Association for Public Policy Analysis & Management

Efforts aimed to produce “credit democratization” in developing countries are varied. Development banking has delivered support to small and medium enterprises (SMEs) in the form of factoring, training and technical assistance programs, or loan provision at preferential interest rates. In recent years, other device that promotes sustainable economic development in the SME sector has turned into a very popular tool. Credit guarantees (CG) are aimed at small productive units that need financial support from private lenders. The existent asymmetry of information between capital owners and SMEs reduces the regular financial flows to this productive sector, which represents a substantial portion of operating business in metropolitan and rural areas. By backing SMEs with guarantees of loan repayments, public financial institutions create business relationships that potentially last across time, producing sustainable economic development. This study analyzes whether CG provision is part of a group of factors that promotes private credit supply. The study uses Vector Autoregressive Models (VAR) to test the dynamic behavior of monthly time series balances of credit guarantees and total commercial credit from the database of the National Banking and Securities Commission (CNBV) of Mexico. The study will provide some insights regarding the impact of CGs on credit supply and the SMEs access to the financial system. Study findings would have implications for the design and implementation of sustainable financial accessibility programs in order to maximize responses of the private financial sector on one of the main sources of economic activity in metropolitan areas.