The Central Guarantee Fund and the effects on SMEs

Although they are more dependent on bank loans, SMEs actually have less access to external funding with respect to their larger counterparts: this fact has been firmly established. Information asymmetry, high administrative costs for small loans, the perception of high risk and a lack of collateral are the main reason why access to credit is a more critical problem for these companies. Yet the development of SMEs has always been a priority among policy makers, in light of the contribution that these companies make in turn to economic and social development.

Public credit guarantee schemes can build a solution to their credit problems. These programs are funded with public money with the aim of mitigating losses for banks in case of borrower default. Although a lack of data makes it hard to measure the actual effectiveness of these schemes, they are widely used all over the world, along with other forms of financial support including grants, subsidized loans and co-investments in equity. The Fondo Centrale di Garanzia (Central Guarantee Fund, hereafter FCG) is the main credit guarantee scheme in Italy, established to support economic growth for micro-, small-, and medium-sized enterprises which, as we all know, are the economic-productive backbone of Italy.

There is solid consensus on the capacity of public credit guarantee schemes to create financial additionality, i.e. to make more credit available in the system. Yet academic contributions to date are scarce on economic additionality, which is on the ultimate goal of such schemes. Economic additionality refers to an upgrade in the economic conditions of the system, which is generally measured by an upturn in the GNP and the employment rate. By gaining access to credit - thanks to this guarantee scheme - companies can make investments which, if they bear fruit, give rise to positive externalities such as enhanced performance and/or bigger profits. Higher profitability in turn can lead to higher levels of employment, greater wealth for society as a whole, and more tax revenues for the government.

The lack of research on economic additionality is understandable considering both the challenge that academia faces in accessing data, and the well-known gap between academia and policy making. So the question we ask is: how has the FCG contributed to economic additionality? This question is particularly pertinent seeing as the global crisis triggered by Covid-19 has reignited the debate on the most appropriate forms of financial support for companies, especially SMEs. What factors should today’s policy makers take into account as they design credit guarantee schemes?

To evaluate the true effectiveness of the FCG, we need to focus on the profitability – and specifically the ROI - of SMEs as a measure of economic additionality. In our study, we explored the impact of the FCG on the profitability of guaranteed companies over a two-year period starting when the guarantee was issued, that is from 2007 to 2008. We compare the data on the beneficiary companies with a control sample made up of firms that did not utilize the public guarantee during the timeframe in question. We were able to conduct this research thanks to a collaboration between Bocconi University and the FCG.

An analysis of the data clearly reveals that the Italian FCG shored up the profitability of SMEs during a dramatic economic downturn, when the average ROI among these companies dropped from 9.4% in 2007 to 6.5% in 2009. But our study also shows that these effects vary substantially depending on the size of the company and the sector in which it operates. Specifically, the impact of the FCG on profitability was positive for micro- and small-sized enterprises, with particularly impressive results in the manufacturing sector. Yet in contrast, medium-sized concerns saw no appreciable effects. The reason for the success specific to manufacturing is most likely linked to the fact that this sector is more capital-intensive, and requires extra funding to fuel profitability.

It comes as no surprise that the benefits of the Fund were more significant for micro- and small-sized enterprises, which are most often plagued by information asymmetry and a lack of funding. In this context the FCG was able to lower the barriers to financing and expand access to bank loans. In contrast, the effect of the public guarantee was not as statistically robust for medium-sized companies, which, as we’ve said, are better positioned to secure to access to credit on their own, as compared to smaller firms.

Overall, there is no doubt that the Central Guarantee Fund has generated economic additionality during the period in question, that is, in the early years of the 2007-08 global financial crisis. Nonetheless, significant differences emerged in our study among various companies based on size and sector.

Despite the limitations of our study, which are due primarily to the short time period we considered, our results offer invaluable input for policy makers. In particular, when funds are limited and must be allocated as efficiently as possible, the financial requirements of various types of SMEs must be carefully assessed, both in terms of size and sector. This serves to design and realize schemes that provide adequate guarantees and financial support. In fact, our study clearly shows that guarantee funds are not one-size-fits-all. Public guarantees, in particular, should target companies that face the biggest obstacles to funding, as well as sectors where investments are more capital-intensive such as manufacturing. Generally speaking, however, we should point out that this sector is not the only one that requires more substantial investments to power profitability. But manufacturing in Italy has proven to play a crucial role in sustaining the economic recovery following the previous financial crisis.

The key is to design more customized schemes, concentrating public spending on these programs and on the more efficient companies which can actually drive economic growth. Although this approach is more complex and probably less gratifying in terms of winning political consensus, it is an indispensable condition for achieving most effective outcomes from financial policies that support the economic development of SMEs. It is our hope that the findings of our study can guide the choices of national and regional policy makers as they face the economic emergency caused by Covid-19.