According to the World Bank, public credit guarantee schemes (PCGSs) have been one of the main policy tools used to alleviate the liquidity shock faced by firms during the COVID-19 outbreak and the associated lockdowns. Governments in advanced economies as well as in emerging markets and developing economies (EMDEs) have mobilized unprecedented credit-risk mitigation support to get emergency bank lending flowing to firms. We have asked several finance and banking experts to evaluate the role of PCGSs in building the post-COVID world. Check their opinions below.
“In my opinion, the use of Public Credit Guarantee Schemes (PCGSs) has proven to be an increasingly important tool that is alleviating the challenges in accessing finance for both small businesses and farmers facing liquidity constraints due to COVID-19. These guarantees and other credit-risk mitigation tools are key factors that have kept the “taps flowing” from banks and other lenders to support a private sector that is struggling with the collapse in customer demand and consumption as a result of the pandemic. In the context of the increasing deployment of PCGSs as a pandemic response tool, this is a fact that is well evidenced by research from the World Bank, SME Finance Forum, AECM, USAID and many others. The research shows that the use of PCGS tools has been significantly scaled up over the course of 2020 and early 2021 in both developed and developing countries. This makes good sense because, as a simple function of leverage, the provision of guarantees is increasing the available amount of loan capital from banks, which complements well the declining interest income and lower savings balances faced by many lending institutions due to the challenges faced by their customers. In my view, the role of PCGSs in the post-COVID environment will continue to strengthen, as both banks and governments realize the excellent value-for-money methodologies of PCGS leverage and risk-sharing. These will increasingly serve on a global basis to raise capital deployment much more affordably and over a longer-term than by using grants or softer measures.”
“An economy supported by a public credit guarantee scheme for the small and medium enterprise scheme opens the door to accessing finance for SMEs which will, in turn, foster the development of such a country, and this would bring increased productivity, the effective distribution of scarce resources, employment generation and increase revenue at large. One of the major challenges of SMEs in the developing country has always been inadequate working capital to source raw materials for production which could be frustrating for such business owners. To solve this challenge, the government, Foreign, Commonwealth & Development Office (FCDO), (former DFID), and/or private investors need to come up with funds/grants/credit lines to guarantee raw material procurement for this sector of the economy to enable and to unlock the opportunities and potentials within the SMEs space for economic growth and development. Granting full or partial credit guarantee would de-risk the fear of the supplier of raw materials and that of commercial banks participating in lending to the SMEs sector and this will cause a great revolution in the manufacturing industry that will bring about growth and development within the economy. My experience in managing trade credit guarantees within the fertilizer value chain in Nigeria under the Africa Fertilizer Financing Mechanism shows that lots of SMEs are struggling with financing in terms of getting raw materials for the production and distribution of NPKs in the country. The public credit guarantee scheme will offer great relief to the SMEs as this is the only way of getting financial support for production in this post-COVID-19 era.”
“Currently, mortgage offers are focused towards the high and middle-income bands which demonstrates the business focus of mortgage bankers. A mortgage, being a long-term product, carries a substantial risk which presently cannot be associated with the low-income strata as this is economically fragile and prone to interest rate risk. To bridge this fear and need gap, comfort can be drawn in the shape of Credit Guarantees, a role where sovereign bodies wholly or partially alleviate the credit risk entailed by providing risk coverage to mortgagees which helps to assume the exposure of low-income mortgagees, particularly those in the informal sector. A Credit Guarantee comes with a nominal upfront cost that in turn provides coverage on a portfolio basis. Especially in these testing times of the pandemic, where job markets and business cycles have seen a momentous shift, income profiles have now been shaken to their core, and purchasing capacity has contracted. Lenders are repositioning their interests but carefully screening the borrower of their financing options. This is the time when Credit Guarantees come into play best and provide comfort to the lenders and equally reopen the avenues for the public’s access to finance.”
“PCGSs have a checkered past with regard to promoting businesses and stimulating job growth. Some PCGSs have achieved wild success, others have simply muddled along or ended in utter failure. Their performance can be largely attributed to design and implementation issues. When designed correctly, and in accordance with the World Bank and FIRST Initiative’s 2015 Principles for Public Credit Guarantee Schemes for SMEs, for example, they can help to quickly mobilize substantial funding to numerous businesses, contributing to business development and job growth that would not have happened otherwise and sustain those gains over the long term. Some of the most critical program components include: 1) minimizing political interference and market distortion by establishing the PCGS as a separate legal entity with a clear mandate, sound governance, and rigorous reporting requirements with externally audited financial statements and 2) building the credit origination and risk management capacity of intermediary lenders by mixing technical assistance with access to partial guarantees that balance outreach, additionally, and sustainability.”
“PCGSs can help to reduce government spending in building the post-COVID world because they can offer a more economical and certainly more effective solution than the cash grants that many governments are presently providing to help businesses survive. PCGSs alone are not going to be able to do it though. Recovering from a global catastrophe such as COVID will require out-of-the-box thinking, such as temporary changes to long-established prudential policies, guidelines, and norms practised by the financial sector. This will enable the development of innovative PCGS products that can help businesses access the liquidity that they need to endure the economic impact of the pandemic. It needs to be kept in mind that PCGSs can, themselves, only be sustainable under conditions where a business can be expected to operate uninterrupted. To ensure this, a more collaborative effort among the PCGSs, the government, the central banks, financial institutions, and businesses is going to be needed.”
“Based on the experience after the financial crisis in 2008, many countries were prepared to use PCGSs again as part of the government anti-crisis package to support liquidity and to protect businesses and jobs affected by the COVID-19 outbreak but this time on a larger scale and in a timely manner. For the first half of 2020, the guarantee institutions in Europe increased their outstanding guarantee volume by 135% compared to the modest 27% increase after the financial crisis in 2008. As an instrument designed to support access to finance, policymakers often resort to PCGSs in times of crisis when guarantees are most needed. But PCGSs could also be an instrument of choice to support recovery and to stimulate sustainable investments in the post-COVID world. Working with the existing financial intermediaries, PCGSs could achieve significant leverage on public funds, private sector involvement, and better quality of the supported investments.”
“The effectiveness of PCGS schemes is highly dependent upon how they are implemented. In some countries, central governments’ guaranteed loans are to be provided by banks but certain criteria must still be met, such as being an existing business customer with no other alternatives (how do you prove this?) Further, many businesses were reluctant to take on new debt due to COVID-19’s economic uncertainties, instead preferring grants and equity investments. As a result, a significant portion of the promised funds has not been disbursed. According to South Africa’s treasury, R200bn was available but only R18bn had been disbursed by April 2021. Of the 511 applications, only 97 were taken up by clients. Instead, banks used their own balance sheets to shelter clients with over R30bn in payment relief. There is a need not only to make access to PCGS funds easier but also to provide alternative funding mechanisms and motivate private-sector forbearance without excessive support of zombie enterprises. ”
“USAID is implementing a five-year program christened Feed the Future Kenya Investment Mechanism (KIM), a Credit Guarantee Scheme that is addressing three major market failures that have discouraged investors from financing micro, small and medium enterprises (MSMEs) in the Kenyan economy: insufficient quality consulting services, limited availability of financial products tailored to these sectors and inadequate collateral to secure the much-needed financing. USAID has engaged professional consultants to create financing proposals and link the enterprises to financial institutions and manage the end-to-end debt/equity investment process and has signed MoUs with financial institutions. This program guarantees the sustainability of enterprises post-COVID by underwriting the collateral risk by up to 50% hence enhancing financial access in the agricultural sector.”
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