Role of Partial Credit Guarantee Scheme in Enabling Growth of SME

Abstract

Despite their importance Small and medium sized enterprises (SMEs) in Azerbaijan and in other developed and developing countries suffer from limited access to financing due to high costs of small-scale lending, information asymmetry, high risks attributed to SMEs and collateral requirements. Thus, the lack of SME access to finance is to the large extent the consequence of weaknesses in enabling environment for finance. Shortfall in enabling environment becomes major constraint for economic growth and diversification and/or causes regionally-unbalanced growth. These deficiencies motivate government to make policy interventions toward SME financing expansion. Largely interventions come in form of credit guarantee schemes (CGS), direct lending facilities and lending by state-owned financial institutions. In turn, partial credit guarantee schemes are considered as most market friendly intervention type. There are also notable examples when countries like South Korea employed PCG as countercyclical policy tool to face difficulties came from economic downturn. The diverse and resilient SME sector is the center piece of the Azerbaijan government’s strategic agenda to diversify the economy away from oil. Credit Guarantee Schemes were introduced in Azerbaijan as a measure of Government to make financing accessible for SMEs and to reduce effect of negative impact of two recent major events: the drop in worldwide oil prices and COVID-19 pandemic. The objective of this paper is to review characteristics of Credit Guarantee Schemes and assess preliminary outcomes of Partial Credit Guarantee mechanism implementation in Azerbaijan.