The World Bank Group has put job creation at the center of its strategy, and small and medium enterprises (SMEs) — which account for more than half of all employment in emerging markets and developing economies — sit at the heart of that effort. Yet a multi-trillion-dollar credit gap continues to hold back the very firms expected to absorb the 1.2 billion young people reaching working age in developing economies over the next decade.
Credit guarantee schemes are a policy tool many governments reach for. They exist in more than half of all developing countries and absorb significant public resources. Yet remarkably little systematic evidence exists on what actually makes them work and how many businesses they reach. A new global survey of 108 such institutions across 74 countries — the most comprehensive ever assembled — offers some answers, and some are uncomfortable.
The scale of these programs is larger than most people realize. Across the countries surveyed, outstanding loan guarantees averaged 2 percent of national economic output in 2024. East Asia and the Pacific stands out: guarantees there amount to more than 5 percent of GDP. Sub-Saharan Africa, where the need for small business finance is arguably greatest, records just 0.1 percent. Measured against SME lending specifically, guarantees cover around 11 percent of all SME loans on average, raising real questions about who bears the risk when loans go bad.
The connection between guarantees and jobs is real, but conditional. Evidence from high-income countries indicates that guaranteed firms grow faster and survive downturns better, with measurable job creation particularly among small and young companies. However, durable additional employment depends on whether guarantees reach businesses that banks would not lend to otherwise. This is the bar these programs must clear if they are to contribute meaningfully to the World Bank Group's jobs agenda — and the survey suggests many are not yet clearing it.
The single strongest predictor of a program's size is the depth of the country's financial system — how much lending banks do relative to the economy. Countries with deeper credit markets have larger guarantee programs, regardless of how those programs are set up. This challenges a common belief in policy circles: that tweaking eligibility rules or redesigning products will automatically bring more small businesses into formal lending.
Design does matter, but mainly for how much risk a scheme takes on, not how many businesses it serves. Guarantee schemes amplify their impact by issuing more in guarantees than they hold in capital reserves. Better-governed schemes tend to operate at higher leverage while also experiencing lower default rates: good governance enables more efficient use of capital. At the other extreme, some schemes issue less in guarantees than they hold in capital, reflecting underused programs or overly restrictive lending rules rather than prudent caution.
Whether a scheme manages its finances actively or simply waits for the next government top-up depends on where the funding comes from. Schemes relying on annual budget allocations face no external pressure to charge fees, invest reserves productively, or price loans according to actual risk. Schemes that bring in other sources of funds, like retained earnings or backing from multilateral development banks, must prioritize risk management — including risk transfer mechanisms such as counter-guarantees.
Perhaps the most uncomfortable finding is how little most schemes know about whether they are actually reaching businesses that would otherwise go without credit. The data shows that many schemes may simply be growing alongside a more robust banking system rather than opening doors for businesses that banks would otherwise turn away. A guarantee that backs a loan a bank would have made anyway generates no additional economic activity and no additional jobs — it just shifts the risk to the government at a cost.
Credit guarantee schemes sit at the intersection of two of the World Bank Group's three jobs pillars: building a more enabling business environment and mobilizing private capital for the firms that create the most jobs. Used well, they direct scarce public capital toward the SMEs that banks would otherwise overlook. Used poorly, they substitute fiscal risk for credit risk without expanding employment or productivity at all.
Four priorities stand out for governments and their development partners.
- First, program size should be grounded in the country's banking reality. A modest program in a thin credit market may do more good than a large one where banks already lend freely.
- Second, governance standards such as independent boards, internal controls, and regular external audits should be requirements for taking on more risk.
- Third, schemes need a sharper focus on a clearly defined gap, including explicit targets for job creation. Most schemes try to do too many things at once — supporting exporters, green investments, women entrepreneurs, and first-time borrowers through the same undifferentiated program results in reaching fewer businesses.
- Fourth, schemes should invest in data systems to determine whether public money is being converted into employment gains.
Taken together, these design features can expand the reach of guarantee schemes and ensure that they deliver additional, financially sustainable support to SMEs in emerging markets.
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