the guaranteed enterprises must meet the criteria set by the government on SMEs.

Second, it is clarified that emphasis would be put on enterprises that can not obtain loans or funding through normal channels of fund-raising, referring mainly to those small enterprises that do not have sufficient mortgages but boast big development potentials.

Third, all guarantee programs have specified their emphases of guarantee in line with the local conditions. A common characteristic of different guarantee programs is their promotion of employment, support to SMEs in export and technical upgrading, replenishment of seasonal working capital, and prevention of public hazard. Since the SMEs of different countries and regions are at different stages of development and adopt different management systems, these guarantee programs may have some special focus of assistance. For instance, the guarantee program of the United States is designed to provide guarantee to some special communities, including enterprises run by women, the disabled, demobilized army men or minority people, or operating in poverty-stricken areas. The credit guarantee program of the Japanese government, is tailored to the industrial policies of the government and based mainly on the industrial policies of the government for different periods of time. The guarantee is provided mainly for projects falling into line with these industrial policies, such as the program on the automation of SMEs. In Taiwan Province, items of guarantee to undertakings of creation by young people and development of name brands by enterprises have been established under the credit guarantee funds in line with the government program for the development of SMEs, focusing on support to small business of a new undertaking character.

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