Editor's Note: The following post was submitted jointly by Youssef Hassani, Economist, MENA, Zsofia Arvai, Senior Financial Economist, MENA, and Roberto Rocha, Senior Adviser, MENA.
Many countries in the Middle East and North Africa (MENA) region have established partial credit guarantee schemes (PCGs) to facilitate SME access to finance. These guarantee schemes can potentially play an important role, especially in a period where MENA governments are still making efforts to reduce risks for lenders by improving the effectiveness of credit registries and bureaus and strengthening creditor rights. However, the contribution of credit guarantee schemes to SME finance depends largely on their design.
Well designed schemes may be able to achieve significant outreach and additionality, i.e. benefit a significant number of SMEs that have substantial growth potential but are effectively credit constrained due to lack of credit information and collateral. In some countries PCGs have also played an important capacity-building role. By contrast, poorly designed guarantees schemes may have a limited development impact by providing guarantees to firms that are not credit constrained. PCGs may also accumulate losses by providing overly generous and underpriced guarantees, and ultimately become a burden to public finances.