UN-ECE Regional Industrial Development Programme

FINANCIAL POLICIES FOR STRENGTHENING SMEs THROUGH MICROCREDIT AND CREDIT GUARANTEE SCHEMES

An ECE Conference-room paper is prepared for the Project Group on "FINANCIAL POLICIES FOR STRENGTHENING SMEs THROUGH MICROCREDIT AND CREDIT GUARANTEE SCHEMES" of the Southeast European Cooperative Initiative (SECI). The First Project Group Meeting will take place on 24 April 1997 in Bucharest (Romania).

SUGGESTIONS FOR IMPLEMENTATION OF MICROCREDITING AND CREDIT GUARANTEE SCHEMES IN COUNTRIES IN TRANSITIONS

In CITs, as a consequence of industrial and agricultural restructuring during the transition to a market economy, self-employment has increasingly become an employment option for the many unemployed, including millions of people living below the poverty line. These new unemployed or underemployed have become a new class of poor and economically marginalized people without previous experience or even knowledge of how to enter the market economy. Many unemployed individuals are forced to turn to self-employment as a means to create income for themselves and their families. However, there are difficulties and risks in entering the business world in a weak and hostile environment characterized by economic instability, high and growing inflation, transition bureaucracy, lack of information and credit facilities, and the presence of the grey economy and mafia. To facilitate the transition to a market economy in CITs and help victims of the economic transformation process overcome poverty and start life afresh, there is a need to launch microcredit programmes and credit guarantee schemes in all CITs.

The appropriate infrastructure for microcredit and credit guarantee institutions has not been developed in response to this requirement. Microcredit and credit guarantee organizations in CITs need a combination of capacity-building, funding, policy development and performance-based objectives to develop into professionally managed, permanent and self-sustainable institutions. While establishing long-term capacity-building programmes, experimentation should be encouraged to develop national models, taking into account thorough strategic and business programming.

Efforts should be strengthened to set up microenterprise and start-up development centres in transition economies including business incubators. Providing credit, training and counselling could have a positive impact on the transition economic process.

While the Microcredit Summit has stated that approximately USD 21.6 bn will be required to reach 100 million of the poorest families in the world by the year 2005, ECE estimates that at least 3 million households have to be reached in CITs. The resources needed to achieve and fund the Summit's goal in CITs should be assessed in more precise terms.

Policy changes may be needed to allow an appropriate portion of the European Union's and the banking sources of funding into the CITs. The amount of aid for foreign counselling and advice should be decreased and financial funds should be provided for credit guarantee schemes for start-up entrepreneurs. Microcredit programmes should serve as a policy alternative to unemployment benefits and job training programmes, because they contribute to self-employment and economic self-reliance of poor and low-income families.

PRIORITIES FOR THE DEVELOPMENT OF MICROCREDIT AND CREDIT GUARANTEE SCHEMES IN TRANSITION ECONOMIES ARE:

1. capacity-building, especially the establishment of micro-credit guarantee schemes;
2. training for staff in lending and fund management, as well as for start-ups and beginners; and
3. soft advisory services for entrepreneurs, e.g. through business information centres established by the PHARE and other multinational and bilateral aid programme or mentoring schemes similar to the system used in Italy in accordance with Law No.44.

STEPS TO BE TAKEN IN SUPPORT OF THIS PROCESS MIGHT INCLUDE THE FOLLOWING

1. Promote national policy changes in SME promotion programmes in favour of microcredit and credit guarantee organizations.
2. Encourage pilot programmes in individual CITs to develop national models suited to society and the business community.
3. Evaluate the current experiences accumulated in CITs and organize national and international workshops. ECE would be an excellent forum for such workshops.
4. Elaborate medium- and long-term capacity-building programmes to create cost-effective and self-sustained microcredit organizations.
5. Create long-term national and international grant and financial funds to implement national programmes.

For further information, please contact Mr. Antal Szabó, to whom you can send your remarks and recommendations.
Telephone: +41-22-917 24 71.
Fax: +41-22-917 01 78.
E-mail: antal.szabo@unece.org