The potential for small and medium-sized enterprises (SMEs) to power growth in transitional and developing countries is widely recognised. Why then, are bank and SME relationships problematic? How can governments help SMEs to access credit? How much can they afford to risk guaranteeing loan schemes?

A study from Loughborough University Business School reviews the experience of Malaysia’s Credit Guarantee Corporation (CGC). Established in 1972, the CGC has a brief to support SMEs, described by Malaysian Prime Minister Mahathir Mohamad as ‘the driving force of the Malaysian economy’. Because nascent SMEs usually lack ready access to affordable institutional finance, the CGC provides guarantees in support of bank loans. Owned by the national bank and a consortium of commercial banks, the CGC is a classic example of a credit-guarantee scheme where the guarantor has no direct contact with the borrowers.

The report shows how, in Malaysia as elsewhere, banks turn down potentially viable propositions from SMEs, especially younger and/or high-tech firms, because banks do not have sufficient information about such firms and SMEs don’t communicate their ideas well. Because of the small sums involved, it is not economic for banks to monitor SME loans closely. Risks are increased as SME managers may allocate funds for purposes not specified in the funding application.

The study interviewed a large sample of borrowers and financiers and looked in detail at fifteen firms in order to assess the CGC’s principal lending facility, the New Principal Guarantee Scheme (NPGS). The results were broadly supportive of the scheme. NPGS loans have helped borrowers lacking collateral. Other findings included:

• The level of finance additionality generated by the scheme (37 percent) is comparable to other well-managed guarantee schemes (but less than the UK’s).
• Economic additionality (added employment, turnover and profits) can be demonstrated.
• Despite the pro-Malay philosophy underlining Malaysia’s National Development Plan, many sizeable CGC-backed loans are granted to Chinese entrepreneurs.
• The quotas imposed by the central bank for NPGS loans might not be helpful, especially when they are applied too rigidly.
• Firms using external advisers are more likely to utilise NPGS loans.
• The net cost of the scheme is hard to determine.

Recommendations are of relevance to similar schemes elsewhere. The CGC should:

• Stop operating at arm’s length from SME clients and introduce training, advisory and consulting services to help firms.
• Develop support schemes tailored to the needs of micro firms.
• Provide salaries and career development opportunities that are sufficient to attract and retain motivated managers skilled in SME support.
• Establish a specialist unit to appraise applications from technology-related sectors and give innovative firms more time to generate profits where the development stage of a product is protracted.
• Monitor additionality more rigorously.

Source(s):
‘The operation of a credit guarantee corporation: the experience of Malaysia’ paper presented at the 'Development and Business Finance: Policy and Experience in Developing Countries' conference, University of Manchester by Grahame Boocock and Mohd Noor Mohd Shariff, 5-6 April 2001 Full document.

Funded by: University Utara Malyasia

id21 Research Highlight: 25 June 2001

Further Information:
Grahame Boocock
Business School
Loughborough University
Ashby Road,
Loughborough,
Leicestershire LE11 3TU
UK

Tel: 01509 223117
Fax: 01509 223962
Contact the contributor: j.g.boocock@lboro.ac.uk

The Business School, Loughborough University, UK

Mohd Noor Mohd Shariff
School of Management
University Utara Malaysia

Tel: 604 700 5003
Fax: 604 700 5761
Contact the contributor: mdnoor@uum.edu.my

School of Management, University Utara Malaysia

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