The Evolving Role of Credit Guarantees – from Crisis to Recovery
Feb 18, 2021
A virtual roundtable summary.
Managing liquidity has been one of the major challenges that SMEs encountered since the beginning of the COVID-19 pandemic. The governments and credit guarantee institutions have implemented numerous relief measures, including subsidized interest rates, moratoriums on loan repayments, and deferments of tax payments, to address this concern. As the economic outlook remains uncertain, credit guarantee programs are projected to play an increasingly important role in supporting SMEs’ recovery.
As part of a webinar series on COVID-19 mitigation efforts, the SME Finance Forum hosted a virtual roundtable with Katrin Sturm (AECM), Homam Hashem (Kafalah), Mahmut Sahim (Kredi Garanti Fonu), and Min-ki Jeon (KODIT) to discuss the long-term implications and potential risks resulting from the COVID-19 pandemic for credit guarantee institutions. The speakers also shared their experiences in helping the financial sector distinguish between businesses that are temporary or permanently damaged by the crisis.
Kredi Garanti Fonu (KGF), a credit guarantee facility with the objectives of providing strategic support to the growth and development of Turkey and facilitating access to financing for all enterprises, has achieved impressive expansion in 2020. The institution owns almost 30 banks as shareholders with paid-in capital of USD 73 million and equity ceiling of USD 85 million. With KFG’s own equity, treasury commitment, in addition to other sources, KFG currently enjoys a total guarantee capacity of USD 88 billion. The capabilities acquired from digitalization have enabled KGF to adapt to the new normal over a short period of time and to support the SMEs more effectively. From March 2020 to January 2021, the number of guarantees issued by KGF has doubled from 542,038 to 1,094,606. The ratio of loans backed by KGF in the Turkish market has also increased to 11.1% during the past months. While incessantly conducting financing activities to support local enterprises, KGF not only intends to serve as a temporary instrument but also to contribute to a permanent structural reform that will strengthen the economy.
Korea Credit Guarantee Fund (KODIT) is a non-profit special legal entity established in 1976 and is one of the largest credit guarantee institutions in the world as of the end of 2020. KODIT maintains USD 56.9 billion for 424,090 guaranteed companies in Korea. During the pandemic, KODIT has worked closely with the government and has been an indispensable part of Korea’s responding policies due to its extensive experience in financing SMEs with guarantees for bank loan as well as middle-standing enterprises with P-CBO guarantees. In comparison with the first half of 2019, the total amount of credit guarantee supply has increased by 9.1% to USD 24,191 million in the first half of 2020. In the second half of 2020, the total supply rose by 28.3% compared to the same period in 2019. The credit guarantee scheme of KODIT has played a counter-cyclical role when Korea faced economic crisis. KODIT keeps monitoring the growth rate of the GDP and credit guarantee, which tend to move in opposite directions. Thus, KODIT frequently and proactively adjusts its activities based on the performance of the national economy. In this case, the credit guarantee institution serves as a crucial component of the sophisticated mechanism that supports the economy.
The European Association of Guarantee Institutions (AECM) has witnessed a 135% increase in the volume of outstanding guarantees in the first half of 2020, reaching an all-time high of nearly EUR 260 billion. The significant growth is originating largely from the extensive government programs in the region. Austria Wirtschaftsservice Gesellschaft (AWS), one of the 47 members of AECM, serves as a great example. Their financing project activities are 17 times higher in 2020 in comparison to 2019, and the number of those concerning guarantees is 18 times higher. Over the past year, the awareness and recognition of guarantee instrument has been continuously increasing and most governments have utilized these relief measures. However, the recovery phase may bring several challenges to SMEs. As the public and private benefits for SMEs gradually come to an end, they encounter the risks of over-indebtedness and insolvency wave. Hence, there is a need for risk sharing for debt and equity. Similarly, recovering from the health crisis presents pressing issues to the banking sector as well. The financial institutions are seeing worsened loan portfolios and more insolvencies, in addition to the cost of necessary investments in digitalization. For the banks to recapitalize and sustain future activities, there is also a need for risk sharing. In the post-COVID times, the role of guarantees will remain very important to ensure that SMEs are becoming more resilient. And the expertise from guarantee institutions is critical in supporting the banks to identify valuable investments in growth, sustainability, and innovation.
Homam Hashem shares the experience of Kafalah in promoting financing to SMEs in Saudi Arabia during the pandemic. In the past few years, the Saudi government has recognized SMEs as the foundation of the economy and the importance of providing more financing opportunities for SMEs to enhance their capabilities of creating innovative and high-quality products and services as a core part of the Saudi vision 2030. The Kafalah program was established with the aim of encouraging banks to provide support to the SME segment through offering effective and efficient loan guarantees. In 2020, the total value of loan facilitated by Kafalah has reached USD 4.06 billion with compare to USD 1.9 billion in 2019 and provided USD 3.3 billion worth of government guarantees. Kafalah’s market share of the SME lending also increased from 4.2% to almost 11% over the past year. The program partnered with Saudi Central Bank to develop a stimulus funding initiative, Guarantee Loan, that has positively forced SME lending interest rate dropped from an average of 10.63% to 4.0%. Kafalah’s second major relief program, Deferring Instalments Payments, has retained cash worth of USD 33.3 billion for 89,311 credit contracts throughout three stages. Despite the remarkable achievements in supporting SMEs during the pandemic, Homam points to the liquidity risk as one of the main challenges for the SMEs in the upcoming times. The ability of small businesses to pay back their dues to the lenders will put high stress on the loan guarantee program. Thus, Kafalah, along with other credit guarantee institutions, must work in advance to process and start considering rescheduling loans to avoid potential losses.
While we are entering the recovery phase of the COVID-19 pandemic, it is a priority for SMEs, credit guarantee institutions, governments, as well as banks to cooperate on the same task: mitigating the potential challenges and repercussions brought by the relief programs.