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Guarantees and mutual guarantees
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EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.1. Purpose and scope of the expert group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.2. Participants in the expert group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2. POLICY CONTEXT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.1. Small and medium-sized enterprises in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.2. Access to credit for SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.3. The role of guarantee schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3. DEFINITION AND IMPORTANCE OF GUARANTEE SCHEMES . . . . . . . . . . . . . . . . . . . . . . . 15
3.1. Mutual guarantee societies and guarantee funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.2. Importance of the guarantee industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.3. The role of public authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.4. Distribution of guarantee schemes across the European Union . . . . . . . . . . . . . . . 18
4. MANAGEMENT PRACTICES OF GUARANTEE SOCIETIES . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.1. The management philosophy of guarantee schemes . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.2. The target market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.3. Guarantee products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.4. Procedure for treating guarantee applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.5. The decision-making process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.6. Risk sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.7. Complementary support mechanisms oered to SMEs . . . . . . . . . . . . . . . . . . . . . . . 25
5. PERFORMANCE INDICATORS OF GUARANTEE SCHEMES . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.1. Market relevance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.2. Additionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
CONTENTS
4 Guarantees and mutual guarantees
5.3. Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.4. Eectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.5. Eciency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.6. Default rate and sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6. BEST PRACTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.1. Support to the establishment and development of guarantee schemes . . . . . . . 35
6.2. Special products and services for SME clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.3. Approaches to the provision of funding for SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.4. Best practices in the guarantee business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
7. CONCLUSIONS AND IDEAS FOR CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.1. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.2. Ideas for consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ANNEX 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Slovene Enterprise Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
National Loan Guarantee Fund for SMEs, Romania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Invega, Lithuania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
The Portuguese Mutual Guarantee Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SIAGI, France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Hitelgarancia Rt., Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
BDPME/Sofaris, France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Socama, France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Sowaln, Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
KfW StartGeld programme, Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
AWS, Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Vkstkaution, Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SFLG, United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Brgschaftsbanken, Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
The Italian Condi networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Sociedades de Garanta Recproca, Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
BBMKB, the Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
The Guarantee and Development Bank of Czechia-Moravia, Czech Republic . . . . . . . . . 60
KredEx, Estonia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Finnvera plc, Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
ANNEX 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
EXECUTI VE SUMMARY
The European Commission launched the project Expert group on best practice in the eld of guaran-
tees because guarantees are a traditional way of improving access to nance for small and medium-
sized enterprises (SMEs). In the new nancial environment (e.g. Basel II) the relevance of guarantee
schemes and guarantee societies has been growing: they oer a mitigation of the risks associated with
banks SME portfolios. The objective of the expert group was to increase understanding of the potential
oered by guarantees as a mechanismfor improving access to nance for SMEs.
Access to bank loans can be particularly dicult for SMEs in cases where they have insucient collat-
eral or lack a sucient track record and/or credit history. When SMEs, especially starting businesses,
want to access external nancial sources, banks are confronted with asymmetric information. The in-
formation asymmetry basically amounts to the fact that the borrowing company will know more about
its ability and willingness to repay than the bank. As a consequence, a signicant number of viable and
protable investment projects may not be nanced or may not obtain funding at reasonable costs. In
those cases, SMEs, even when proposing good investments, need certication in the formof collateral
and/or third-party support to signal their creditworthiness.
A possible solution to the above identied problemis the use of guarantee schemes. Indeed, guaran-
tee schemes have a signicant role to play in facilitating SMEs access to nance across the European
Union. Guarantees provide an important leverage of the capital available for lending. Experience has
shown in the past that in a downward phase of the economic cycle they were able to increase their
contribution to banks lending activities.
The experience of the participants of the expert group and of the European Mutual Guarantee Associa-
tion (AECM), the presentations of the national schemes and the discussions within the group allowed
an analysis of guarantee societies on the aspects of management philosophy, the target market, guar-
antee products, the procedure for treating guarantee applications, the decision-making process, risk
sharing and complementary support mechanisms oered to SMEs.
Guarantee societies attribute the highest importance to their economic and social mission of SME sup-
port. At the same time, the experts unanimously agreed that guarantee schemes operating in their
jurisdictions aim to support only sustainable projects. While most European guarantee societies are
multi-sectoral, there are also examples of a focused approach. The target market of guarantee societies
in terms of size is the micro-enterprises and small businesses segment with limited nancial needs
(self-employed, family companies and partnerships). By nature, this target market includes companies
that have diculty in obtaining a loan and/or do not present evident features of creditworthiness. The
range of products oered by guarantee societies depends on various factors, which include the risk
assessment procedure used by the guarantee society, the legal environment of the country, the term
of the guarantee, the guarantees extent of coverage and the associated costs.
The expert group identied several indicators which allowa good assessment of the performance of a
guarantee scheme. These included a schemes relevance to ll a market gap, its additionality in terms
of providing additional nance, its leverage, eectiveness and eciency. The overall purpose is to
reach long-term sustainability and a default rate that is under control.
Examination of current practices across the Member States suggests that opportunities exist for in-
creasing the use of guarantees, building on the diversity of the schemes that currently exist to address
particular needs. These opportunities may be developed within the design of the successor to the
multiannual programme for SMEs (MAP), as delivered through the guarantee windows and managed
by the EIF on behalf of the European Commission. The research framework programme could also pro-
vide an opportunity to enhance the use of guarantees.
The regulatory framework for guarantees at European and Member State levels determines to a high
degree the correct functioning of a guarantee scheme. Examples of that framework are the proposed
new capital adequacy directive, the emergence of a new rating culture and a clear application of State
aid rules. In the new nancial environment, Basel II will qualify most guarantee societies as guarantors
if their guarantee product is in line with the regulatory requirement. This will allow banks to reduce
regulatory equity on their loan portfolio.
Furthermore, complementary advisory services improve the performance of guarantees and increase
the chances of success, especially for start-ups.
The ndings of the expert group resulted in the following ideas for consideration.
It is recommended that the guarantee instruments of the successor to the MAP be reinforced, to
allow a exible approach in the EU Member States and to take into account the specic needs of
target groups as well as recent developments of SME nancing. The successor to the MAP should,
in addition to a broadly dened guarantee windowfor SMEs, keep a windowfor micro-businesses
which allows the packaging of nance and mentoring. It could also provide new windows for in-
novation investments of SMEs, for the transfer of businesses and for the securitisation of SME loan
portfolios of banks to encourage the banking community to maintain lending ows to SMEs.
The EU Structural Funds could make their contribution to an increased future role of guarantees in
the European Union by providing equity to guarantee schemes to cover part of their risks.
Scientic research, technological development and innovation are at the heart of the knowledge-
based economy and are one of the main pillars of the Lisbon process. The guarantee instrument
could provide an appropriate support to help innovative SMEs nance their investments in re-
search and innovation. Such an instrument might be shaped, at European level, to debt providers
in order to support technological research and development projects implemented by SMEs.
The development of SMEs including innovative SMEs could be encouraged through techni-
cal guarantees, for example, to facilitate their access to public tendering.
Disseminating best practices and encouraging dialogue among guarantee institutions and with
the European Commission are key to ensuring a high professional standard of guarantee institu-
tions in the European Union. A regular dialogue could be particularly benecial for those Member
States who have not yet introduced guarantee schemes or have done so only recently, and it could
also provide a forum to discuss new developments in nancial markets aecting the guarantee
business.
Guarantees are part of the European nancial services landscape for SMEs. They are delivered through
intermediation networks working towards the economic and social goal of encouraging access to
nance for SMEs. While banks have been and indeed continue to be the principal source of external
capital for small and medium-sized enterprises, guarantee schemes have a complementary role to play
by making available guarantees to compensate for SMEs insucient collateral.
1.1. Purpose and scope of the expert group
The European Commission launched the project Expert group on best practice in the eld of guaran-
tees to increase understanding of the potential oered by guarantees as a mechanismfor improving
access to nance. This project forms part of the series of projects adopted under the multiannual pro-
gramme for enterprise and entrepreneurship, in particular small and medium-sized enterprises (2001
05) (
1
). Experts of the Member States, EEA countries and candidate countries and representative bodies
nominated by the Commission, such as the European Mutual Guarantee Association (AECM), partici-
pated in meetings from November 2003 to November 2004.
The project was intended to encourage reection on existing guarantee practices within the European
Union, establish a typology, identify examples of good practices in this area and make recommenda-
tions. The aim of this report is to present a summary of discussions and best practices discussed by the
expert group.
Presentations by representatives of guarantee schemes and other bodies focused mainly on:
descriptions of the activities and the proles of the guarantee organisations, including their status
and purpose;
descriptions of the schemes;
pricing and nancing matters.
1.2. Participants in the expert group
All Member States, EEA countries and candidate countries were invited to designate a qualied na-
tional expert on the subject. Additionally, experts from AECM, EIF (European Investment Fund), KfW
(Kreditanstalt fr Wiederaufbau), Fdration national des Socama, SIAGI (Socit interprofessionnelle
artisanale de garantie dinvestissements Groupe chambres de mtiers), Verband der Brgschafts-
banken and Credit Guarantee Fund of Turkey were nominated by the European Commission.
Thirty-one experts in the eld of guarantees fromAustria, Belgium, Bulgaria, the Czech Republic, Den-
mark, Estonia, Finland, France, Germany, Hungary, Lithuania, Luxembourg, Malta, the Netherlands,
Norway, Poland, Portugal, Romania, Slovenia, Spain, Sweden, Turkey and the United Kingdom attend-
ed four meetings (November 2003 to June 2004) (
2
).
1. I NTRODUCTI ON
(
1
) Multiannual programme for enterprise and entrepreneurship, and in particular for small and medium-sized enterprises
(SMEs) 200105.
(
2
) See Annex 2: List of participants in the expert group.
In addition, two meetings were held in September and November 2004 to prepare the nal report.
These meetings were attended by a drafting group of experts from Belgium, Germany, Estonia, France,
Lithuania, Austria, Finland and the United Kingdom, as well as AECM and Commission services.
2.1. Small and medium-sized enterprises in Europe
The European Union is committed to the long-term development of the use of guarantees and of guar-
antee societies and other organisations delivering them, since access to bank loans can be particularly
dicult for small and medium-sized enterprises (SMEs) in cases where they have insucient collateral
or lack a sucient track record or credit history. They are often also more sensitive towards changes in
the economic climate than larger companies. These obstacles can be overcome by guarantees given by
public or private guarantee or mutual guarantee institutions.
Guarantees typically provide cover to third-party lenders in cases where the borrower defaults on re-
payments and, when the lender makes a claim on the borrower, the borrower is unable to meet its
obligations from its assets.
The abbreviation SME used throughout this report refers to the Community denition of micro-enter-
prises and small and medium-sized enterprises (SMEs) given in the Commission recommendation of
1996 (
3
) with the changes that entered into force from 1 January 2005.
SME thresholds
Enterprise category Headcount
(unchanged)
Turnover or Balance sheet total
Medium-sized < 250 = EUR 50 million
(1996: EUR 40 million)
= EUR 43 million
Small < 50 = EUR 10 million
= EUR 10 million
Micro < 10 = EUR 2 million
(1996: not dened)
= EUR 2 million
(1996: not dened)
The Observatory report SMEs in Europe 2003 reveals that there are 19.3 million enterprises in the Euro-
pean Economic Area (EEA) and Switzerland, providing employment for 140 million people. Some 92 %
of these are micro-enterprises, 7 % are small, less than 1 % are medium-sized and only 0.2 % are large
enterprises. Just over two thirds of all jobs are in SMEs, so almost one third of all jobs are provided by
large enterprises. Within SMEs, the major share of employment is in micro-enterprises employing less
than 10 employees (56 %) (
4
).
SME Large Total
Number of enterprises (1 000) 19 270 40 19 310
Employment (1 000) 97 420 42 300 139 710
Employees per enterprise 5 1 052 7
The average European SME employs ve people. Enterprises in Member States, however, dier signi-
cantly in scale. For example, the average number of occupied persons per enterprise varies between
2. POLI CY CONTEXT
(
3
) Commission Recommendation 96/280/EC of 3 April 1996 (OJ L 107, 30.4.1996) replaced by Commission Recommendation
2003/361/EC of 6 May 2003 (OJ L 124, 20.5.2003).
(
4
) Source: Estimated by EIM Business & Policy Research; estimates based on Eurostats structural business statistics and
Eurostats SME database; also based on European Economy, Supplement A, May 2003, and Economic Outlook, No 71,
OECD, June 2003.
two in Greece and 12 in the Netherlands. About half of all enterprises in the EU have no employees at
all, providing employment and income solely to the self-employed.
On 1 May 2004 the European Union welcomed 10 new Member States. In terms of employment, the
EU-15 was almost ve times as large as the newMember States and candidate countries together. The
corresponding number of SMEs, however, was only three times larger.
New Member States (2001) (
5
)
Micro-
enterprises
Small
enterprises
Medium-
sized
enterprises
Total
Micro + SME
Large
enterprises
Number of enterprises
(1 000)
5 670 230 50 5 950 10
Occupied persons
(1 000)
10 210 4 970 5 350 20 530 10 150
2.2. Access to credit for SMEs
According to surveys in the EU-15 Member States, between 18 % and 35 % of SMEs were refused when
they applied for credit. According to anecdotal evidence, these numbers are higher in the new Mem-
ber States.
The reasons for credit applications being rejected are diverse and are outlined in a study by the Euro-
pean Mutual Guarantee Association (AECM) in 2003 (
6
):
factors relating to the structure of SMEs:
the risk associated with the high dependence on one single person (or a small team);
unforeseeable risk factors (illness, family conicts, etc.);
low level of capitalisation from manager-founders own funds (
7
);
lack of clarity of ownership of assets between assets privately owned and those owned by
the business;
higher than average recourse to debt nance, which may jeopardise solvency and constrain
availability of working capital;
insucient collateral to oer to lenders;
incomplete information or unclear nancial statements;
insucient management capacity to clearly communicate the aims and objectives of the busi-
ness;
business plans often based on opportunities or owner preferences rather than on the basis of
strategic planning;
(
5
) Source: Estimated by EIM Business & Policy Research; estimates based on Eurostats structural business statistics and Euro-
stats SME database; also based on European Economy, Supplement A, May 2003, and Economic Outlook, No 71, OECD, June
2003, and information from ENSR partners.
(
6
) Guarantee scheme members of the AECM, presentation and comparison by Andr Douette, September 2003.
(
7
) See the sixth report of the European Observatory, 2000.
factors relating to sources of venture capital:
reluctance of the manager-founder to share control with an external partner;
insucient management capacity to prepare information for and consider proposals frompo-
tential investors;
relatively high and xed due diligence costs, making relatively small investments uneconomic;
limited exit options for the investor, especially if there is a dierence of opinion between the
investor and the manager-founder regarding exit;
factors relating to the external sources of loan capital:
banks may be more comfortable or consider it more lucrative dealing with larger business cus-
tomers; frequently, however, by oering a range of services to SME customers, the bank may
consider that a worthwhile relationship with even the smallest enterprises could be estab-
lished;
contradiction between the interests of small enterprises and banks, as illustrated by the third
round table of bankers and SMEs (
8
), in particular, the contradiction between the need for per-
sonal contact on the part of the SME and the tendency towards the standardisation of the
banks;
limited chance of recovery of assets for lenders in the case of insolvency and little condence
in personal guarantees;
reluctance among bankers to invest medium to long term in SMEs;
regarding microcredits, in particular, these diculties are made worse by:
the high overheads of credit back-oce functions (data recording, drafting of the granting let-
ter, etc.) in relation to achievable prot margins;
lack of a sucient track record or credit history and/or experience;
weakness or even the absence of collateral oered by the SME.
2.3. The role of guarantee schemes
In light of the diculties of SMEs in accessing credit, access to nance requires support. The introduc-
tion of a guarantor can reduce the abovementioned diculties. Companies providing guarantees play
two roles: one vis--vis the SME and one vis--vis the nancial counterparty.
Firstly, in relation to the SME, guarantee institutions:
facilitate access to the external nancial resources without diminishing the nancial responsibili-
ties of the borrower; this access to nance can prove a catalyst for the launching and expansion of
a business;
issue guarantees on the basis of a sound and comprehensive analysis of quantitative and qualita-
tive risks (experience, training and competence);
(
8
) http://ec.europa.eu/comm/enterprise/entrepreneurship/nancing/index_en.htm
enrich the analysis of the risks with the knowledge obtained from their close proximity to the SMEs
such as information about local competition, foreseeable developments in technology or market-
ing; as a consequence, entrepreneurship is stimulated and in this way guarantee schemes contrib-
ute to job creation, a suitable nancial structure and attractive credit conditions;
provide support to the company by giving advice and supervision in terms of nancial manage-
ment.
Secondly, in their relationship with the nancial counterparty, guarantee institutions:
build an individualised nancial le on each company, applying simplied and standardised pro-
cedures;
externalise the risk of the counterparty from the nancial responsibility perimeter of the bank,
against a generally very moderate premium;
frequently supplement the nancial and quantitative analysis of the bankers with a more qualita-
tive approach;
endeavour, within the limits of the safety provisions, to alleviate the regulatory banking capital to
carry the risk of their SME credit portfolios.
3.1. Mutual guarantee societies and guarantee funds
3.1.1. A diversied landscape of institutions: tentative classication
The presentations of the guarantee experts revealed a diverse landscape of institutions (see Annex 1).
Just as banks are based on a large variety of structures, legal forms and organisational structures (pub-
lic banks, private commercial banks, savings banks, cooperative networks, micro-nance institutions,
etc.), guarantee schemes in the EU vary in practice due to the dierent economic and historical back-
grounds and legal contexts that exist across the Member States. Behind these cultural and philosophi-
cal dierences, there lies a common set of objectives.
Most schemes have the sole purpose of providing loan guarantees. Others, in the category of develop-
ment banks, use a plurality of tools vis--vis SMEs, including mainly loans and guarantees. They can
also target other market segments.
Examples: Finnvera (FI), CMZRB (CZ), SZRB (SK), BDPME/Sofaris (FR), KfW (DE), Sowaln (BE Wal-
lonia), Bank Gospodartswa Krajowego (PL).
The following denitions are proposed.
Mutual societies are collective initiatives of a number of independent businesses or their representa-
tive organisations. They commit to granting a collective guarantee to credits issued to their members,
who in turn take part directly or indirectly in the formation of the equity and the management of the
scheme. The philosophy is based on the mutualisation of responsibility, decision-making by peers and
operation within a market economy. Nevertheless, mutual guarantee societies can and do receive pub-
lic support.
Examples: Socama (FR), Siagi (FR), Condi (IT), the Sociedades de Garanta Reciproca (ES), the
Portuguese system associating SPGM and SCM, Brschaftsbanken (DE), Brgschafts-
gesellschaften (AT), Socamut Socits de cautionnement mutuel/Onderlinge Borg-
stellingsmaatschappijen (BE), Teskomb (TR), Kredi Garanti Fonu (TR), Mutualit daide
aux artisans (LU).
Guarantee funds are in general publicly driven: founded and owned by local, regional or national
public authorities. They form a last resort cover for SME risks from a public protection perspective.
Nevertheless, they address the nancing needs of private SMEs and are fully managed according to
market rules.
Examples: AWS (AT), Invega (LT), Rural Credit Guarantee Fund (LT), KredEx (EE), Hitelgarancia (HU),
AVHGA (HU), NLCF for SMEs (RO), SEF (SO), Malta Enterprise (MA), Vlaams Warborgfonds
(BE Flemish Region).
Guarantee programmes are activities exercised by, or in the name of, a ministry as a support service
dedicated to supporting SME policy. Sustained directly by the State budget and driven by State strat-
egies, they are sometimes managed by a private-sector partner.
Examples: BBMKB (NL), SFLG (UK), Ministry of Trade and of Industry (CY).
3. DEFI NI TI ON AND I MPORTANCE
OF GUARANTEE SCHEMES
3.1.2. Common features and tentative comprehensive denition of guarantee
societies
The following criteria give a coherent picture of guarantee systems presented in the report.
European SME guarantee activity is based on a broad national consensus between authorities, SME
lenders and borrowers. It is exercised by specialised entities or sometimes by Member State ser-
vices.
Guarantee systems are a part of the nancial industry, subject to legal regulation and nancial
supervision which creates the conditions of mutual condence with the lending partners.
Public support provides equity and protection to guarantee systems in order to achieve higher
leverage and eciency.
Guarantee systems provide improved access to credit by sharing the potential loss with the banker
without releasing the borrowers from their nancial obligations.
Guarantee systems work with a social philosophy without seeking prot for their members. The
objective is not to maximise return but rather to create long-term sustainability.
Guarantee systems work in full compliance with market rules and aim to support viable projects
and sustainable SMEs. The decision-making process diers from that of a commercial lender by
giving more weight to qualitative and personal values of the projects.
Specialist mutual guarantee societies are established as a combination of private and/or public
initiatives and tend to involve entrepreneurs in the shareholding, decision and management
mechanisms.
A special feature of the European structure is the existence of national counter-guarantees and of
a platform of supra-national counter-guarantees organised and funded by the EU Commission and
managed by the European Investment Fund.
3.2. Importance of the guarantee industry
Guarantee systems are important players in the economy. Collectively, the systems have decades of
experience in facilitating risk-taking decision processes and improving access to credit.
In gures, the resources of the member systems of the AECMat the end of 2002 were over EUR 20 bil-
lion, which provide protection for about EUR 32 billion of credits.
Data on European guarantee schemes, 31 December 2003
Guarantee scheme Country Own funds

(EUR 1 000)
Outstanding
guarantees
(EUR 1 000)
Guarantees
granted 2003
(EUR 1 000)
Number
of SME
beneciaries
AWS Austria 57 800 370 000 105 600 8 734
Brgschaftsges. Austria 13 600 48 900 19 300 858
SCM/MOB Belgium 16 964 42 833 13 868 4 900
Sowaln Belgium 50 697 80 961 40 746 1 657
CMZRB Czech
Republic
122 620 252 340 87 170 2 000
>>>
Guarantee scheme Country Own funds

(EUR 1 000)
Outstanding
guarantees
(EUR 1 000)
Guarantees
granted 2003
(EUR 1 000)
Number
of SME
beneciaries
Vkstfonden Denmark 305 248 128 686 17 723 961
KredEx Estonia 6 118 17 150 10 126 360
Finnvera Finland 368 739 758 500 407 100 4 751
Socama France 67 209 1 517 733 564 900 260 737
Siagi France 43 972 662 022 131 648 43 806
Sofaris France 327 556 5 810 224 1 991 000 300 000
Brgschaftsbanken Germany 290 000 5 040 719 906 095 42 822
Hitelgarancia Hungary 79 190 456 898 434 000 15 806
AVHGA Hungary 46 159 147 914 114 810 16 295
Fedartdi Italy 580 700 3 589 000 2 091 038 654 837
Federcondi (2002) Italy 421 225 2 569 743 1 475 590 45 738
Fincredit Italy 169 921 1 723 220 965 005 32 916
Federascondi Italy 235 515 2 621 459 1 175 391 157 054
Federdi (2002) Italy 67 599 719 041 553 108 70 000
Fondo Interbancario Italy 341 796 7 298 224 1 518 431 193 194
Invega Lithuania 6 012 9 278 7 316 255
Rural Guarantee Fund Lithuania 12 318 55 422 51 958 752
BBMKB Netherlands n.a. 1 269 000 357 000 18 817
SPGM/SCM Portugal 21 108 126 461 65 814 900
SZRB Slovakia 72 758 57 118 26 240 3 206
FGC Rural Romania 11 321 24 058 40 431 n.a.
RLGF SMEs Romania 5 766 5 273 3 549 n.a.
NCGF Romania 10 143 6 137 10 663 158
SGR/Cesgar Spain 337 861 2 829 271 1 255 719 69 010
Teskomb Turkey 57 200 492 000 392 715 390 000
Kredi Garanti Fonu Turkey 5 495 19 704 8 400 n.a.
Total 3 847 362 37 351 603 14 467 731 2 065 746
3.3. The role of public authorities
Intervention by authorities can be in dierent forms and can take place at dierent levels, including
regional, national and EU levels.
Provision of a legal and prudential framework: the actions of guarantee schemes need to be based
on condence in their capital base. Consequently, the government has to set up rules regarding
the capacity of their management, the extent of their commitments, liquidity and solvency. This
legislation can either be in line with banking law or can be of a more specic nature.
Support for the beneciary SME: subsidising the guarantee premiumcan reduce costs, which are a
barrier to access to nance.
Financial support to the guarantee scheme can take the form of:
equity formation,
increasing the risk funds (provision accounts),
providing automatic counter-guarantee of its losses,
providing subsidies for recently established schemes,
reducing some indirect taxation or income taxes.
Financial support is also oered at the European level by:
contributions from Phare or the Structural Funds,
the MAP guarantee window managed by EIF on behalf of the European Commission.
3.4. Distribution of guarantee schemes across the European Union
Guarantee schemes have a signicant presence in the European Union. The following countries, how-
ever, have not yet established guarantee mechanisms: Bulgaria, Ireland, Latvia and Sweden; though
projects have already begun in Latvia and Sweden.
In the third multiannual programme (MAP) for SMEs in the European Union (19972000), the Commis-
sion promoted the creation and development of mutual guarantee schemes. While the action may be
seen as EU policy supporting loan guarantee schemes, the main objective was to facilitate access to
nance for SMEs. In this context, the Commission has supported the establishment of the European
Mutual Guarantee Association, acting as umbrella organisation for the mutual guarantee societies
(MGSs) in a number of European countries.
In the fourth MAP, following the Lisbon European Council of 2000, special attention was paid to guar-
antee systems. As part of the objectives of improving the nancial environment for business, the SME
guarantee facility was established within the European Investment Fund, aiming to support enhanced
access to nance, including oering counter-guarantees to guarantee systems in Europe, such as the
mutual guarantee schemes (
9
).
(
9
) In 2003, IDEA Consult presented the evaluation of the MGS action. The evaluation provides an assessment of the relevance
and eectiveness of the activities supported by the MGS action, and suggestions on improvement. See further details in
Evaluation of the Commission action to promote the development of mutual guarantee schemes and their use by SMEs
in the EU, No ENTR/01/059 nal report, IDEA Consult, July 2003.
Comprehensive information was assembled by the expert group via questionnaires completed by the
participants, presentations of the national schemes in the expert group, debates generated by those
presentations and the experience of the AECM as a specialised business association. This material
allowed an analysis of the following aspects of guarantee societies:
management philosophy,
target market,
guarantee products,
procedure for treating guarantee applications,
the decision-making process,
risk sharing,
complementary support mechanisms oered to SMEs.
4.1. The management philosophy of guarantee schemes
The expert group concluded that guarantee societies attributed the highest importance to their eco-
nomic and social mission of SME support. They tend to measure their results more in terms of market
impact rather than in terms of nancial performance. It is important to note, however, that there could
be conicting objectives for a guarantee society: on the one hand, they are nancial institutions re-
sponsible for their protability; on the other hand, they carry out a non-prot mission. The expert
group members unanimously reported that guarantee schemes operating in their jurisdictions aim to
support only sustainable projects, based on realistic business plans, run by managers with a sucient
prole of professional capacity. The expert group members also commented that:
the feasibility of projects is generally examined by both the nancier and the guarantor;
applications are backed by a detailed nancial proposal, nancial statements, a business plan and
details of the experience of key sta in the business.
Members of the expert group highlighted that guarantee schemes in their country of operation do not
distort competition and do not create abuses of a dominant position because:
the typical beneciary of a guarantee is a micro-business or small company that does not possess
a signicant market share;
guarantees tend to promote competition between large companies and SMEs; the former usually
have access to a wider range of nancing options and specialist nancial consultancy; guarantee
schemes thus help SMEs obtain aordable nance under market conditions;
the system is open and non-discriminatory, as guarantees are accessible to all SMEs within the eli-
gible sectors, without discrimination between applicants;
the system is balanced as, in the case of default, the beneciary remains fully liable while the lend-
er will bear a loss of 20 to 50 % of the uncovered credit amount.
4. MANAGEMENT PRACTI CES
OF GUARANTEE SOCI ETI ES
Guarantee schemes function within limited management autonomy. They may not take commitments
beyond a number of limits. These are listed below.
Maximum value of total commitments that a guarantee scheme is allowed to take
Schemes with a banking qualication must respect a capital adequacy equal to at least 8 %of
the weighed assets (e.g. the Brgschaftsbanken in Germany, CMZRB in the Czech Republic,
the Spanish SGR or the Portuguese SCMS). In public systems, it can be an administrative ceil-
ing xed by the ocial authorities (e.g. Sowaln, the Lithuanian Rural Guarantee Fund). In
Estonia, for example, the capital adequacy requirements may be set together with administra-
tive ceilings.
In Italy, the partner banks used to set a multiplier of the risk funds to determine the maximum
of acceptable commitments on behalf of a Condi.
Maximum guarantee that can be delivered to any single borrower, ensuring a good portfolio
spread
Under banking regulation, there are strict rules of concentration of the risks between and with-
in groups of borrowers, with associated reporting obligations.
The ceiling can also be of an administrative or statutory nature.
EU competition rules set a limit: a guarantee to a single beneciary may not incorporate more
than EUR 100 000 of State aid within three years (
10
).
Maximum extent of coverage that can be provided in percentage of the loan
As a rule, the percentage of cover does not exceed 80 %: Brgschaftsbanken (on average less,
due to risk negotiation with bank), Hitelgarancia, Invega.
Other systems go up to 70 % (Romanian Funds, CMZRB) or 75 % (Belgian SCM, KredEx, UK
SFLG).
Many guarantee societies apply a 50:50 risk sharing with the lender (Italian Condis, Portu-
guese MGS, BBMKB).
Lowest rates, down to 35 to 40 % can still provide an incentive eect for the lender (Sowaln,
Sofaris, Siagi).
The Spanish guarantee system is special: the guarantor takes the full credit risk but, in ex-
change, the guarantor exercises in full the risk management and is the only beneciary of the
collaterals oered by the borrower. The bank is only the funding provider.
Maximum duration of a commitment
The administrative term of the guarantee usually runs from ve years (KGF Turkey) to 15 years
(AVHGA and Hitelgarancia Hungary, Brgschaftsbanken). Usually the guarantee is adjusted to
the duration of the loan.
The usual average maturity of a guaranteed loan is 10 years (UK SFLG, Finnvera, Sowaln).
Equally, in general, it is not possible to cover an already existing loan with a guarantee.
(
10
) Commission notice on the de minimis rule for State aid (96/C 68/06) (OJ C 68, 6.3.1996).
4.2. The target market
The target market of guarantees is the SME sector. It is important to note that although the EU deni-
tion of an SME is gradually gaining ground, certain systems still use other classications for guarantee
support (UK SFLG).
Most European guarantee societies are multi-sectoral. They diversify their portfolio in order to re-
duce risks. In France, the Socama have opened gradually from the craft sector to commerce and
services. Italy, however, is an exception with the ve major federations of Condis each serving a
distinct sphere of business: industry, the small-scale industry, the craft industry, trade, and services
and tourism.
The agricultural sector is often served by specialised providers (Lithuania, Hungary, Romania, Italy, Bel-
gium), or by separate programmes of a guarantee society (Slovakia). Agricultural guarantee societies,
however, often extend the scope of their activities to include other development activities in rural
areas. This is in line with recent European policies and contributes to the diversication of farming
activities towards rural tourism or to the production of green consumption goods.
The expert group characterised the target market of guarantee societies as follows.
In terms of size it is the micro-business and small business segment with limited nancial needs:
self-employed, family companies, partnerships. The commitment to this market is illustrated by the
average guarantee provided: from system to system, between EUR 25 000 and EUR 200 000
amounts that are far below the Basel threshold of retail credits (EUR 1 000 000).
By nature this target market includes companies that have diculty in obtaining a loan and/or
do not present evident features of creditworthiness, such as:
start-ups or recently established businesses (trading for less than three years);
cases of business transfer and succession;
SMEs starting major development or expansion programmes (technological investments, mar-
ket expansion, internationalisation);
SME businesses with temporary cash problems (e.g. because of seasonality, defaulting debtor
and/or economic downturn);
SMEs that have already pledged their assets as collateral for previous borrowing and are thus
unable to borrow further.
4.3. Guarantee products
The expert group agreed that the range of products oered by guarantee societies depends on vari-
ous factors which include the risk assessment procedure used by the guarantee society, the legal envir-
onment of the country (e.g. length of bankruptcy procedures), the term of the guarantee, its extent of
coverage and the associated costs.
While the traditional approach is to present the guarantee as a generic product, some participants in
the expert group pointed out that the guarantee can also be presented in various packages. The meth-
odology involves adapting the characteristics of the guarantee product to dierent business situa-
tions. This oers the advantage that, if the product is adapted to a particular business situation, it gains
better visibility and attractiveness on the part of its potential users. A more sophisticated product may
result if the guarantee is accompanied by additional features such as coaching or mentoring for bene-
ciary enterprises.
Examples of the various products used by guarantee societies are listed below.
Business start-up products
Sofaris manages a specic fund dedicated to companies in their early stage of development. The
guarantee covers amounts up to 70 % of the credit instead of 40 % in a development operation.
The performance is excellent: EUR 1.3 billion covered and EUR 2 billion underlying loans. The pene-
tration rate is estimated at 65 %.
SBS from the UK presented the Phoenix Fund guarantee, intended to facilitate the external fund-
ing of community development nance institutions (CDFIs). The guarantee can cover up to 100 %
of the capital and of the interest due.
German Brgschaftsbanken launched the Brgschaft ohne Bank system. The entrepreneur con-
tacts the guarantee society; its credit le is completed and analysed with the assistance of experts
of the chamber of craft/commerce/industry. A guarantee bond is provided to successful applicants.
The bank intervenes at a stage when the le is already completed and the coverage partially en-
sured. Some guarantee banks add an accompanying service which enables a follow-up of the start-
ing business. The network of the German Brgschaftsbanken counts 42 % of starting-up business-
es in their portfolio.
AWS manages the Nachfolge Bonus (Successor bonus) programme. It consists of a savings ac-
count with an extra bonus if this money is used as equity base at the establishment of the business.
The bonus premium is nanced by the Chamber of Commerce, Federal States and AWS. In addition
AWS can also provide guarantees.
Microcredits guarantee: microcredits are business loans up to EUR 25 000.
The Socama Express Loan does not require any pledge on the private assets of the entrepreneur.
Decision criteria are simplied and the decision is made within three days.
Condi Sardegna is a guarantee society which is member of Fedartdi. They have designed a
microcredit guarantee based on a exible decision process in which simplied decision criteria are
taken into account. It is distributed by the network of Artigiancassa and regional banks.
KredEx is also setting up a mechanism of microcredit loan guarantee with a delegation to the bank
in order to speed up the procedure.
In Spain, Sociedades de Garanta Recproca has a product that receives a counter-guarantee of
75 %, allowing more risks to be taken. Some Spanish regions subsidise the interest rate to make the
product more attractive.
Socamut, a Sowaln specialised subsidiary created with the support of the ERDF, reinsures guaran-
teed credits granted by the Walloon mutual guarantee societies with more favourable terms and a
simplied process for microcredits.
Guarantee for growing companies
Vkstkaution, Denmark, gives support to companies with a high growth potential: the guarantee
applies to the development of new products, concepts, production methods or markets. The deci-
sion-making process is of less than ve days for loans fromEUR 10 000 to EUR 670 000. The guaran-
tee premium amounts to 3 % for the rst and second years, then to 1.5 %for the following years.
Guarantee for business internationalisation
AWS proposes a guarantee to Austrian companies which pursue an objective of internationalisa-
tion. The premium rate is limited (0.5 %/year) and the protection is high (80 %). In 2002, 42 projects
were accepted, giving a guarantee outstanding of EUR 24.2 million. The default rate amounts
to 1 %.
Innovation guarantees
Sofaris manages the Biotechnology fund which is a combination of a loan and a venture capital
guarantee. Sofaris has established contractual partnerships with 16 venture capital companies and
provides them with a 50 % guarantee for 10 years (70 % for the businesses of less than three years
of age). Potential losses on private equity risks are capped. The fund recorded 114 operations in
2002 and 105 in 2003.
AWS runs a programme to encourage productive investments and high technologies. A guarantee
of 80 % is attached to loans of a maximum of EUR 1 million. The premium ranges between 0.5 and
1.5 % according to the risk. A prot-sharing premiumcan also be applied. In 2002, 417 applications
were treated, representing EUR 184.9 million in commitments.
BBMKB gives special conditions for innovation: the protection rate of credit passes from 50 % to
66 %. The duration of the engagement passes to 12 years and a grace period of three years can be
granted.
Guarantee for working capital needs
Hitelgarancia developed a guarantee linked with a credit card. In full security, cash can be drawn,
and suppliers can be paid from a guaranteed account.
Sofaris can cover commitments of good performance or other technical commitments that a busi-
ness must assume in accordance with public markets, contractual or legal obligations. Likewise,
24 % of the Spanish SGR activity consists of technical guarantees. They insure the good achieve-
ment of a contract, meet legal obligations, pre-nance public subsidies and reinforce the nancial
position of the company vis--vis suppliers.
Business transfer guarantee
Siagi is a guarantee society specialised in transfer and succession of micro-businesses (67 % of its
activity). Bankers are interested in the professional expertise of Siagi and are satised with a guar-
antee protection negotiated at 35 to 45 % of the nal loss.
4.4. Procedure for treating guarantee applications
Various participants presented the procedures for accessing the guarantee within the credit applica-
tion process. Two methods are available.
The most common procedure (Figure 1) consists of applying rst to the banker. It is the lenders
decision to call for a complementary guarantee if it is not satised with the collaterals or not fully
convinced by the elements of the le. The guarantee society is consulted by the banker and makes
its decision independently. A commitment to provide the guarantee triggers the issuance of the
loan.
An alternative way (Figure 2) is the consultation of the guarantee society in the rst instance by
the SME. The le is completed and the coverage decision is made rst. The banker is requested
afterwards. This schedule is mostly applied in Italy and is the usual procedure in Spain. The German
Brgschaft ohne Bank mechanism was inuenced by this practice.
4.5. The decision-making process
A professional risk evaluation and a sound decision are key factors in the management of a guarantee
society, as the institution must minimise the extent of the losses arising from the scheme. The goal of
the guarantee society is, as far as is possible, to complement the assessment of the bank and to add
value. For this reason, mutual guarantee systems insist on their market specicity andstress the import-
ance of peer involvement in the lending decision.
A nancial analysis of the application is always carried out and each project is assessed according to
the usual toolkit: indebtedness, working capital, liquidity, protability and viability of the project. Com-
plementing this is the appraisal of the capacity of the applicant to carry out his project considering
qualitative factors such as his/her qualications, experience, skills and reputation, among others.
Guarantee societies make independent decisions and have a committee specically for granting guar-
antees. Some guarantee societies, however, delegate decision-making to the lender. This is the work-
ing principle at BBMKB, a public service, which is dependent on the Ministry for Economic Aairs in the
Netherlands. Annually, the government allocates a special budget to guarantee support. The total en-
velope is distributed amongst banks, which can provide themselves the guarantee to credits which
require a complementary cover. BBMKB manages the amount, collects information and intervenes as a
controlling and paying agency.
This special technique, which is not an overall portfolio cover, functions very well.
Figure 1

Figure 2


However, the system requires special conditions.
The bank itself must be at risk: a 50:50 loss sharing urges the bank to great prudence.
The eligible operations must be accurately dened and the guarantor must be allowed to with-
draw the guarantee if the principles are not applied correctly.
The nancial system must be familiar with SME credit, mature and experienced. It will not work
without a perfect know-how on behalf of the lender on SME matters.
In certain countries, a partial and limited delegation is left to the lender. For instance, in France the
cultural proximity and the strong connection between the Socama and the banques populaires is the
basis of a delegation from the former to the latter. The Socamas committees establish their frame-
work of criteria and the banks must follow the guidelines. A permanent dialogue with a banks expert,
Monsieur Socama, is the instrument by which the condence is established and strengthened.
4.6. Risk sharing
The principle of risk sharing, and thus the distribution of any loss arising between the various partici-
pants, is a key element of the guarantee philosophy. If the guarantee society is called to pay, it substi-
tutes the main borrower for the bank, but it leaves the main debtor fully liable for his/her debt. The
question of redemption by the entrepreneur is discussed between the guarantee society and the debt-
or. After debt collection on the pledged assets, some supplementary recoveries may be attained. The
guarantee works on a principle of subsidiarity. A rst possible recourse is directed to national public
counter-guarantors. Either the counter-guarantee is multiannual (in Belgium and Germany) or its
amount and operational working are xed annually (in Lithuania and Finland).
The European Investment Fund (EIF) manages the European Commissions MAP guarantee programme.
It is a contractual system of automatic and free-of-charge intervention. The condition to contract is
that the protected portfolio should have an additional eect.
4.7. Complementary support mechanisms oered to SMEs
The expert group debated the complementary advisory services that guarantee societies could pro-
vide to SMEs and the opportunity to develop them. It was recognised unanimously that advice oered
increases the chances of success, especially for start-ups.
It was also agreed in the discussions that:
a guarantee society could either try to provide a direct coaching service or work in partnership
with a specialised service provider;
a guarantee society cannot provide the full range of services requested by an SME, as many of
these, such as sta management, commercial management and production management, fall out-
side its competence;
a quality service has a cost and the guarantee premium cannot absorb this charge; either a com-
plementary fee should be charged or the service should be supported by a subsidy;
coaching is not only useful for the SME but also for the guarantee society, which can likewise re-
duce its risks and losses.
There was unanimous agreement within the expert group to consider the MAP microcredit guarantee
window and the performance fee examples of best practice.
This chapter reviews the theory and practice of guarantee schemes in Europe, with the objective of
identifying and providing an overview of the dierent criteria that can be used to assess their perform-
ance. The results draw on both the discussions and practical experience of the expert group.
As a basis to assess the performance of guarantee societies, the following criteria were proposed by
AECM and discussed within the expert group:
relevance,
additionality,
multiplying eect,
eectiveness,
eciency.
The default rate and sustainability were considered specially, as the result of policies of additionality,
leverage and public support.
5.1. Market relevance
5.1.1. Relevance of guarantee societies
This indicator refers to the capacity to ll market gaps. A market gap is a structural situation in which
the market fails to eciently provide or allocate the credit demanded by SMEs. Due to developments
in the banking sector (e.g. Basel II) the role of guarantee societies has been growing. The relevance of
guarantee societies for banks is to oer a mitigation of the risks associated with their SME portfolios.
Basel II will qualify most guarantee societies as guarantors, provided that their guarantee product is in
line with the regulatory requirement. This will allow banks to reduce regulatory equity on their loan
portfolio.
In countries that have a low banking intermediation rate, guarantee societies can provide a general
incentive eect. Banks consider SMEs risky and a non-protable business segment. Guarantee societies
contribute to a general learning process, helping SMEs and banks familiarise themselves with each
other.
In countries with more mature nancial sectors, the market gap in the provision of SME nance is more
specic and is located in special niche markets. In such circumstances, guarantee societies must oper-
ate more specialised strategies. In this regard, a guarantee society has several roles.
First, the most signicant role of a guarantee society is to compensate for an SMEs lack of collat-
eral to satisfy the lenders requirements. In the case of collaterals, banks are forced to assess the
value of collateral according to a scenario of forced sale and to consider a time lag between the
default and the payment in recovered money. Banks therefore could require coverage of as much
as 200 % or 300 % of the credit amount.
A second role of a guarantee society is to boost access to nance for companies that, evenif enough
collateral is available, have diculties in establishing their creditworthiness. This is particularly
dicult in the absence of any track record or of any relevant nancial statements permitting a
5. PERFORMANCE I NDI CATORS
OF GUARANTEE SCHEMES
reasonable prediction of their future. This is a situation common to a large majority of business
start-ups, fast growing companies and to all businesses facing nancial diculties.
Guarantee societies also play an important role in economic development. The actions of guaran-
tee societies in disadvantaged regions or areas, or risky economic sectors, should be highlighted,
as the nancial sector tends to concentrate on regions and sectors that are considered more
secure from a risk aspect.
Finally, a key feature of the relevance of guarantee societies is their ability to continue to grant sup-
port to projects, even during a downward economic cycle. During the 200203 economic down-
turn, many nancial intermediaries (e.g. venture capitalists) reduced their level of activity. In con-
trast, most guarantee societies actively increased their commitment.
5.1.2 How can the relevance of guarantee societies be better managed?
The relevance of guarantee societies is dependent on several factors. First, the relevance of a guarantee
society is higher if its establishment was the result of a broad consensus at the national level. Public
private partnerships are expected to take on an increasingly signicant role. Second, the relevance of
guarantee societies can be enhanced by improvements made to their operational process and market-
ing activities.
A key relationship for guarantee societies is with banks. In this regard, clear contracts, simple pro-
cedures and quick payment of a default are vital elements, as is good knowledge of the work of a guar-
antee society by bank credit sta. Good working relations between a bank and a guarantee society can
help accelerate decisions.
The other key relationship for a guarantee society is with SMEs. As with the bank, it is vital that the in-
terlocutor has a sound understanding of a guarantee society and what it does. In order to develop this
aspect, a guarantee society must be close to the market (i.e. to SMEs). In developing these two crucial
relationships, a guarantee society can help SMEs negotiate better credit terms.
Examples
Statistics collected from the 200203 activity of guarantee societies shows the anti-cyclical action
of guarantee schemes. An average growth rate of 30 % was reached in Portugal, despite the 9 %
drop in investments in 2003.
Finnvera, Finland: 48 % of the domestic support goes to the less-favoured regions (annual report
2003).
Sofaris, France, has increased the rate of the guarantee from 50 % to 70 % on credits granted in EU
Objective 2 areas and in other regions struck by the closures of companies.
5.2. Additionality
5.2.1. Additionality of guarantee societies
Additionality of a guarantee society is the capacity to provide additional nance, that is nance
which would not have been available from any other commercial source. From the perspective of a
guarantee society, this is the case if access to nance is provided for a credit applicant that would
otherwise be rejected by the nancial system. This can be achieved by the guarantee society through
reducing adverse selection, information asymmetry and/or compensating a situation of weakness
so that the applicant can benet from better credit terms than it would otherwise be able to ob-
tain.
In practice, the additionality of a guarantee society may take several forms.
An increase in the volume of microcredits (< EUR 25 000) a segment that is often neglected by
lenders because of its time-consuming approach and low protability is a meaningful indicator.
Longer-term loans or credits provided with more favourable conditions can indicate the success of
additionality of a guarantee society (e.g. credits with an initial grace period, credits with no private
assets to be pledged or credits for intangible investment).
A guarantee society may be able to help overcome temporary diculties between banks and SMEs
by harnessing its local knowledge.
A decision by peers can be an added value to the banks decision by giving more weight to personal
skills or local elements. Information asymmetry can be reduced and more applications accepted.
A company that has pledged its assets for previous loans is able to mobilise additional securities for
new investment programmes.
Some guarantee schemes are able to relieve entrepreneurs from the obligation to pledge private
assets to cover a business credit.
5.2.2. How can the additionality of guarantee societies be improved?
Although signicant, a guarantee society should not focus exclusively on developing its additionality,
as there is a risk that it focuses exclusively on the margins of the market rather than the core, which
entails certain risks. Consequently, a portfolio should be diversied over:
various sectors,
short- and long-term operations,
nancial and technical guarantees,
a variety of viable companies.
It is important to note that if a policy decision is taken to increase the level of additionality it should be
a step-by-step process over time and should be tailored to the national economic environment.
Examples
Brgschaftsbanken, Germany: the portfolio of EUR 5 billion is composed of 42 % of start-ups
and 98 % of long-term commitments (maximum 15 years duration);
Federcondi, Italy: the December 2003 to January 2004 survey compares the Condi interest rate
(4.14 % for medium-term operation) with the average market rate (5.20 %).
5.3. Leverage
5.3.1. Leverage of guarantee societies
The leverage of a guarantee society is the ratio of the outstanding guarantee commitments to the un-
derlying own funds of the guarantee scheme. It is an important indicator of the successful operation of
a guarantee society as it measures the impact of the endowment of equity of a scheme on the lending
activity.
While microcredit institutions or a venture capital company are not able to disburse more than their
funding, guarantee schemes can take commitments that culminate to several times their equity
amount. Various rules limit the maximum size of a portfolio. The banking supervision xes the leverage
to a theoretical 12.5 times the equity. Internal policies of guarantee societies also impose a limit on the
portfolio. The leverage is linked with the additionality policy: more risky businesses in a portfolio mean
a lower leverage. Written policies, risk-sensitive management and the forming of adequate provisions
are conditions to increase the leverage.
No model has yet been developed to calculate the optimum level of the leverage. Basel II and the EU
directive proposal on capital adequacy (
11
) are the new guidelines. The expert group considered that a
reasonable level for a mature guarantee scheme with a well-diversied portfolio could reach six to
seven times.
Examples
Equity Portfolio Leverage (
12
)
Siagi, France EUR 44 million EUR 670 million 15 times
Fedartdi EUR 550 million EUR 4 100 million 7.4 times
Brgschaftsbanken, Germany EUR 290 million EUR 1 760 million 6.2 times
Another way to assess the success of a guarantee scheme is to look at its full multiplier ratio. The full
multiplier analyses the relation between the total investment value achieved by guaranteed credits
and the own funds of the guarantee scheme.
5.3.2. Leverage of investment
The leverage of investment can be dened as the estimated euro volume of loans leveraged for each
euro of funding spent on a guarantee.
Leverage eect nancial intermediaries
The following table shows the leverage eect (gearing) achieved with the Community funds in terms
of guaranteed amounts within the EIF multiannual programme.
Table 1
Allocated budget
(signed)
(EUR)
Maximum EIF
guarantee amount
(EUR)
Leverage eect
Loan guarantee window 83.3 million 1 738.0 million 20.9
Microcredit window 33.0 million 179.0 million 5.4
Equity guarantee window 4.2 million 35.1 million 8.3
Total 120.5 million 1 952.1 million 15.6
(
11
) COM(2004) 486, 14 July 2004.
(
12
) Attention should be paid to the fact that the guarantee societies operate in very dierent situations. As such, the interpre-
tation requires very careful attention.
Table 2 shows the leverage eect (gearing) achieved with the Community funds in terms of the esti-
mated volume of loans within the EIF multiannual programme.
Table 2
Allocated budget
(signed)
(EUR)
Estimated underlying
loan volume
supported (EUR)
Leverage eect
Loan guarantee window 83.3 million 6 071.6 million 72.9
Microcredit window 33.0 million 280.6 million 8.5
Equity guarantee window 4.2 million 60.0 million 14.3
Total 120.5 million 6 412.2 million 51.8
5.4. Eectiveness
5.4.1. Eectiveness of guarantee societies
Eectiveness is the capacity of a guarantee scheme to enable better macroeconomic performance
relative to the means implemented, especially public resources. It can be measured by the number of
guarantees granted in a year, the growth rate of the portfolio, the development of the network and the
attraction of more banking partners.
5.4.2. How can the eectiveness of guarantee societies be improved?
It was unanimously stated that eectiveness requires good capitalisation, allowing:
sucient extension and diversication of the portfolio;
condence on behalf of the lenders;
professional activity, with a sta sucient in number and skills;
reduction of sensitivity to losses;
the addition of nancial income to the guarantee fees.
Collecting equity can be a challenge, because of the non-prot character of the scheme: mutual mem-
bers pay a small equity share. Banks could become interested if their strategy is to obtain a market
share; nevertheless, State nancial support is often necessary. EU nancial tools could also give an ap-
preciated complement to the equity base.
By increasing the leverage of commitments, more businesses can access the instrument. More acces-
sibility is provided by a good visibility of the guarantee scheme and by the existence of a widespread
network of branches. The question is central in a period of bank consolidation resulting often in a re-
duction in the number of bank branches.
Examples
Portuguese guarantee schemes used EU funds to increase their equity.
Retained earnings are the most important way to increase own funds. A vast majority of schemes
assign their earnings to increase their reserves. Between 2000 and 2003, the reserves of Hitelgaran-
cia, Hungary, increased from HUF 9 735 million to HUF 14 845 million (approximately from EUR 39
million to EUR 59 million, using EUR 1 = HUF 250 as the exchange rate).
5.5. Eciency
5.5.1. Eciency of guarantee societies
Eciency considers the productivity of a guarantee society and the quality of its management: it refers
to elements of cost, organisation and process relative to the output and to the price of the service.
5.5.2. How can the eciency of guarantee societies be improved?
The price of the guarantee service is a very sensitive parameter. A fee amounting to 1 % of the out-
standing is usual. The highest fees amount to 3 to 4 %. It is not only a nancial value, but also a psycho-
logical concept and a competition element. Currently, in a period of low interest rates, a 1 % fee ap-
pears to be too high.
The following general statements can be made.
A too high premium discourages businesses that could manage without a guarantee. Consequent-
ly, the quality of the portfolio drops. Only businesses for which access to credit is not dependent on
the price are interested in a guarantee.
A too low fee neither discriminates against risks nor rewards them; random portfolios could be
built with a possible capital depletion.
The eciency of a guarantee scheme is to be assessed by means of the costincome ratio. A para-
mount element is the productivity of the organisation, the simplicity of the procedures, the automa-
tion of the accounting system, the follow-up of the commitments and the settlement of the losses.
Eciency is also measured by the speed of delivering the service. Procedures must be transparent
and quick instead of a new obstacle in the processing of a loan application. The most labour inten-
sive part should remain the decision-making and the monitoring of problem guarantees.
Good productivity requires a good collaboration with the lender by avoiding double work. Various
systems can be implemented.
A standard application le can be used by the guarantor and the bank.
Limited delegation of power can be given to the bank, a system that is functioning well:
with a mature and experienced banking system,
with policies and practices in the bank which are to the satisfaction of the guarantor,
with a proportion of risk sharing of at least 50:50,
provided that the guarantor is allowed to apply a penalty to banks that do not behave in ac-
cordance with the rules.
The follow-up of the guarantee can be partially delegated to the bank.
In the case of default, the recovery procedure can be made by the bank.
In the future, eciency will also depend on several developments that are challenging guarantee
schemes.
Many SMEs and guarantee schemes will be confronted with rating and scoring procedures. Guar-
antee schemes should be strong enough to give a special weight to qualitative elements, balan-
cing the banks nancial criteria.
The monitoring of the portfolio will have to be accurate.
Special attention has to be paid to the quality of management of guarantee schemes; the existence
of policies, guidelines for procedures, internal control and sound principles of corporate govern-
ance.
Disclosures must be clear and complete towards the market.
Examples
BBMKB, Netherlands, and Fondo Interbancario, Italy, allow the bank to commit in their names.
Sofaris and Socama, France, Hitelgarancia and AVHGA, Hungary, have the same procedure, but
restricted to some thresholds in amount or to some kind of businesses.
Several systems (SGR, Spain, Finnvera, Finland, AVHGA and Hitelgarancia, Hungary) created an
intranet to be online with partner banks. This reduces decision time and improves productivity.
The average processing time of a guarantee application at Finnvera, Finland, is 1.3 weeks. As many
as 61 % of the les are treated within two weeks.
5.6. Default rate and sustainability
5.6.1. Sustainability of guarantee societies
Sustainability and the extent of public support are vital for a guarantee society. This sustainability is
dependent on a variety of factors such as the default rate, the costincome ratio or the recoverability
of losses. Experts considered that there is much confusion about the default rate. Below are two ex-
amples to demonstrate this.
First, an important indicator is the survival rate (the percentage of guarantees granted in year x that are
surviving in a year x + n). It can hardly be used in international comparisons, because of the dierent
characteristics of the portfolios. Applied to homogeneous segments, however, it should provide a way
to forming risk provisions in the course of a guarantee life.
Second, an annual calculation instead of over a period of time is more appropriate (the ratio of
annual ows of defaults to the stock of guarantee outstanding). In such circumstances, both the nu-
merator and the denominator have to be clearly dened.
Default: from the viewpoint of a guarantee society, it is the claim made by the bank to the guaran-
tor. But borrowers could be in diculty before the banks decision to accelerate the loan and every
bank has special policies vis--vis late payers.
Confusion between provisioning a default and paying a default: both are items of the prot and
loss account but provisions can be formed before a default.
There is a dierence between the gross loss and the net loss, depending on the intervention of a
counter-guarantor and monies recovered on the debtors assets.
Clarications brought by the next Basel framework will be very useful in this respect. The forthcoming
directive will harmonise the data at EU level and provide:
a denition of a default and of a loss;
a measure of risk parameters: probability of default (ve years average of annual rates), loss given
default (dierence between gross and net), exposure at default and the inuence of the maturity;
an obligation to pay losses in a timely manner (be it a provisional payment of the loss estimate),
reducing the time lag between claim and payment;
the obligation to provide for emerging risks.
The concept of loss coverage is dominated by the concept of long-term sustainability (
13
). The default
rate of a guarantee scheme is very much linked with the idea of loss sharing: both the lender and the
guarantor have to share a loss. In a system that would relieve the bank from any risk, adverse selection
would be possible with undesirable eects.
The amount of guarantee premium is the income covering default risks. Some systems, mainly mutual,
recommend a at rate, equal to all, expressing the nancial solidarity between partners. Other systems
are in favour of a premium modulated according to level of risk.
Each guarantee scheme has a strategy compliant with public support policies. Higher default rates are
possible in systems that benet fromcounter-guarantees and are acceptable if the systemoers more
additionality at the same time.
A paramount question is that of the organisation of national court systems and recovery procedures.
The expert group drew attention to the red tape, the cost and the diculty to solve situations of bank-
ruptcy, legal protection or debt collection.
5.6.2. How can the sustainability of guarantee societies be improved?
A low rate of default in itself is not deemed as an indicator of good performance if the result is not
considered in light of the additionality of the system, the existence of external assistance and long-
term sustainability. Various policies and approaches are possible that conduce to reasonable results.
First, it appears desirable to build up a balanced portfolio with dierentiated risks. Second, it is not
advisable for a guarantee society to focus exclusively on weaker businesses or high-risk segments.
Third, well-trained sta help to improve the quality of decision-making. Finally, the availability of
sound nancial information on SMEs (such as through the annual report) clearly enables better
decision-making.
(
13
) AECM Vienna seminar, May 2003.
In the context of the report, best practices are the description of special products and/or procedures
which meet their objectives regarding the targets, features and the implementation as planned and
requested. The expert group had paid attention to the specic aspects of the presented guarantee
schemes to nd out illustrations of best practices that should be noteworthy and complementary
under dierent viewpoints.
6.1. Support to the establishment and development of guarantee
schemes
In the following cases, examples of best practices of guarantee schemes are stated which focus on the
support of SMEs and/or which oer benets in the formof lower interest rates as well as more favour-
able terms and conditions for loans (
14
).
Slovene Enterprise Fund, Slovenia
The creation of the guarantee scheme in Slovene Enterprise Fund
SEF was established to promote micro-businesses and small and medium-sized companies by oering
favourable terms for loans. SEF oers benets for SMEs in the formof aordable interest rates for loans,
more favourable terms and conditions for granting loans, guarantees for investment loans raised with
commercial banks in Slovenia, and grants in combination with indirect loans or guarantees.
SPGM, Portugal
The formation of a fully integrated guarantee network
SPGM has concentrated on guarantees beneting medium-sized SMEs. The Portuguese guarantee
scheme forms a fully integrated guarantee network. It is based on the following principles.
First, the guarantees are issued by autonomous mutual guarantee societies (MGSs) in which the bene-
ciary SME also holds a stake. Second, a counter-guarantee mechanismis granted through the Mutual
Counter-Guarantee Fund, managed by SPGM.
Invega, Lithuania
The First Instalment Guarantee Scheme
The Lithuanian guarantee system includes the Lithuanian Rural Credit Guarantee Fund as well as In-
vega. Invega is a guarantee institution established at the end of 2001 by the Government of Lithuania
with a view to promoting the economic development of small and medium-sized enterprises (SMEs) in
Lithuania, through the facilitation of their access to nance.
6. BEST PRACTI CES
(
14
) Creating and developing a successful guarantee scheme, AECM study paper.
6.2. Special products and services for SME clients
Within the framework of some guarantee schemes in EU countries, special products have been devel-
oped in favour of the SME clients. Particular examples can be found in guarantee schemes in France,
Belgium, Germany and Austria.
SIAGI, France
Siagnostic, a risk monitoring system
SIAGI developed Siagnostic, a new tool used in following up projects to prevent problems, to solve
them and, as a result, to reduce the probability of default. SIAGI provides guarantees to a large pro-
portion of French banks dealing with very small rms and is monitoring the risks of the guarantee
beneciary.
Hitelgarancia Rt., Hungary
Procedure of issuing grants under special agreements with banks
Hitelgarancia Rt. has developed a procedure of issuing guarantees under special agreements with
banks. The institution had been looking for a method to undertake guarantees in bulk, yet in a prudent,
risk-sensitive, cost-saving way for both the banks and the guarantor. Conditions of creditworthiness
have been dened jointly for each specic product initiated by the partner bank.
BDPME/Sofaris, France
The equity guarantee scheme: fostering research and development in innovative SMEs
Sofaris is a specialised nancial institution, fullling a permanent mission of public interest. The share-
holders are the French State via BDPME (Bank for Development of SMEs) (58.3 %), banks and nancial
institutions. Its aim is to manage loan guarantee schemes funded by the French State, Caisse des dpts
et consignation (CDC), the European Commission and French local authorities. Sofaris, as a guarantee
system, has developed specic schemes dedicated to innovation nancing and private equity invest-
ments.
Socama, France
Guarantees for small companies with a lack of collateral
The Socama are mutual guarantee societies. They are private companies; the equity capital and the
guarantee fund are entirely provided by the 260 000 stakeholders. Their activity consists of granting a
guarantee in favour of small companies entrepreneurs that need to borrow money from the bank in
order to fund a project which have a lack of collateral but whose managers are considered as good
and skilful professionals by the managing board of mutual guarantee societies.
Sowaln, Belgium
Guarantee scheme dedicated to cover business angel operations
Sowaln is dedicated to cover business angel operations. Since May 2004, Sowaln is allowed by the
government to guarantee investments made by business angels in the form of subordinated loans or
capital increase. The scheme is intended to increase the number of Walloon SMEs nanced by business
angels as well as the amounts invested.
KfW Bankengruppe, Germany
KfW StartGeld programme: nance for entrepreneurs and small companies
KfW launched the StartGeld programme in 1999 to improve access to loan nance for entrepreneurs
starting their business and small companies. StartGeld loans aim at providing long-term nance of a
small scale to newly created or established smaller companies, thus targeting a market segment in
which access to long-term external capital is often dicult to obtain.
Austria Wirtschaftsservice GmbH, Austria
Guarantees for nancial restructuring of SMEs
AWS created the Financial restructuring programme for SMEs dedicated to help in dicult nancial
situations. The support oered by this programme consists of guarantees for long-term loans and
equity capital with guarantee quotas of between 50 % and 100 %.
6.3. Approaches to the provision of funding for SMEs
Dierent approaches to the provision of funding for SMEs have been developed in guarantee schemes
in Denmark, Germany, Spain, Italy, the Netherlands and the United Kingdom.
Vkstfonden, Denmark
Multi-functional funding approach: close collaboration between funding teams
By combining the competence and eorts from nance professionals in loan guarantee, equity and
mezzanine nance teams, Vkstfonden oers an integrated approach to the provision of funding for
innovative SMEs and puts together a nancial package that is adapted to the funding needs of each
SME in its portfolio.
The United Kingdom small rms loan guarantee
Government support to secure lending
This is a partnership arrangement in which a government guarantee backs eligible SME lending by
banks and other institutions in cases where intermediaries would be prepared to lend except for the
absence of appropriate collateral against which to secure the lending.
Verband der Brgschaftsbanken, Germany
Guarantee without a bank
Brgschaftsbanken developed a new approach for SMEs in order to facilitate their access to credit:
Guarantee without a bank, as start-ups often do not obtain bank nancing for their projects because
they lack a track record and the amounts involved are rather low.
The Italian Condi Networks, Italy
Condi based on cooperation and mutuality
The source of Condi is an association of small entrepreneurs, based on cooperation and mutuality.
The objective has been to overcome diculties in access to external nancing sources while preserv-
ing the economic and legal autonomy of each enterprise. It is an answer to the need of placing a fur-
ther intermediary at the centre of the relationship between banks and SMEs.
Mutual guarantee societies, Spain
A network of 21 regional companies associated into its union body, Cesgar
The mission of the Spanish guarantee system is to help micro-companies and SMEs to face nancial
diculties. To reach that goal, the guarantee systemof Spain has 22 mutual guarantee societies called
Sociedades de Garanta Recproca (SGR) and a public counter-guarantee society called CERSA (Com-
paa Espaola de Reaanzamiento) which is supported by the State.
BBMKB, the Netherlands
Decision-making delegated to banks
BBMKB applies a full partnership principle: decision-making is delegated to banks. The guarantee sys-
tem consists of the allocation of guarantee envelopes to partner banks, out of a total annual budget
decided by the State. Banks supply the guarantee on their own credits without an individual decision
made by the fund. The fund is the guardian of the rules and decides the principles for allowing the is-
suance of a guaranteed loan.
The National Loan Guarantee Fund for SMEs, Romania
The guarantee to support the development of SMEs
The guarantee system in Romania comprises three independent funds: the Romanian Loan Guarantee
Fund for Private Entrepreneurs, the Rural Credit Guarantee Fund and the National Loan Guarantee Fund
for SMEs. Through the guarantee schemes, the Government of Romania aims to stimulate the develop-
ment of the private sector, to support the restructuring and privatisation of the economy, as well as the
development of rural areas.
6.4. Best practices in the guarantee business
In the following cases, dierent examples are stated of best practice in the eld of doing business.
Within the frame of the long-term strategy of the schemes, the management approves a business plan
for each individual year, based on the available funds for SME support. The business plan determines
the respective targets to be achieved in commercial transaction by specifying the volumes of the indi-
vidual forms of support (loans, guarantees and grants) provided under the existing programmes of
SME assistance. The following best practice examples describe management tools which are imple-
mented in the guarantee schemes of the Czech Republic, Estonia and Finland.
The Guarantee and Development Bank of Czechia-Moravia, Czech Republic
Sta motivation as a means to create responsibility and to improve portfolio quality
In order to stimulate the bank stas eorts in achieving the business targets, the management has
adopted an internal system of nancial motivation incentives. The experience gained up to nowshows
that implementing the system of nancial incentives has helped to better utilise the capacity of branch
employees and to improve the quality of the banks portfolio. Furthermore, encouraging sta to make
more eorts to recover debts due fromclients has had a positive impact on moderating the volume of
losses as well.
KredEx, Estonia
Marketing action of a newly established guarantee scheme
The aim of KredEx is to stimulate the creation of new jobs while maintaining those existing and to in-
crease the likelihood of start-up businesses to survive. For a newly established guarantee scheme, mar-
keting actions were essential to promote KredExs business loan guarantees.
Finnvera, Finland
Internal rating
For Finnvera, a special nancing company that operates with weak collateral, it seemed essential to be
able to estimate the risk of the portfolio and to make some kind of forecast of credit losses. The original
rating system was developed in 1989 and since then all clients have been rated regularly.
7.1. Conclusions
The Best expert group reached the conclusion that guarantee and mutual guarantee schemes have a
signicant role to play in enabling SMEs across the European Union to access the nance they need to
start up and grow. The following countries, however, have not yet established guarantee mechanisms:
Bulgaria, Ireland, Latvia and Sweden. Projects have already begun in Latvia and Sweden.
Guarantees provide important leverage of the capital available for lending and oer better value for
money than one-o grants or subsidies. As experience has shown, guarantee schemes have been able
to increase their contribution to banks lending activity even in a downward phase of the economic
cycle.
In the new nancial environment (e.g. Basle II), the role of guarantee societies has been growing. The
relevance of guarantee societies for banks is to oer a mitigation of the risks associated with their SME
portfolios. Basel II will qualify most guarantee societies as guarantors provided that their guarantee
product is in line with the regulatory requirement. This will allow banks to reduce regulatory equity on
their loan portfolio.
The experience of the participants of the expert group and of AECM, the presentations of the national
schemes and the discussions within the group allowed an analysis of guarantee societies on the as-
pects of management philosophy, the target market, guarantee products, the procedure for treating
guarantee applications, the decision-making process, risk sharing and complementary support mech-
anisms oered to SMEs.
Guarantee societies attribute the highest importance to their economic and social mission of SME sup-
port. At the same time, the experts unanimously agreed that guarantee schemes operating in their
jurisdictions aim to support only sustainable projects. The target market of guarantee societies in terms
of size is the micro-business and small business segment with limited nancial needs (self-employed,
family companies and partnerships). By nature, this target market includes companies that have di-
culty in obtaining a loan and/or do not present evident features of creditworthiness.
The range of products oered by guarantee societies depends on various factors, which include the
risk assessment procedure used by the guarantee society, the legal environment of the country, the
term of the guarantee, its extent of coverage and the associated costs. While most European guarantee
societies are multi-sectoral, there are also examples of a focused approach.
Several indicators were identied that allow a good assessment of the performance of a guarantee
scheme. These included a schemes relevance to ll a market gap, its additionality in terms of providing
additional nance, and its leverage, eectiveness and eciency. The overall purpose is to reach long-
term sustainability and a default rate that is under control.
Examination of current practices across the Member States suggests that there are opportunities for
increasing their use, building on the diversity of the schemes that currently exist to address particular
needs. These opportunities may be developed within the design of the successor to the multiannual
programme for SMEs (MAP), as delivered through the guarantee windows and managed by EIF on be-
half of the European Commission. The research framework programme could also provide an opportun-
ity to enhance the use of guarantees.
The regulatory framework for guarantees at European and Member State levels determine to a high
degree the correct functioning of a guarantee scheme. Examples of that framework are the next capital
adequacy directive proposed by the Commission, the emergence of a new rating culture and a clearer
application of State aid rules.
7. CONCLUSI ONS AND I DEAS
FOR CONSI DERATI ON
7.2. Ideas for consideration
The ideas for consideration adopted by the Best expert group on guarantees and mutual guarantees
focus on three areas that could be highly relevant for better access to nance for SMEs in the European
Union: the successor to the MAP; the EU Structural Funds; and research, development and innovation.
The Best group also includes ideas for consideration on how to disseminate best practice examples
and encourage the dialogue among the guarantee institutions community in the European Union. The
ndings of the expert group are as follows.
The current MAP, the most visible promotion scheme for SMEs in the European Union, provides
very useful nancial support for small and medium-sized enterprises. In particular, the SME guar-
antee facility, with its specic windows, which is operated by the European Investment Fund (EIF)
has been widely recognised as an eective and ecient instrument with high added value for the
SME community. It is therefore recommended that the guarantee instruments of the successor to
the MAP be reinforced, to allow a exible approach in the EU Member States and to take into ac-
count the specic needs of target groups as well as recent developments of SME nancing. The
successor to the MAP should, in addition to a broadly dened guarantee windowfor SMEs, keep a
window for micro-businesses that allows the packaging of nance and mentoring. It could also
provide new windows for innovation investments of SMEs, for the transfer of businesses and for the
securitisation of SME loan portfolios of banks to encourage the banking community to maintain
lending ows to SMEs.
The EU Structural Funds could make their contribution to an increased future role of guarantees in
the European Union by providing funding to guarantee schemes to cover part of their risks. En-
hancing the capitalisation of guarantee societies would enable them to cover higher risks and/or
to extend their operation to target groups which otherwise would not receive a guarantee.
Scientic research, technological development and innovation are at the heart of the knowledge-
based economy and are one of the main pillars of the Lisbon process. A guarantee instrument
could provide an appropriate support to help innovative SMEs nance their investments in re-
search and innovation. Such an instrument might be shaped at European level to debt providers in
order to support technological research and development projects implemented by SMEs.
The development of innovative SMEs could also be encouraged through technical guarantees.
Currently, public or private clients may implicitly prefer collaboration with larger enterprises even
though SMEs often have a high(er) innovative potential. This reluctance towards contracting SMEs
originates mainly from insucient nancial data available, the lowperception of nancial strength,
unstable revenues and the duration of the project. A technical guarantee scheme would allow the
client to entrust a key project to an innovative SME, as the guarantee society would counter-
guarantee payments made by banks to the client under contractual arrangements in the case of
bankruptcy of the SME or the failure of the project. Such a guarantee product could increase the
number of SMEs participating in public or private procurement.
Disseminating best practices and encouraging the dialogue among guarantee institutions and
with the European Commission are key to ensure a high professional standard of guarantee institu-
tions in the European Union. The Best expert group, based on its own positive experience of fruitful
exchanges of best practices and inspirations for future improvements, therefore proposes to or-
ganise regularly, such as once a year, meetings between the guarantee institution community and
the European Commission for that purpose. Such a regular dialogue could be particularly bene-
cial for those Member States who have not yet introduced guarantee schemes or have recently
done so. It could also provide a forum to discuss new developments in nancial markets aecting
the guarantee business.
Slovene Enterprise Fund
General presentation
The Slovene Enterprise Fund (SEF) is the national nancial institu-
tion created to promote the establishment and development of
micro-businesses and small and medium-sized enterprises. SEF of-
fers benets to SMEs in the formof lower interest rates for loans, more favourable terms and conditions for grant-
ing loans (lower charges, longer maturity and grace period), guarantees for investment loans raised with com-
mercial banks in Slovenia, and grants in combination with indirect loans or guarantees. The two most important
products for the nancial support of SMEs for the last ve years have been indirect favourable investment loans/
second oor loans and direct loans for newenterprises.
Basic conditions for creating a new guarantee scheme
According to the support of the Ministry of the Economy, the Slovene Enterprise Fund increased the current ex-
tent of high-risk nancial instruments and assumed a part of the risk which was until then fully borne by enter-
prises and banks. To this end, in July 2004, the newly created national guarantee scheme started. The scheme is
performed by SEF. The objective of starting a guarantee scheme was to convince the government that SEF has
enough equity (SEFs equity amounted to EUR 43.2 million) to create a guarantee potential. SEF is legally obliged
to keep this amount of equity. In spite of good capitalisation, SEF needed a provision fund to manage risky nan-
cial instruments for SMEs. The Slovene government granted nancial sources for the creation of the provision
fund in 2004. It was a basic condition for the start of the scheme. With the provision fund of EUR 1.1 million, SEF
was able to launch EUR 5.5 million of guarantee potential for investment loans of SMEs in 2004. The provision fund
is earmarked for covering the potential losses of the guarantee scheme.
Another key issue was to convince banks of a risk sharing with SEF and that the SME sector is important for them as
much as it is for the national economy. SEF has succeeded in involving 10 important banks in the scheme. The pro-
motional activities and working meetings to solve the concrete problems and overcome the incipient diculties of
the new scheme are going on very intensively. The fact is that the success and the eciency of the scheme are
dependent on good cooperation between banks and SEF. The important issue in the Slovene entrepreneurial envi-
ronment was and still is to convince companies that money has its price and, besides money, the quality of the
projects, know-how, a well-qualied and connected team, and strategic planning with an international relation-
ship are also important. Therefore, cooperation is needed with consultants for entrepreneurs in local entrepre-
neurial centres and consultants of regional chambers of craft and regional chambers of commerce and industry.
Explanation of the scheme
The most important aim of the scheme is to facilitate long-term credit nancing for investment of small and
medium-sized competitive enterprises by reducing the credit and interest risk. Beneciaries are start-ups and
existing companies with up to 100 employees; the guarantee rate is 50 % of bank loan on the principal. The total
amount of guarantee potential is EUR 5.4 million in 2004, which presents EUR 10.8 million of loan potential. The
interest rate and the processing fee are lower than the market level because the banks are bound to charge the
lowest interest rate and the lowest processing fee they have on oer.
Guarantees are intended for investment loans (material and non-material investments). Guarantees are issued on
the basis of an invitation for application for loans granted by 10 banks in Slovenia. The company submits the ap-
plication for obtaining the guarantee to SEF after it receives the banks decision on the granting of the loan.
The guarantees included benet from a counter-guarantee issued by the European Investment Fund under the
European Communitys multiannual programme for SMEs.
ANNEX 1
National Loan Guarantee Fund for SMEs, Romania
The guarantee system in Romania was estab-
lished at the initiative and with the support of the
Romanian government, after 1990, when Ro-
mania decided to turn from a centralised State-
owned economy to a market economy. Through the guarantee schemes, the government aimed to stimulate the
development of the private sector in Romania and to support the restructuring and privatisation of the economy,
as well as the development of rural areas. Nowadays, the guarantee system in Romania comprises three inde-
pendent guarantee funds: the Romanian Loan Guarantee Fund for Private Entrepreneurs, the Rural Credit Guaran-
tee Fund and the National Loan Guarantee Fund for SMEs (NLGFSME).
Explanation
The setting up of NLGFSME in the year 2002 was motivated by the importance given by the Romanian govern-
ment to the SME sector to increase GDP and exports, and to create new jobs as well as strengthen research and
development. The development of SMEs is a priority of the economic and social policy of the government. Di-
cult access to nance is one of the main problems with which SMEs are confronted. The funds own capital as of
31 December 2003 amounted to EUR 10 073 000.
Advantage
The setting-up of a fund by the State, dedicated entirely to SMEs, is benecial due to the fact that such a fund,
although it proposes to support itself nancially, does not have as its main objective the making of an accounting
prot fromthe guarantee activity. It aims to support, through a guarantee policy adjusted to the needs and fea-
tures of SMEs, the objectives and policies of the government in the area of SMEs, taking into perspective Romania
joining the European Union.
Conditions for good working of the system
Products are adapted to the requirements and specicities of SMEs. NLGFSME supports both the launching of
new enterprises and the development of existing ones. For existing enterprises, guarantees cover up to 75 % of
the value of medium- and long-term credits, but no more than EUR 500 000, and up to 60 % of the value of short-
term credits, but no more than EUR 400 000. For start-ups, guarantees cover up to 80 % of the value of medium-
and long-term credits, and up to 70 % of the value of short-term credits, with the same value limits. Commissions
are of 1.5 % (for short-term credits) and of 2.5 % yearly (for medium- and long-term credits) of the outstanding
guarantee. The average time for analysing and approving the guarantee le is nine days.
For start-ups and micro-enterprises there is a special product for microcredits up to EUR 10 000. The guarantees
are approved within three days, based on data from the analysis document sent by the bank. Guarantees cover up
to 80 % of the value of medium- and long-term credits, and up to 70 % of the value of short-term credits. The
guarantee commission is of EUR 100. There is no minimum level for guarantees granted by the fund.
Cooperation with all banks that nance the SMEs sector
NLGFSME has concluded working conventions with 15 banks (the main banks that nance the SME sector).
A network of 13 territorial oces that covers the whole territory of the country
Through this network the fund intends to stand by entrepreneurs in order to oer themfree assistance for access-
ing the funds guarantees. The territorial oces promote the funds products and cooperate with banks branches
in sending and analysing guarantee requests.
Involvement of SMEs representatives in the management of the fund
There is a representative of SME associations on the board of directors, in order to have a transparent selection
process and to receive an input from SMEs for shaping the guarantee products.
Prudential criteria in the management of the funds resources
The management of the funds resources is performed carefully, each decision being made in compliance with
prudential norms. These include the funds maximum exposure on a single bank, the funds maximum exposure
on a single debtor, minimum level of solvability, minimum level of liquidity, and treasury management. Meeting
the established levels of prudential criteria is checked monthly by the funds board of directors.
Invega, Lithuania
Description of the scheme
Guarantees by Invega are granted from the guarantee limit set annually by the Government of Lithuania. Invega
guarantees are equal to sovereign guarantee, thus are quite eective way of risk mitigation and are treated posi-
tively by banks in terms of capital adequacy requirements. Due to the sovereign status, all the banks treat this
Invega guarantee like the primary security, which replaces collateral. Invega guarantees are granted under de
minimis rule, i.e. State support to the SME, including the equivalent of the subsidy in terms of guarantee, cannot
exceed EUR 100 000 over the three years.
Guarantees are granted under the rst instalment guarantee scheme, which means that Invega takes the rst risk
for non-repayment of the loan. After the debtor repays the bank the guaranteed part of the loan, Invegas guaran-
tee ends. Invega examines the business case and makes a decision on each loan given by the bank to the SME.
Invega delegates to the bank the control of the disbursement/utilisation of the loan. Invega generally grants up
to 50 % guarantees on bank loans to eligible SMEs. Banks do not usually require the additional pledge of any col-
lateral to secure the guaranteed part of the loan.
To minimise the loss risk, Invega requires the businessman to invest not less than 20 % of his own capital or assets
into the business project for which the loan with Invegas guarantee is taken. Invegas guarantee scheme is very
attractive for entrepreneurs and banks, but more risky to Invega. The risk is shared with the State budget: 90 % of
the losses incurred by Invegas operation under the rst instalment guarantee scheme are covered from public
funds.
The maximum loan amount that could be guaranteed by Invega is LTL 1 million (EUR 289 600) for investments,
and LTL 500 000 (EUR 145 000) for working capital. Particular importance is attached to the nance of micro-com-
panies. Under the new scheme, Invega provides guarantees of up to 80 % in the case of microcredits (up to
EUR 25 000) for investments. The Invega guarantee scheme is supported by the European Investments Funds
50 % counter-guarantee under the SME guarantee facilitys loan guarantees window. This fact has made a big
step forward strengthening condence with the banks. Fromthe beginning of the activity to 1 October 2004, In-
vega guaranteed 405 loans to SMEs, of EUR 26 million total portfolio.
Invega has cooperation agreements with almost all commercial banks which have around 400 branches and cus-
tomer service ocers in all main cities and towns over the country.
Advantages
Currently, every partner knows what will happen in the case of default. Banks can apply for guarantee payment
immediately after the default and receive up to 50 % of the guarantee amount in advance. The rest of the guaran-
tee amount will be paid to the banks after the realisation of collateral. No additional collateral is needed to cover
the guaranteed part of the loan, thus allowing lower administration expenses to the bank and lower credit cost to
the borrower. Banks are satised that they can receive a good nancial participation of Invega in the case of de-
fault and thus are motivated to conduct a recovery action.
The rst instalment guarantee principle is good for the ecient use of limited public resources allocated to fa-
cilitate SMEs access to nance, and for increasing the number of potential beneciaries. The design of the guar-
antees on microcredits was made to give a maximum of additionality to the system and the maximum of incen-
tives for use on behalf of the banks. This scheme has created more favourable conditions for small and starting
companies to get external nancing for their business development.
The Portuguese Mutual Guarantee Scheme
The national guarantee scheme is based on the following principles.
1. The guarantees are issued by autonomous mutual guarantee societies (MGSs) in
which the beneciary SME also holds a stake. The MGSs are credit institutions,
under central bank supervision, subject to common law principles and operating
according to market criteria. The main shareholder categories are represented on
the Board (one independent chairman, one bank representative, two SME dele-
gates and one person representing the national SME agencies). A minimum of
25 % of their initial share capital (and 50 % after three years of activity) should be-
long to SMEs and SME associations. The leading national banks and public entities,
such as IAPMEI and ITP (tourism agency), also hold stakes in all MGSs.
2. A counter-guarantee mechanism is granted through the Mutual Counter-Guarantee Fund, managed by
SPGM. The counter-guarantee is compulsory and works as second level guarantee of all MGS portfolios, being
the part counter-guaranteed dened by the funds general council, according to specic rules. IAPMEI and ITP
have subscribed to the fund capital. The fund is also subject to central bank supervision and should respect
most rules on nancial risk and provisions. The fund started operating in early 2000. Fromthen to the end of
2002, it counter-guaranteed SPGM portfolios. From 2003 onwards, it concentrated fully on counter-guaran-
teeing the MGS portfolios.
SPGM has concentrated on guarantees beneting medium-sized SMEs. The risk-appraisal process used to be bet-
ter achieved within these kinds of companies, as the availability of nancial and market data was greater than for
typically very small SMEs. This management option has allowed SPGM to test and build nancial analysis and risk
appraisal models, the same applying to the technical training of sta. However, the consequent high average
guarantee amount (and so counter-guarantee too) has been showing a reducing trend along time, particularly
since MGSs started operating on 1 January 2003. These focus on the smaller and nancially weaker SMEs. The
evolution of the national guarantee portfolio exhibits interesting growth rates with regard to both the volume
and number of operations. This is especially visible from 2002 onwards, when SPGM was operating through three
branches that would become the head oces of the rst three MGSs (Oporto, Lisbon and Santarm).
The activities of the existing MGSs have been boosted by the support of the European Investment Fund (through
an agreement established with the Mutual Counter-Guarantee Fund) regarding certain kinds of guarantees and
beneciary SMEs. The same applies to joint activity protocols that have been signed with the major national
banks, allowing SMEs to access medium- and long-term nance in privileged conditions in respect of pricing and
average decision time. By June 2003, the accumulated portfolio of issued guarantees had reached EUR 223 mil-
lion.
The number of MGSs is expected to increase soon, with the setting up of one society fully dedicated to the rural
world. This corporation will work from premises in the central city of Coimbra and will have national geographical
coverage. As regards other industries covered by the existing three MGSs, the growth strategy includes the open-
ing of regional branches in specic locations around the Portuguese territory (including the Azores and Madeira).
This strategy has in mind a medium way between proximity with smaller SMEs and scale economies to achieve. In
fact it is important for the SMEs to feel the MGS is nearby (because of its ability and comfort to deal with the SME
risk), but on the other hand there are some scale economies which may be achieved when the scheme works
through branches instead of other MGSs.
This network of small local branches is expected to count 18 oces in two years and will work as the front oce
of the scheme. SPGM now provides accounting, computer, legal and administrative services to all existing MGSs.
Its experience as the only guarantee society for approximately eight years has made it clear for the scheme
decision-makers that it would rather continue executing these kinds of tasks, allowing the MGSs to concentrate
on the guarantee operation scope.
SIAGI, France
Characteristics of SIAGI
SIAGI was created as a mutual guarantee company in 1966 by the chambres de mtiers,
public institutions in charge of the interests of craftsmanship and small rms of up to 15
employees. SIAGI provides guarantees to a large proportion of French banks dealing with
very small rms. It employs 90 people through a head oce located in Paris and a network
of 28 branches. In 2003, there were 6 000 loan guarantees, of which two thirds nanced,
company transfers and EUR 440 million of loans were guaranteed. As of 31 December 2003, SIAGI had 45 000
guaranteed companies in its portfolio, i.e. EUR 1 985 million of outstanding credit liabilities guaranteed.
For a dozen years, SIAGI has concentrated its activities on specic guarantees dedicated to nancing company
transfers, not only from the banks but from vendors (since January 2004 SIAGI has experimented with guarantees
to vendors) or suppliers of raw materials (SIAGI has an agreement with a leading French miller). There are 60 SIAGI
local experts who examine each request on a case-by-case basis. These experts meet with each new entrepreneur.
The guarantee percentage, ranging from 20 % to 60 %, is adapted to each project, the average being 34 %.
Each project is dierent; SIAGI uses a hiring approach vis--vis the new entrepreneur. Since 2001, SIAGI has been
experimenting with the substitution of collateral (CARE 2001) to protect the entrepreneurs personal and family
property. Since 2000, SIAGI has provided services: selection at the entry point and Siagnostic, a new tool used in
following up projects to prevent problems, to solve them and, as a result, to reduce the probability of default.
What are the key success factors of relevant risk prevention?
Identify simple events that can become dramatic
Have the entrepreneur anticipate and detect anomalies
Oer a call-centre backup with experts online
Quick and condent actions
Follow up
How does it work?
Subscription: When an entrepreneur is about to borrow money from a bank in order to nance a project, the
bank recommends subscribing to Siagnostic. SIAGI makes the oer, including conditions of access, barom-
eter (i.e. types of events to watch over) and cost. The payment of Siagnostic subscription is included in the
payment for the guarantee.
Conditions and cost: EUR 200 (excluding taxes) paid at by the enterprises
Period of availability: the life of the loan
Unlimited access to online services, but only one audit
Method of operation in case of need
1. The entrepreneur calls the online expert (and is called back within six hours)
2. Discussion: useful information provided to the entrepreneur
3. Advice from experts
4. If necessary, a local audit is ordered
Results
3 000 subscribers from 1 January 2000 to 31 December 2003
Annual rhythm: 1 000 subscribers
Market share: 33 % of well-targeted entrepreneurs
Reduces the probability of default by up to 40 %
Hitelgarancia Rt., Hungary
(Creditguarantee Co.)
Agrr-Vllalkozsi Hitelgarancia Alaptvny, Hungary
(Rural Credit Guarantee Foundation)
Hitelgarancia Rt. was established in 1992 by the Hungarian State and nancial institu-
tions as a well-capitalised company, in order to support the access of domestic small and
medium-sized enterprises and organisations established to implement employee share option programmes
(known as MRPs) to loans and bank guarantees by means of granting them unconditional payment guarantees
(sureties).
The Rural Credit Guarantee Foundation was established under a Phare programme in 1991. Founding mem-
bers included the Ministry of Agriculture and ve nancial institutions. The main goal of the foundation is to in-
crease the creditworthiness of rural enterprises to promote their nancial viability and to improve their access to
lending through credit guarantees. The guarantee schemes make it possible to obtain loans/bank guarantees for
those viable undertakings which are not in a position to present acceptable cover for obtaining credit and, con-
sequently, the bank without the strengthening or supplementation of the cover available would consider
the lending too risky. The loan applicant apart from the unconditional payment guarantee granted/under-
taken by the guarantee institution shall also oer other collaterals acceptable for the bank. In respect of the
cover requested, the banks take decisions within their own scope of authority. Decisions concerning the neces-
sity of guarantees are taken by lending banks or savings cooperatives, and the applications for obtaining guaran-
tees are presented by these institutions.
Who can apply for unconditional payment guarantee?
Businesses and private entrepreneurs qualifying as small and medium-sized enterprises in accordance with Act
XXXIV of 2004 on small and medium-sized enterprises and development support oered to SMEs as well as or-
ganisations established in accordance with Act XLIV of 1992 on employee share option programmes can apply.
The guarantees can be applied for loans or bank guarantees with tenors of up to 15 years. The extent of the guar-
antee can reach a maximum 80 % of the requested loan or bank guarantee. Guarantees provided are backed with
a 70 % public counter-guarantee. The total value of outstanding guarantees of one client cannot exceed HUF 600
million (approximately EUR 2.4 million) in the case of Hitelgarancia, HUF 600 million for integrators and HUF 150
million for other clients in the case of the foundation.
Hitelgarancia Rt. considers the procedure of issuing guarantees under special agreements with banks to be a
highly successful practice. The institution had been looking for a method to undertake guarantees in bulk, yet in
a prudent, risk-sensitive, cost-saving way for both the banks and the guarantor. Conditions of creditworthiness
have been dened jointly for each specic product initiated by the partner bank. The agreements regulate the:
eligibility criteria,
acceptable loan purposes,
types of collateral and the proportion of cover required,
minimum and maximum sum of the individual loans,
tenor,
xed percentage of the guarantee issued if all the above criteria are met.
On the basis of these agreements the nancial institutions can develop uniformsoftware to handle the product,
and the decision-making in both the credit and the guarantee assessment takes much less time. The conditions
of one of the well-functioning agreements are indicated below.
Clients: SMEs, as dened by law
Maximum tenor: 10 years
Working capital nance, investment and development loans, bank guarantees
Maximum amount per client:
loan: HUF 50 million (EUR 200 000)
bank guarantee: HUF 80 million (EUR 320 000)
loan and bank guarantee together: HUF 100 million (EUR 400 000)
Guarantee rate: 80 %
The number of contracts signed during the approximately one-and-a-half-year lifetime of this agreement is
roughly 1 800 and the aggregate guarantee portfolio exceeds EUR 124 million.
BDPME/Sofaris, France
Sofaris, created in 1982 by the French government, is a specialised nan-
cial institution fullling a permanent mission of public interest. The
shareholders are the French State via BDPME (Bank for Development of
SMEs, 58.3 %), banks and nancial institutions (41.7 %). Its aimis to man-
age loan guarantee schemes funded by the French State, Caisse des dpts et consignation (CDC), the European
Commission and French local authorities. BDPME has 40 local branches, including French overseas departments.
Fifty thousand guarantees are granted annually, representing an amount of nancing of around EUR 4 400 mil-
lion. This represents a part of around 20 % of the loans granted by banks to SMEs in France, including 65 % of
SMEs in their early stage.
Sofaris, as a guarantee system, has an increasing coverage in innovation nancing, via several schemes.
Medium- and long-term loan for innovative SMEs: when an SME is declared an innovative enterprise by
ANVAR (National Institute for Research and Development), Sofaris increases the share of risk guaranteed
(60 % instead of 40 % of the investment amount). Furthermore, the Sofaris guarantee of loans is often used,
by some banks, as substitute collateral in the nancing of intangible investments.
Financing of biotechnology: it combines loans and equity guarantee schemes. By the end of 2003, 16 loan
guarantees had been granted for EUR 17 million of nancing and 23 VCFs had been authorised.
Guarantee of venture capital fund: the Dveloppement technologique pour les FCPI/FCPR fund, counter-
guaranteed by the EIF granted 285 guarantees in 2003.
Counter-guarantee of banking guarantee: in addition, Sofaris is currently investigating a guarantee scheme
aimed at encouraging large corporations to entrust key projects to innovative SMEs. The principle would be
that Sofaris counter-guarantees a bank which pays to the client a contractual amount in the case of SME
bankruptcy. The counter-guarantee granted by Sofaris should help SMEs nd banking guarantees, in order to
act as a more trustworthy provider.
Focus on the equity guarantee scheme
Sofaris signs an annual framework agreement with VCFs after analysing the management team, the investment
targets (focus on innovation) and past performances. Each VCF benets froman annual portfolioinsurance and
is guaranteed up to a maximum investment amount, with investment decisions totally free (all eligible invest-
ments are guaranteed until the maximum investment amount is reached). The eligible investments are nancing
in shares, convertible bonds or subordinated loans, in young (less than seven years old) unlisted SMEs located in
France. The guarantee covers 50 % of the investment for 10 years and can be raised to 70 % for less than three-
year-old enterprises. The fee is split between an annual percentage on the investment amount and a small share
in capital gains made by the VCFs. In terms of payment amount, a stop-loss ceiling is determined based on the
portfolio composition. The guarantee comes into play when the SME is declared bankrupt or in the case of divest-
ment with a loss when the SME has lost more than 50 % of its equity since the investment date.
The advantages of this mechanism are, for the government and European Commission, a perfectly controlled
nal risk thanks to the stop-loss technique and an important leverage on public money (when VCFs achieve a
positive IRR, the leverage increases dramatically). The advantages for VCFs are simplied formalities, quick deci-
sions and a smoother J curve. This is particularly useful when trying to bring in institutional investors which are
especially averse to highly volatile returns. Furthermore, the guarantee mechanism increases the amount of cash
available during the rst years after investment phase, thus allowing for second round nancing or new invest-
ments.
Socama, France
The Socama are mutual guarantee societies (MGSs). They are private companies. The
equity capital and the guarantee fund are entirely provided by the 260 000 stake-
holders. There is no State aid in the mechanism of the guarantee at any level (national
or regional).
Their activity consists of granting a guarantee in favour of small companies, entrepreneurs
that need to borrow money from the bank in order to fund a project, which have a lack of
collateral but whose managers are considered as good and skilful professionals by the managing board of MGSs.
Socama, are both regional and multi-professional schemes. The decision of granting a guarantee is taken round
the corner, as close as possible to the small companies. The 42 Socama cover the whole national territory. The
regional network is completed by more than 100 credit committees at the local level (dpartements).
Socama grant their guarantee to the clients of banques populaires only. The credits are medium-term and long-
term. The average maturity is six years.
When Socama give a positive appraisal, according to the status, the borrower has to:
participate in the capital of the Socama for about 0.1 % of the amount of the guarantee;
pay a deposit in the guarantee fund for 1 % to 1.50 % of the amount of the guarantee;
pay the annual fees to the Socama (about 0.50 % included in the credit rate).
Those rst two items are reimbursed at the end of the total repayment of the loan. If Socama has to pay for a great
number of defaults, the losses may aect partly the reimbursement of the deposit.
The professional and independent appraisal given by the Socama credit committee completes the nancial ap-
praisal given by the bank. What Socama look for is to appraise the human factor, which is the most decisive point
to assess.
Socama have developed fruitful collaboration with the chambers of craftsmen, commerce and professional
unions. Members of the local credit committee belong to those organisations. They bring to the committee their
experience, the accurate knowledge of the local economic situation, the professional cursus of the borrower.
This constitutes the real added value on which both bank and Socama can base the decision of granting a loan
and a guarantee. The expected added value is exactly the opposite of a credit scoring contribution.
Activity
During the last ve years, Socama have, annually, granted their guarantee to 25 000 entrepreneurs for more than
EUR 550 million. At the end of 2003, the amount of outstanding loans was EUR 1.5 billion. Socama is the rst net-
work in France for the guarantee of loans to the small enterprises.
Sowaln, Belgium
Since its start in mid-2002, Sowaln has guaranteed directly or indirectly (through
MGAs) medium- and long-term bank loans nancing the creation, the develop-
ment and the transmission of Walloon SMEs.
Since May this year, Sowaln has also been permitted by the government to guarantee investments made by
business angels in the form of subordinated loans or capital increase.
The scheme is intended to increase the number of Walloon SMEs nanced by business angels and the amounts
invested.
The budget available for the scheme represents EUR 13 000 000. Regarding the leverage of the guarantee and the
willingness to achieve 40 interventions a year during ve years, it should contribute to the creation of 1 800 new
jobs in the Walloon Region.
Scope of the guarantee
The guarantee is partial, meaning that it covers a maimum 50 % of the investments realised by the business angel
during years 1 to 3, 40 % during year 4 and 30 % during year 5.
The guarantee is also suppletive, meaning that it might only be called in the case of bankruptcy or liquidation of
the enterprise. The business angel is supposed to produce proof showing that he will not receive any potential
dividend resulting from the bankruptcy or the liquidation.
Duration of the guarantee
Five years.
Size of the underlying eligible investments taken into account for the guarantee
Minimum EUR 25 000; maximum EUR 150 000, in cash.
Cost of the guarantee
Annual fee payable during ve years: at least 2 %of the guaranteed funds.
Eligible enterprises taken into consideration for the guarantee
SMEs or VSEs (European denition) nancially sound located in the Walloon Region.
Sectoral restrictions
Most of the activity sectors are eligible for the guarantee, except health, banking and insurance, real estate, agri-
culture and shing.
Procedure
The demand needs to be introduced by the intermediary of a BAs network before the equity investment or the
grant of the subordinated loan. The network and the business angel are supposed to have previously signed a
convention with Sowaln. Files are submittedtwice a month to an investment committee, which implies a prompt
decision-making process and no red tape for the enterprise.
KfW StartGeld programme, Germany
The reasoning for launching the scheme
The StartGeld loan programme was launched in 1999 to improve access to loan -
nance for entrepreneurs starting their business and smaller companies with up to 100
employees. StartGeld loans can be used to nance investments and working capital related to starting a business
and for taking over and expanding an existing smaller company. Loans which bear a market rate of interest are
granted for up to EUR 50 000 for each project, with a maturity of up to 10 years and a grace period of up to two
years. StartGeld loans therefore aim at providing long-term nance of a small scale to newly created and estab-
lished smaller companies, thus targeting a market segment in which access to long-term external capital is often
dicult to obtain.
Programme approach and advantages
StartGeld loans are market-rate commercial loans. The pricing also includes a risk premium which is incorporated
in the borrowers interest rate. StartGeld loans, like any other commercial loan, have to be secured by collateral
provided by the entrepreneur or the SME. However, the provision of sucient collateral is often the key bottle-
neck for new enterprises and smaller companies, preventing them from obtaining commercial loan nance. For
this reason, the StartGeld loan scheme combines loan nancing with a risk-sharing element in order to allow
lending to enterprises with promising business plans even if the available collateral is not entirely sucient. This
approach allows access to loan nance for a group of entrepreneurs and smaller enterprises which otherwise
would not be able to raise enough external capital despite having a sound business concept.
Achievements
The introduction of the StartGeld loan programme was made possible through a balanced risk mitigation ar-
rangement of all nancing parties involved in running the scheme. The risk-sharing partners are the European
Investment Fund (EIF), KfW and the respective local on-lending bank. KfW provides StartGeld loans via on-lending
banks to the enterprise, oering a partial exemption fromliability of 80 %for the on-lending bank. In the case of
default, the on-lending bank therefore has to assume only 20 % of the total loss. KfW and EIF equally share the
remaining 80 % of liability for any losses, up to a certain ceiling (cap rate of the guarantee).
The loss-sharing between EIF and KfW for the StartGeld loan scheme was arranged under the SME guarantee facil-
ity of the multiannual programme for entrepreneurship and enterprises, particularly SMEs (MAP), 200105. Be-
tween the launch of the StartGeld loan scheme in 1999 and August 2004, loans amounting to a total of EUR 902.95
million were granted to around 28 400 entrepreneurs and smaller enterprises, with an average loan amount of
EUR 31 800.
The StartGeld programme is complemented by KfWs microcredit scheme, launched in October 2002, covering
the very small or micro businesses in need for small-scale initial investments. This additional microcredit scheme
targets primarily rst-time entrepreneurs (including qualied jobless persons), business start-ups and very small
companies with less than 10 employees. The microcredit scheme provides market-rate loans of up to EUR 25 000
with a maturity of up to ve years and a grace period of six months. Loans are granted for investments and work-
ing capital. The microcredit scheme is supported by a similar guarantee arrangement between the EIF, KfW and
on-lending banks under the MAP of the European Commission, under which EIF assumes an even larger risk por-
tion, due to the higher risk prole of the target group.
AWS, Austria
Help for small and medium-sized enterprises (SMEs) in dicult nancial situations is cur-
rently a matter of serious discussion in the European context (see for example http://
ec.europa.eu/comm./enterprise/entrepreneurship/support_measures/failure_bankruptcy/
index.htm).
The Austria Wirtschaftsservice GmbH (AWS) (www.awsg.at) runs a programme for SMEs, introduced by the former
BRGES Frderungsbank in the year 1999. The support oered by this nancial restructuring programme con-
sists of guarantees for long-term loans and equity capital with guarantee quotas of between 50 and 100 %.
The aims of the programme are to secure the enterprise for at least the medium-term and to conserve existing
jobs. Conditions for the raising of new funds via guarantees include the active participation of entrepreneur(s)
together with important creditors and banks. Companies with acute insolvency cannot be supported.
The missing equity capital should be replaced through the processes of consultation and nancial engineering
for example by creating new conditions for terms, interest, waivers, new funds, securities, etc. A nancial clear-
ance of a minimum three years is planned through these measures. In this way, guarantees up to EUR 1.0 million
(EUR 0.75 million for working capital) with a duration of 10 years (up to 20 years maximum) can be provided. With
the new funds the structure of creditors can be cleared, and the funds can also be used for new concepts and
consultancy and even for new investments.
The conditions for guarantee provisions are between 1.25 and 2.0 % per annum and even higher in respect of
European competition regulations. A handling fee of 0.5 % is also charged with the application. For this programme,
as for all other SME programmes of the AWS, an attractive interest rate is received by Austrian banks in October
2004 this stood at 3.875 % per annum. For projects in the tourism branch, which are within the responsibility of
AWS, a similar programme is carried out by the sterreichische Hotel- und Tourismusbank (www.oeht.at).
It should be considered that the programme is new and so far very small, with approximately 10 to 15 guarantees
issued per annum, and about 70 % of the projects must already be declined in the application process. Reasons
for declining applications are often that the state of insolvency is already reached or that the contribution of
entrepreneur(s) is not substantial. After a period of more than four years the total losses have been less than 1 %
of the total commitments per annum, although in the model plan losses up to 4 % per annum were calculated.
Up until the end of 2003, 48 guarantees with total commitments of EUR 11.4 million for new credit lines of EUR 18.0
million had been issued. Most projects involved manufacturing and service companies. The programme is still in
the test period, which will end by 2006, but the experience has so far been very positive.
Vkstkaution, Denmark
The government-backed Danish investment fund, Vkstfonden, oers a unique integrated approach to the provi-
sion of funding for innovative SMEs. By selectively combining its three dierent funding teams equity and
subordinated debt investments, fund-of-funds, and loan guarantees and through its extensive network of
private investors and banks, Vkstfonden is able to put together a nancial package that is specially adapted to
the funding needs of each SME in its portfolio.
Explanation
When a company applies for a loan guarantee (Vkstkaution), a loan guarantee manager determines whether it
is relevant to involve managers from other teams to better assess opportunities and risks regarding the com-
panys business model.
Advantages
There is greater credit assessment capability as each loan guarantee manager can tap into a deep pool of
resources and skills across the entire organisation.
Vkstfonden is able to meet virtually any funding need that an innovative SME experiences as it progresses
from proof-of-concept to the shipment of fully edged products.
Throughout the portfolio life of a company, as Vkstfonden moves from equity participation through fund-
of-funds to loan guarantees, investment managers work with the company, building and acquiring knowl-
edge about its strengths and weaknesses.
Vkstfondens investment managers rely on built-in knowledge-sharing mechanisms, which ensure that
someone handling a later-stage nancing such as a loan guarantee can access the cumulative knowledge of
all colleagues who have previously worked with the same company. Vkstfondens portfolio management IT
system makes accessing information on a companys funding history easier, too.
The layout of Vkstfondens oce space further underpins interaction based on its open-space oces, where
each team has a designated work area yet also has an unobstructed view of the other teams.
For the entrepreneur, the organisational set-up at Vkstfonden means that if a business plan is submitted to
an equity investment manager, who after considering the plan determines that the riskreward proposition
better matches a bank nancing propped up by a loan guarantee, the plan is handed over to a colleague in
the loan guarantees team. An assessment of the proposal is then made and, if favourable, a funding package
containing a loan guarantee is proposed to the entrepreneur.
Branding Vkstfonden is made easier and more eective due to the internal circulation of investment pro-
posals, since it matters less if an SME comes through the wrong door as long as it ends up in the hands of the
right team with the nancing tool best suited for it.
Close cooperation throughout the organisation also is required for Vkstfondens top management to moni-
tor overall risk exposure. In particular, management is very mindful of the portfolio implications of acquiring
exposure to individual SMEs through a variety of nancial instruments.
Since 2000, when the loan guarantees were introduced, Vkstfonden has helped fund close to 1 500 com-
panies, making it by far the most active provider of nance for innovative, growth-oriented Danish compa-
nies.
SFLG, United Kingdom
The guarantee system currently provides an open-ended commitment from the government,
through the Department of Trade and Industry (DTI), to guarantee eligible loans made by the
participating lenders. Lenders make the loans from their own capital and have the option of delegated authority
to directly apply the guarantee to eligible loans valued at up to GBP 30 000. All loans over GBP 30 000 are subject
to eligibility checks and individual issuing of the guarantee by ocials of the Small Business Service (SBS), part of
the DTI that is responsible for all SME activities. Risk is shared between the DTI and the lender on a 75:25 ratio.
Process
An enterprise approaches its bank or one of a number of other approved business loan providers for a loan. The
lender appraises the business plan and concludes that it is a viable proposition. However, because the enterprise
does not possess the necessary collateral against which to secure the borrowing, the lender is unwilling to pro-
ceed. At this point SFLG can be considered. Subject to the enterprise meeting a number of eligibility criteria the
lender will be entitled to use the guarantee. The most important criteria are:
not more than 200 employees (limit applies across group if business is connected);
turnover: not exceeding GBP 3 million, or GBP 5 million for manufacturing;
maximum loan: GBP 100 000 for businesses trading for up to two years, otherwise GBP 250 000;
purpose of loan: certain restrictions apply, to ensure additionality;
business sector: certain restrictions apply, but most sectors are eligible.
Volumes
Almost GBP 4 billion of lending to almost 90 000 businesses has been guaranteed over the 23-year life of the
scheme. In 2003/04 almost 6 000 loans with a total value of over GBP 400 million were guaranteed. Direct opera-
tion of the scheme is the responsibility of a team of 16 sta.
Conditions for an eective guarantee system
A mature banking system is necessary. Before oering a loan, lenders have to satisfy themselves that they would
have oered conventional nance but for lack of security. They should establish that all available assets have been
used to facilitate conventional loans. In this way, the amount of State-guaranteed credit cannot exceed the dier-
ence between the enterprises available security and the security a bank would normally require.
In the case of default, the borrower is fully liable. The lender carries a proportion of the risk, which should ensure
that the lender has applied its normal commercial criteria when assessing the loan application. It also gives the
lender a more direct interest in pursuing recovery on its own behalf and that of the government in the event of a
default.
The borrower pays a premium of 2 % of the outstanding balance of the loan each year, which contributes towards
the operating costs of the scheme.
The lenders understand the governments eligibility criteria. If in the event of a default they cannot demonstrate
that the rules have been followed then they are wholly liable for the loss.
Future developments
An independent review of SFLG was commissioned in December 2003 and reported in October 2004. It suggested
that there was still a requirement for such a mechanism but proposed a greater delegation of decision-making
responsibility to the lenders, restricting eligibility to businesses under ve years old and other eligibility simpli-
cations.
Brgschaftsbanken, Germany
History/structure
The credit guarantee organisations in Germany, as they are today, began in the 1950s. On the initiative of trade
organisations, savings and loan associations, cooperative banks and the Federal Department of Economics the
concept of state-related nance help for small and medium-sized enterprises was called into existence. Founders
and shareholders of Brgschaftsbank are the chambers of commerce and crafts, associations of various business
sectors, banks and some insurance companies. Self-help means that no dividends are paid out; surplus funds are
retained and allotted to reserves. Guarantee banks operate under the regulations of the German banking law and
are supervised by the German banking authority. In addition to the help the founders and shareholders provide,
the government assists with partial counter-guarantees. Today there are 22 federal guarantee schemes in the dif-
ferent states.
Objectives/scope of activities
Guarantees are given for capital investments for start-ups and established SMEs for the nancing of assets and/or
working capital. Beneciaries are entrepreneurs according to the EU SME denition.
How to get a guarantee (rst way)
The prerequisite for a guarantee of a Brgschaftsbank is the application from a rm together with a statement
from its bank asserting their readiness to take over the share of the risk the guarantee does not cover. The Brg-
schaftsbank share of the credit risk varies between 50 % and 80 %. The longest term runs for 23 years; the average
term of the guarantee is up to 10 years. The upper limit extends to EUR 1.0 million. A at fee of 1.0 %of guarantee
amount and a yearly commission of approximately 0.8 % of loan amount are charged.
New approach to get a guarantee: guarantee without a bank (second way)
Most start-ups often do not obtain bank nancing for their projects as they do not have a proven track record and
the amounts involved are rather low. This new approach has been developed to facilitate access to credit. In con-
trast to the rst way, the entrepreneur makes direct contact with the guarantee bank, which evaluates its business
plan. If the guarantee bank is convinced of the success of the project, it approves the application and issues a
certicate with its readiness to guarantee a loan. With this assurance, the entrepreneur selects a bank of its own
choice, which grants him the necessary loan, based on the guarantee banks certicate (valid for three months).
The amount to be granted ranges from EUR 50 000 to EUR 300 000. Banks complain about screening and monitor-
ing costs. This way of obtaining a guarantee results in less transaction costs for the SMEs bank and leads to a
greater willingness to grant the credit.
Approval process
The ultimate criteria for approval of a guarantee application are the nancial viability of the project. The credit of-
cers collect and evaluate information such as balance sheets, business plans, cash-ow projections, comments
of the chamber of commerce or crafts or the appropriate business or trade association and data on the specic
business sectors for example the competitive situation. For the application of a person planning to become
self-employed, the professional qualication is particularly carefully reviewed, as is his expertise in business and
nancial aairs. A detailed report and rating of the rm, prepared by the credit ocer, will be discussed in a com-
mittee consisting of representatives from trade and industry, the banks and representatives from the ministries of
economics and nance.
Figures
Guarantee schemes support in a very ecient way the creation of newbusinesses and jobs; every year more than
2 500 start-ups are stimulated. Furthermore, they contribute to improving access to nance for SMEs. In total,
more than 5 000 entrepreneurs are beneciaries of the German guarantee system.
The Italian Condi networks
Mutual guarantees are very active: relying on the partnership with more than 941 000
micro-businesses and small and medium-sized enterprises, they had an outstanding guar-
antee of EUR 11.3 billion at 31 December 2002, based on responsible own funds amount-
ing to EUR 1.4 billion. The Condi have not only granted EUR 6.3 billion guarantees to SMEs, but they have also
increasingly conducted consulting activities and delivered nancial services to their aliates.
Reasons of success
First of all, it should be noted that Condi are born from the association of small entrepreneurs, based on co-
operation and mutuality, in order to overcome huge diculties to access external nancing sources while pre-
serving the economical and legal autonomy of each enterprise. They are not based upon a business-policy atti-
tude adopted by public authorities.
The voluntary aspect of this SME aggregation usually implies the existence of a promoter, a role which was played
by their entrepreneurial associations. The Condi are born as a natural answer to the need of placing a further
intermediary at the centre of the relationship between banks and SMEs.
They have focused their activities on getting additionality for their members:
obtaining additional credits compared to the amounts for which they were normally available;
obtaining interest rates in line with prime rate as well as more transparent additional terms;
focusing the credit analysis on corporate protability capacity, rather than on the mere assessment of collat-
eral value.
Condis form a nationwide network composed of 600 entities. This way, there is close vicinity between the
schemes and the local applicants. There is a perfect knowledge of the eld elements. Their sectorial base (handi-
craft, commerce, industry and agriculture) allows them as well to have an in-depth knowledge of the character-
istics of the values that are determinant for the good management of a business. The decision-making and ad-
ministrative bodies of the Condi are based on aliate enterprises, which play a fundamental role. These
enterprises have a central assessment role as they directly or indirectly manage their organisation and technical
committees.
Their relationship with on-lending banks is governed by special agreements and is based upon a monetary de-
posit, called risk fund, that represents the importance of the guarantee capacity and the negotiating power of
Condi. Moreover, they provide information about enterprises and make preliminary investigations, saving time
and cost for the lender. In exchange, the bank reduces the interest rate, provides easier access to credit, and com-
mits the same conditions for the duration of the nancing.
In conclusion, we have two results: which can be illustrated from the craft Condi.
First of all, the default rate is very low: exactly 1.6 % guaranteed by Condi, compared with an 8.5 % default
rate for the industry as a whole, according to an estimate by several banks;
Secondly, on a total amount of loans granted to the craft sector (about 24 % of the total enterprises), EUR 49 870
million, approximately EUR 9 100 million (18 %) has been channelled by Condi active in this sector.
Sociedades de garanta recproca, Spain
The mission of the Spanish guarantee system is to help the micro-businesses and
SMEs facing nancial diculties in a country where 90 %of the business network
is formed by small and medium-sized enterprises. To reach that goal, the guarantee system of Spain has 22 mu-
tual guarantee societies called sociedades de garanta recproca (SGR) and a public counter-guarantee society
called CERSA (Compaa Espaola de Reaanzamiento) which is supported by the State.
A network of 20 regional companies and two specic sectors have been associated into its union body, Cesgar
(Confederacin Espaola de Sociedades de Garanta Recproca) and it covers the whole country. The SGR were
created in 1979, after Spain had initiated an economic policy of openness.
The Spanish system is the result of a long legislative process from 1979 to 1998. The January 1994 law resulted in
a very complete system with:
tax advantages (constitution of tax-free provisions);
premium grants by the autonomous regions for certain programmes (women entrepreneurs, innovation
etc.);
a public counter-guarantee run by CERSA since 1994: 30 to 75 % of the losses (33 % on average at the end of
2003) are assumed by CERSA, according to the political sensitivity of the programmes (higher for innovation
or young entrepreneurs);
certain counter-guarantees are given by the autonomous regions.
The SGR (companies) have a particular legal form that meets the legal denition of the SGR.
It is a mutual system with SME members (almost 74 000 SME members and beneciaries, 55 %of the equity)
and protector members (autonomous regions and other public powers, 29 % of the capital; nance compa-
nies, 12 % of the capital; and SME bodies, chambers of commerce, 4 % of the capital).
The SGR are considered nancial entities by the Law 1/94 and that is the reason why they are under control
and supervision of the Bank of Spain. The shareholders are divided into SMEs (57 %), regional administration
(27 %), credit entities (11 %) and others (5 %).
The SGR addresses all SME sectors: industry (33 %), services (33 %), commerce (16 %) and construction (15 %).
Unlike other guarantee societies, the SME contacts the SGR directly to obtain 100 % guarantees on their credit
needs. In some cases they give their own collateral to the SGR. They receive nancial advice in order to obtain
optimal funding. The Spanish system is enjoying strong growth: + 16 % in 2003. The present outstanding commit-
ments are approximately EUR 3 200 million.
Cesgar is also in charge of the formation process of the MGS workers and organises every year a training plan in
order to improve the knowledge and formation of the workers and also the relations between all its members.
Nowadays, Cesgar is leading a project with an international consultancy company for all the SGR to face the new
capital accord, known as Basel II, in order to make a better assessment of the risk and to adapt to the new rating
culture.
BBMKB, the Netherlands
The guarantee system consists of the allocation of guarantee envelopes to
partner banks, out of a total annual budget decided by the State. Banks
supply the guarantee on their own credits without an individual decision
being made by the fund. The fund is the guardian of the rules and decides on the principles allowing the issuance
of a guaranteed loan. The principle of risk sharing is 50:50 on the nal loss. The entire portfolio is not covered, but
every single operation is reported to the fund.
Explanation
Once an entrepreneur (SME employing a maximum of 100 sta) intends to apply for a government-guaranteed
loan, the rst thing he or she has to do is contact his or her bank. As government-guaranteed loans are made
available by a multitude of banks, the entrepreneurs own bankers will probably also have this facility on oer. The
bank decides whether the entrepreneur qualies for such a line of credit.
The bank pays a one-o commission to the Ministry of Economic Aairs for providing surety, in the amount of 2.0
to 3.6 % of the principal of the loan, depending on the term. The simplicity of the administrative procedure makes
the scheme accessible to companies, which is particularly important for SMEs and it speeds up decision-making
regarding the issuing of credit.
Advantage
It provides for very high productivity, as the fund manages a volume of EUR 453 million available each year for
new guarantees and an outstanding total guaranteed amount of EUR 1.3 billion with only 14 people.
It requires a very high maturity of the banking system. Before oering a loan, lenders have to be convinced
that they would have oered conventional nance but for lack of security. They should establish that all avail-
able assets (both personal and business) are used for conventional loans. This way the amount of State-
guaranteed credit cannot exceed the dierence between the companys available securities and the security
that a bank would normally require.
The bank should lose money as well in case of default. When a bank issues a State-guaranteed credit, it should
also issue a credit of at least the same amount at its own risk and expense, in order to ensure that the bank
uses normal commercial criteria assessing the loan applications. The bank must also take a rst risk element
on the guaranteed loan of 10 %. By doing so, the bank shares the risk which is covered by little and/or no col-
lateral. This increases the banks interest in careful assessment of the loan in terms of the core health of the
business concerned. Secondly, the bank has a more direct interest in an eective collection policy if losses are
to be reclaimed.
The States guarantee is reduced annually over a maximum period of 6 or 12 years. If nancing for the acquisi-
tion of property is involved or for an innovative rm, then the guarantee applies for a maximumof 12 years.
To avoid free rider behaviour, a bank has to pay the ministry a one-o commission, in the amount of 2.0 to
3.6 % of the principal of the loan, depending on the term.
The conditions of eligibility should be very well known at the level of the decision organ within the bank.
Subsequent government assessment takes place only when a loan cannot be repaid and the bank submits a
claim for losses to the fund. There is a risk that the guarantee could be cancelled. If the bank cannot demon-
strate compliance with the criteria and conditions of the scheme, the losses must then be borne by the bank
itself. For the fund, this form of assessment involves considerably lower implementing costs.
The Guarantee and Development Bank
of Czechia-Moravia, Czech Republic
To stimulate the bank stas eort in achieving the business targets, the board of directors has adopted an inter-
nal system of nancial motivation incentives. It consists of:
dividing the planned target volumes among the banks branches according to their size (calculation based on
the number of employees);
setting apart a certain sum from the banks yearly payroll budget to be disbursed as a premium depending
on the branches share of target achievement to be paid out as branch employees salary bonus;
determining the criteria for assessment of the branches share of the realisation of the business plan and
achievement of specic targets, which shall be decisive for the corresponding yearly bonus payment.
At present, there are three main criteria used to estimate stas engagement in the banks good performance, the
indicators and their importance being shown in the table below.
Criterion Indicator Weight
Business plan realisation Achievement of the predetermined volumes of specic commercial
transactions (loans, guarantees, grants and nancial contributions)
30 %
Portfolio quality Value of the individual portfolios quality compared to the average
value of the whole banks portfolio
30 %
Labour productivity Comparison of real volume of business transactions per one branch
employee to specic benchmarks (calculated on the basis of
average volume of individual operations with a special view to its
requirement on labour inputs)
40 %
There are also some additional criteria (the volume of receivables recovered from clients after the due date, sav-
ings in operational expenses, etc.) used to support decisions on the global assessment of the eectiveness of
performance of individual branches.
The interim results are monitored regularly (monthly); the portion of a yearly premium awarded to branches de-
pends on the evaluation of their share of the total achievement of determined volume of business transactions
and the respective indicators. In the case of failing to reach the planned targets, the internal rules determine -
nancial sanctions (percentage of reduction of the potential portion of the premium). Accordingly, the branch
managers follow the same principles to disburse the allocated premium among the respective employees.
Impact of motivation
The experience gained up to now shows that implementing the system of nancial incentives has helped to bet-
ter utilise the capacity of branch employees; at the same time, the motivation of branch managers, and conse-
quently, of salesmen has contributed to improving the quality of the banks portfolio. Furthermore, encouraging
the sta to make more eorts to recover debts due fromclients has a positive impact on moderating the volume
of losses as well.
KredEx, Estonia
The principles of good marketing are a clear planning process and continuous activities
with focus and target groups. The objective of KredEx is to develop entrepreneurship,
increase Estonian exports and enable citizens to improve their living conditions. KredExs
business loan guarantees are mainly directed towards small and start-up enterprises which have limited access to
loan capital even in the conditions oered by developed markets. The aimis to stimulate the creation of newjobs
while maintaining the existing ones and increasing the likelihood of start-up businesses to survive. KredEx loan
guarantees are primarily necessary for enterprises that do not entirely satisfy requirements set by banks.
Explanation
Marketing has been essential to promote KredEx`s business loan guarantees. For eciency reasons the applica-
tions for the guarantees come through banks. Therefore the most important partners for KredEx are banks and
leasing companies, especially their credit ocers. Most of the companies receive the information about the busi-
ness loan guarantees from credit ocers. Thus, in marketing eorts, KredEx focuses on being a good partner to
the credit ocers in banks and leasing companies.
Outcomes
Since 2001, when KredEx was established, the guarantee amount issued by KredEx has reached about EUR 33
million, enabling more than EUR 70 million loan volume. In 2003, 30 % of loan volume granted for enterprises
in processing industry was guaranteed by KredEx. In total, 4.5 % of loan volume granted for small and
medium-sized enterprises in all industries was guaranteed by KredEx.
In 2003, KredEx organised a client survey among credit ocers in banks and leasing companies. In describing
KredEx, over 60 % of the respondents mentioned cooperativeness, competence, and 48 % cited trustworthi-
ness as the main characterising qualities. Credit ocers noted that information sent fromKredEx is accurate
and KredEx`s specialists are recognised as competent and friendly partners.
Clear planning and analysis procedures are set as a basis for the marketing activities. There is an annual plan
and also detailed marketing plans for every quarter and month. Marketing analyses (e.g. media monitoring,
eciency indicators) are made regularly and plans are adapted operatively.
Media relations are one of the key instruments in marketing process. The goal is to be an open and operative
partner for media channels (especially printed media) by creating and maintaining good relations with them.
Press releases and comments from KredEx are regularly released in daily newspapers and economic jour-
nals.
KredEx focuses its main marketing eorts on the credit ocers in banks and leasing companies. As a continu-
ous activity, KredEx sends direct mails and newsletters, organises regular seminars, meetings and client
events. KredEx also organises an annual contest and prizes are given to the best credit ocer in every bank.
KredEx arranges regional information events to promote business guarantees among entrepreneurs.
Advertising in media is used very seldom, and mainly as supporting material for other marketing actions,
since it is not a very ecient tool for complicated nancial products.
In the future, KredEx intends to take a more personal approach towards Estonian SMEs and is planning to
organise client meetings with entrepreneurs around Estonia. To make KredEx`s activities more ecient, op-
erative and convenient, it is important to get feedback from partners and clients. KredEx will carry through a
survey to determine how business guarantees have inuenced companies, analysing their growth and devel-
opment.
Finnvera plc, Finland
In Finnvera, systems and thinking related to credit risk management that include rating date back to the 1980s.
The original rating system was developed in 1989 and since then all clients have been rated regularly.
Business analysis has been an important tool in nancing decisions from the beginning of special nancing in
Finland. Originally, the business analysis report was supposed to provide a conclusion on the nancial viability of
the applicant. Later, due to the needs of risk management and pricing, it became necessary to rank granted -
nancing. For a special nancing company that operates with weak collaterals it is essential to be able to estimate
the risk of the portfolio and make some kind of forecast of credit losses.
In the beginning there was no information about defaults of dierent kinds of companies. At this stage, the dier-
ent risk classes were given numerical values of risk (i.e. A = 0, B1 = 25, B2 = 50, B3 = 75 and C = 100). The risk of the
portfolio was measured as a weighted mean of liabilities in dierent classes and collateral was also taken into
account.
Over the years, more information has been collected and, nowadays, Finnvera uses average 12-year quarterly
measurements of defaults as an estimation of default in dierent risk categories.
This historical empirical data is one of the most valuable intangible assets that Finnvera has. Finnvera has a good
possibility of implementing the risk measurement system and capital adequacy measurement of the Basel II
rules.
The rating process is systematic: the business analyst gives rating points and weights to several functions of the
company, like management, business and nancial results and forecasts. The rating systemcalculates the nal risk
class with that information given. Rating of clients is updated regularly once a year to enhance the validity of risk
measurement of the portfolio. For small liabilities there is an automatic updating of rating in use.
The reliability and validity of rating is followed up by many statistical indicators. Examples of these indicators are:
new arrears, according to the rating of clients; arrears to liabilities ratio, according to the rating of clients; probabil-
ity of default, according to the rating of clients; and cumulative accuracy prole and accuracy ratio.
Rating is used in the company for many purposes. It is the basis for the pricing of risk premiums, one part of the
delegation of nancial decisions and a way to measure the risk in nancial decisions.
The rating of clients makes it possible to measure risk and changes of risk of the whole credit portfolio. One way
of analysing is to use so called transition matrixes. This information is essential in many strategic and operational
business decisions.
Members of the drafting group
European Mutual Guarantee Association (AECM)
Mr Douette Andr
Experts of Member States
Mr Grard Bourguilleau, Socama
Mr Johann Feyertag, Austria Wirtschaftsservice-ERP Fonds
Mrs Beatrice Havard, Sofaris
Mr Mark Hambly, Small Business Service, UK Department of Trade and Industry
Mr Ilpo Jokinen, Finnvera plc
Mr Martin Koch, KfW, Germany
Mr Guy Selbherr, Verband der Brgschaftsbanken
Mr Andrus Treier, Credit and Export Guarantee Fund KredEx
Mr Audrius Zabotka, Investments and Business Guarantees Ltd, Invega
European Commission
Mr Albrecht Mulnger, Enterprise DG until 15 April 2004
Mr Jean Noel Durvy, Enterprise and Industry DG from 16 April 2004
Mrs Helga Zechtl, Enterprise and Industry DG
Mr Vilmos Budavari, Enterprise and Industry DG
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European Commission
Guarantees and mutual guarantees Best Report No 3 2006
Luxembourg: Oce for Ocial Publications of the European Communities
2006 65 pp. 21 29.7 cm
ISBN 92-894-9334-8
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