Association for Public Policy Analysis & Management

One of the objectives of governments in developing countries is to support the business transition from subsistence production into a modern commodity production system. However, one of the most common problems is the lack of financial services to support such a transition. Constrained financial resources limit business development and marketization of small and medium enterprises (SMEs). Credit Guarantees Schemes (CGS) enable SMEs to access financial resources from private financing institutions.

The main purpose of this study is to analyze the effects of CGS on the small business financial environment.  CGS are at the edge of public programs in many developing countries to improve SME development through financial access. A transition to modern commodity production systems requires better and larger financial services to support large-scale trading and transactions. Since financial inclusion to small businesses is an important policy challenge, governments expect that the financial sector will be responsive by expanding and improving its services to new and existing costumers. Therefore, it is worth analyzing whether government indirect subsidies such as Credit Guarantees are effective policy devices for SME financial development. 

This study expects to find evidence of an increase in the use of financial services due to credit guarantee supply. Not only is expected an increase in commercial credit but also in savings accounts, mortgages and consumer loans.  In order to examine the levels of credit guarantee supply and the factors affecting the SME’s usage of financial services, the study will use a database from the Mexican Financial System at the municipality level developed by the National Banking and Securities Commission.

Time series for the amounts covered in guarantee schemes by second-tier institutions from July 2009 to July 2012 on a monthly basis will be cointegrated with time series of savings accounts, commercial loans, mortgages and consumer loans through a Vector Autoregression Model (VAR). The dynamic behavior of such series will provide some insights regarding the structural inference and causal impacts of this kind of indirect subsidies on the SME’s financial environment. Whether CGS are considered as shocks to SME’s capital, an impulse response is expected in the operation dynamics of private financing institutions. Controlling for different SME’s economic activities which CGS are aimed at, the findings would have implications for the design and implementation of financial accessibility programs in order to maximize responses from the financial sector.