Optimal Credit Guarantee Ratio for Asia

27 Pages Posted: 13 Sep 2016

See all articles by Naoyuki Yoshino

Naoyuki Yoshino

Asian Development Bank Institute

Farhad Taghizadeh Hesary

Waseda University

Date Written: August 3, 2016

Abstract

Difficulty in accessing finance is one of the critical factors constraining the development of small and medium-sized enterprises (SMEs) in Asia. Owing to their significance to national economies, it is important to find ways to provide SMEs with stable finance. One efficient way to promote SME financing is through credit guarantee schemes, where the government guarantees a portion (ratio) of a loan provided by a bank to an SME. This research provides a theoretical model and an empirical analysis of factors that determine optimal credit guarantee ratio. The ratio should be able to fulfill the government’s goal of minimizing the bank’s nonperforming loans to SMEs, and at the same time fulfill the government policies for supporting SMEs. Our results show that three categories of factors can determine the optimal credit guarantee ratio:

(i) government policy,

(ii) macroeconomic conditions, and

(iii) banking behavior.

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, in order to avoid moral hazard and ensure the stability of lending to SMEs.

Keywords: small and medium-sized enterprises, SME financing, credit guarantee scheme, government guarantee, credit guarantee ratio, nonperforming loan, NPLs, government policy, macroeconomics, bank, banking behavior, financial soundness, moral hazard, loans

JEL Classification: H81, G21

Suggested Citation

Yoshino, Naoyuki and Taghizadeh Hesary, Farhad, Optimal Credit Guarantee Ratio for Asia (August 3, 2016). ADBI Working Paper 586. Available at SSRN: https://ssrn.com/abstract=2838074 or http://dx.doi.org/10.2139/ssrn.2838074

Naoyuki Yoshino (Contact Author)

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

Farhad Taghizadeh Hesary

Waseda University ( email )

1-6-1 Nishi-Waseda,
Shinjuku, Tokyo 169-8050
Japan

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