Credit guarantees: SME access to finance and employment in Africa

Private sector development and particularly small and medium enterprises (SMEs) play a key role in economic growth, including in the current recovery as they provide economic opportunities of quality to poor people at scale. Yet, the unavailability of finance to SMEs in Africa has been identified as the most severe obstacle for SMEs’ business to thrive. Because of the lack of access to financial resources, many SMEs in Africa do not contribute adequately to economic prosperity and job creation to their full potential.

Among the reasons highlighted, are the high cost of credit, the limited supply of credit, the complicated application procedures, the collateral requirements, and corruption. The lack of access to finance has a huge negative impact on SMEs' growth, performance, and job creation.

Credit guarantee schemes have emerged as one of the main channels through which governments, financial, and development institutions make investment financing available and especially affordable for SMEs by reducing the risk premiums of banks. Consequently, a credit guarantee is expected to enable local lending institutions in Africa, where credit markets are imperfect, to lend more, and on affordable terms, to SME businesses – an engine for decent job creation.
The current report makes a thorough review of existing studies that have laid out the relationship between credit guarantee facilities, SMEs access to credit, and job creation. This includes the macroeconomic models that have been used to assess the job multiplier effect of SME access to finance, mainly through credit guarantees. The report draws lessons from the literature review and provides some indications to better design future credit guarantee schemes and their impact assessment.