SME Finance Policy Guide

G-20 SME FINANCE POLICY GUIDE
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Box: Examples of Credit Guarantee Schemes
Example of an Upper-Middle-Income Country: FOGAPE (Chile)
FOGAPE is a partial credit guarantee scheme operated by Banco Estado, a large state-owned bank in Chile (see
previous section). It provides partial guarantees on SME loans extended by commercial banks and counter-guarantees
to mutual guarantee associations. FOGAPE targets SMEs who lack collateral or need longer maturities. FOGAPE
functions in many aspects as a traditional guarantee scheme by sharing the risk of default on eligible loans and
charging a guarantee premium. However, FOGAPE is also unique by having pioneered a new approach for allocating
guarantees among participating banks. Every year FOGAPE conducts four to six auctions where each bank submits
a bid indicating the amount of guarantee it wants to receive and the minimum coverage ratio it is willing to accept.
Coverage ratios fluctuated around 70 percent before the financial crisis, increased to about 80 percent during 2009
and 2010, but recently declined to pre-crisis levels. Banks pay a premium that depends on their historical default and
claims performance and that typically varies between 1 and 2 percent of the outstanding balance. Banks with high
default rates can be excluded from the scheme. FOGAPE has been financially sustainable, due to the auctioning of
coverage ratios, the risk-related fees, and a very reasonable average net loss ratio of 1.5 percent of guarantees. A
number of empirical studies have concluded that the scheme provides additionality and has a positive developmental
impact. During the financial crisis, the Chilean Government increased FOGAPE’s capital by a significant amount
to enable the scheme to play a substantive countercyclical role. In 2010 FOGAPE’s volume of guarantees to MSMEs
reached USD 1.8 billion for a total financing of around 2.7 USD billion.
Example of a Lower-Middle-Income Country: The European-Palestinian Credit Guarantee Fund (West Bank/Gaza)
The European-Palestinian Credit Guarantee Fund (EPCGF) was created in 2005 and funded by the German
Government, the European Commission, and the European Investment Bank. It was designed to jumpstart SME lending
in a very challenging environment that had resulted in very limited bank lending and practically no lending to
SMEs. It targets SMEs with less than 20 employees but avoids start-ups due to the perception of excessive risks in
this segment. The scheme provides a coverage ratio of 60 percent, a maximum loan amount of USD 100,000, and a
1 percent up-front fee complemented by a 1.5 percent annual commission on the outstanding guarantee. It provides
guarantees on loans with maturities from 1 to 5 years and does not impose interest rate caps. It has streamlined procedures
for approval of guarantees and payment of claims that enhanced its credibility among banks. The guarantees
are not disclosed to the borrowers in order to enhance discipline.
Example of a Low-Income Country: The SME Credit Guarantee Facility for Afghanistan (Afghanistan)
The SME Credit Guarantee Facility for Afghanistan was created in 2005 and funded by the United States Agency for
International Development (USAID) and the German Government. Like its Palestinian counterpart, it was created to
jumpstart SME lending in a challenging environment and shares some of characteristics. It provides a coverage ratio
of 72 percent, charges risk-related fees, does not impose interest rate caps, and does not disclose the guarantees to
the borrowers to enhance discipline. Also like the Palestinian scheme, it introduced from the start a substantive
capacity-building program, including assistance to the establishment of dedicated SME units in the banks. It succeeded
in boosting SME lending from negligible levels and has an NPL ratio of only 1.3 percent of the outstanding
stock of guarantees. The program has provided financing for USD 37 million, reaching more than 1,200 SMEs.