The role of loan guarantees in times of economic slowdown

Loan guarantees have become an increasingly important tool for governments around the world to make it easier for SMEs to obtain financing from banks and other lenders.

The World Bank estimated in 2015 that between 55% and 68% of formal sector SMEs in emerging and developing markets are either not served or underserved by financial institutions. This means there is a credit gap of US$0.9tn-1.1tn, according to the multilateral.

Several Latin American countries have large guarantee programs in place and Chile has been among the leaders in the region through its loan guarantee fund Fogape.

To speak about the 2016 outlook for Fogape and an international event on guarantees that Chile will host this year, BNamericas spoke to Fogape's deputy manager Alessandro Bozzo.

BNamericas: How strong has demand been for Fogape's guarantees so far this year?

Bozzo: It's been a pretty slow year so far. In 2015 we issued guarantees worth 20.4mn of the country's inflation-linked unit, the UF [approximately US$730mn at the end of 2015], and during January-July this year we issued 11.7mn UF. So we're meeting with bankers and trying to convince them to increase their SME financing with our guarantees.

BNamericas: What are the reasons for demand not being very strong?

Bozzo: The first reason is the economy, which is growing at a slow pace. The economic slowdown has affected many SMEs and they must be financially viable to obtain bank financing that is backed by Fogape's guarantees. The second reason is that we now have in Chile a large offering of loan guarantees from different providers.

Besides Fogape, [development agency] Corfo has guarantees that are similar to our guarantees, and in the private sector there are many reciprocal guarantors [SGRs]. So the number of providers and the types of guarantees have seen a significant increase in recent years.

For operative and legal reasons it's also very important that bank executives really know how to offer the Fogape guarantees to their SME clients. There's a high degree of turnover in the Chilean banking sector, and this can lead to a decrease in the number of executives who can offer guarantees to SMEs.

We therefore set a goal to train some 500 bank executives this year on how to properly use our guarantees. I'm now pleased to say that we ended up training approximately 700 bank executives, all across Chile.

BNamericas: How many financial institutions usually participate in the quarterly loan guarantee tenders that you hold?

Bozzo: It's usually between 20 and 25 entities participating. This includes banks and other financial institutions such as factoring companies, cooperatives and SGRs.

BNamericas: Speaking of SGRs. How has this part of the guarantee sector evolved in recent years?

Bozzo: There's been very strong growth since the 2007 law that gave birth to SGRs in Chile. The first SGR was created in 2008 and it launched operations in 2009. And we now have some 15 SGRs.

BNamericas: What is your target for this year in terms of issued guarantees?

Bozzo: We're currently looking at this but the amount is likely to be similar to that of 2015. What we're hoping to see, when the year ends, is that a greater number of the guaranties have actually been used by the banks and other financial institutions, compared to 2015. 

BNamericas: Finally, what can we expect from the international guarantee forum that Chile will host this year?

Bozzo: We will host the Ibero-America guarantee and financing forum here in Santiago on October 20-21. The only time that Chile hosted this event in the past was in 2007.

The forum will be very interesting because the attendees will be able to listen to speakers and experts from other regions, including Africa, Asia, Europe and the Middle East.

The World Bank will also present the 16 principles that they've developed for public credit guarantee schemes. These principles were created last year to help countries design and operate new guarantee schemes, as well as to evaluate the performance of existing schemes.