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Partial credit guarantees and firm performance: evidence from Colombia

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Abstract

This paper studies the effect of government-backed partial credit guarantees on firms’ performance in Colombia. These guarantees are automatically granted by the National Guarantee Fund (NGF) to firms without enough collateral to lift their credit constraints. We put together a panel of firms covering the period 1997–2007 that allows us to control for observed and unobserved firm characteristics potentially affecting both the selection of firms into the program and firms’ performance. We find that firms that gain access to credit backed by the NGF were able to grow in terms of both output and employment. However, we do not find any effect on productivity, wages, or investment.

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Notes

  1. This is valid not only for small and niche banks that engage in relationship lending but also for large and foreign banks that use arms-length lending technologies (de la Torre et al. 2010).

  2. The literature points to institutional development as a robust predictor for explaining variations in firms’ access to external finance. La Porta et al. (1997,1998) show that countries where legal rules are weak and the quality of law enforcement is low have less access to external finance; Beck et al. (2006) find that institutional development is the most important country characteristic explaining cross-country variation in firms’ financing obstacles; and Demirgüç-Kunt and Maksimovic (1998) find that financing constraints are lower in countries with more efficient legal systems.

  3. Credit markets rely ex-ante on information shared via credit bureaus and credit registries to make those credit decisions and rely ex-post on the legal system to enforce debt contracts in the event of a default. IADB (2004) reports that, on average, 90 % of banks in Latin America consult private credit registries frequently for their lending decisions. Beck et al. (2008b) report that 87 % of banks in developing countries require collateral from small-sized enterprises in business lending, and 93 % of banks require collateral from medium-sized enterprises in business lending.

  4. Lenders also use collateral as a screening mechanism to address adverse selection: only low-risk borrowers would be willing to pledge a sufficient amount of collateral as a guarantee for the loan. However, as a consequence, many desirable, low-risk borrowers may be constrained by the assets they can pledge (Bester 1985).

  5. Beck et al. (2008a) show that, although small firms in countries with poor institutions use less external finance—especially bank finance—than medium or large firms, small firms benefit the most from the removal of systemic barriers and institutional reforms that strengthen property rights and financial intermediation mainly due to bank finance.

  6. Contrary to banks in developing countries, banks in developed countries identify competition in the segment as the main obstacle impeding SME finance.

  7. Banks have developed coping mechanisms to deal with some of these difficulties by hedging risk (short-term loans, innovative screening tools, collaterals, etc.) but intrinsic factors make SMEs particularly vulnerable to lack of access to credit because: (1) SMEs are less likely to survive since the probability of firm survival increases with firm size and firm age (Evans 1987), which makes SMEs inherently riskier investments; (2) SMEs face proportionally greater scrutiny and proportionally larger appraisal and monitoring costs for each dollar borrowed; and (3) SMEs are also proportionally more expensive to deal with in the event of a default since the expenses associated with a liquidation procedure—for instance, court and attorney’s fees—are independent of the amount borrowed.

  8. The survey defines large firms as firms with 100 employees or more, medium firms as firms with 20 employees or more but less than 100 employees, and small firms as firms with 5 employees or more but less than 20 employees.

  9. Whether the guarantor does any credit appraisal, the proportion of the credit that is guaranteed—if the scheme guarantees individual loans rather than portfolios—and the categories of eligible borrowers are design dimensions that, together with the pricing, affect the operation of the scheme and its effectiveness in increasing the availability of credit.

  10. See World Bank’s Enterprise Surveys

  11. King and Levine (1993), Rajan and Zingales (1998), Demirgüç-Kunt and Maksimovic (1998), and Jayaratne and Strahan (1996) find that the level of financial intermediation development has a large causal impact on real per capita GDP growth. Beck et al. (1999) find “an economically large and statistically significant relationship between financial intermediation development and both real per capita GDP growth and total factor productivity growth.” Although the link between access to finance and growth seems to be a settled matter in the economic literature, the channel through which access to finance leads to growth is still the subject of debate.

  12. Values in 2008 pesos converted to dollars at the average 2008 exchange rate of 1,966.26 pesos per dollar.

  13. The provision required depends on the credit rating and the number of days in arrears.

  14. The fund also guarantees the portfolio of microfinance institutions. The rest of the guarantees go to credit for social housing and student loans.

  15. The NGF automatically grants partial 50 % coverage for loans of up to US$264,462. It grants partial 70 % coverage for special Bancóldex credit lines of up to US$300,000.

  16. These estimations, reported annually by the World Bank’s publication Doing Business, are based on fictitious standardized cases solved by local practitioners and verified through a study of laws and regulations as well as public information on bankruptcy systems.

  17. Since the NGF only guarantees credit aimed at MSME, these percentages grossly underestimate the importance of the credit guaranteed by the fund.

  18. We use 2002 as our baseline because firm-level records from the NGF are available from 2003 onwards.

  19. The same approach was used in Arráiz et al. (2013), who estimated the impact of a supplier development program on firm performance in Chile, and Castillo et al. (2013), who estimated the impact of an innovation program on employment and wages in Argentina.

  20. We defined three size categories as follows: from 10 to 50 employees, from 50 to 200 employees, and 200 employees and more.

  21. Location is defined as the metropolitan area in which the firm is located.

  22. According to the Enterprise Survey dataset, private commercial banks finance 13.6 % of investment in Colombia, family and friends finance 6.7 %, and informal sources finance 2.4 %. The percentages for working capital are 31.5, 18.9, and 0.05 %, respectively.

  23. The pstest command in Stata used to carry out these tests estimates probit models instead of the logit we are using as our participation model.

  24. We measure TFP using the firm-level residual from a standard production function. We use the estimates of factor elasticities from Eslava et al. (2006), who estimated the production function controlling for the endogeneity of inputs using instrumental variables and EAM data for the 1982–1998 period.

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Acknowledgments

The authors are grateful to the National Guarantee Fund (NGF) and DANE, the Colombian Office of Statistics. Both agencies allowed access to microeconomic data protected by statistical reserve regulations under monitored conditions. We also thank Andrés Salamanca and Juan Sebastián Galán for their research assistance. The views presented in this paper are those of the authors, and no endorsement by the Inter-American Development Bank, its Board of Executive Directors, or the countries they represent is expressed or implied.

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Authors and Affiliations

  1. Inter-American Development Bank, Washington, DC, USA

    Irani Arráiz & Rodolfo Stucchi

  2. Econestudio, Bogotá, Colombia

    Marcela Meléndez

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  1. Irani Arráiz
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  2. Marcela Meléndez
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  3. Rodolfo Stucchi
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Correspondence to Irani Arráiz.

Additional information

This study was developed as part of the project “Ex-post evaluation of competitiveness programs” coordinated and financed by the Office of Evaluation and Oversight (OVE) of the Inter-American Development Bank (IDB).

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Arráiz, I., Meléndez, M. & Stucchi, R. Partial credit guarantees and firm performance: evidence from Colombia. Small Bus Econ 43, 711–724 (2014). https://doi.org/10.1007/s11187-014-9558-4

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