“Guarantee schemes were created to address existing gaps between the business world and the financial markets,” said Bruno Gili—a partner at CPA/Ferrere, professor of Business Consulting, and faculty member at the School of Management and Social Sciences at Universidad ORT Uruguayduring the event “Guarantee Funds and Credit in Times of Crisis.”
The online conference took place on Thursday, May 7, 2020, and was part of the Management and Business Lecture Series organized by the Graduate School of Business.
Guarantee funds are financial instruments designed to expand and improve businesses’ access to formal credit. SMEs, both urban and rural, are the target audience for guarantee funds. These funds aim to facilitate and encourage bank financing by providing guarantees to the financial system, thereby reducing its risks.
Gili questioned whether the guarantee systems, as currently conceived and designed, are appropriate given the economic, financial, and health crisis we are currently experiencing as a result of COVID-19.
“Historically, crises have served as opportunities to solve problems and drive innovation,” the expert said. In that regard, he noted that this moment could be an opportunity to improve financial instruments.
Globally, through both public and private mechanisms, guarantee schemes have sought to address the challenges SMEs face in accessing markets.
In Uruguay, the National Guarantee System (SiGa) was established in 2008 and is administered by the National Financial Corporation for the Administration of Investment Funds (CONAFIN AFISA). This instrument, which began operating the year after its creation, guarantees loan applications for various types of businesses (microenterprises or SMEs) and sectors (real estate, rice, and dairy).
The total amount of loans guaranteed by SiGa in 2010 accounted for 1.5% of the new loans granted that year to micro, small, and medium-sized enterprises. In 2019, the total amount of loans guaranteed by SiGa accounted for 0.6% of the new loans granted that year to these types of enterprises. The average SiGa loan was US$27,120 in 2010 and US$23,996 in 2019. In other words, in 2010 it had what Gili described as a “relative impact,” and in 2019, “a relatively low impact on the overall economy.”
In the wake of COVID-19, Uruguay has implemented various measures. These include reducing bank reserve requirements, extending loan repayment terms, and channeling funds from multilateral organizations to finance loans for businesses in affected sectors.
In response to COVID-19, SiGa launched SiGa Emergencia. This tool offers a new line of guarantees that are more flexible and cost-effective. It aims to support loans for microenterprises and SMEs affected by the health emergency. For companies applying for a new loan, the guarantee covers up to 80% of the principal. For those restructuring existing debt, it covers between 70% and 50% of the outstanding loan balance. The minimum guarantee amount is 16,000 UI, and the maximum is 1,200,000 UI.
In the expert’s view, the criteria applied in Uruguay for micro, small, and medium-sized enterprises appear appropriate in the short term. Looking ahead, it will be necessary to devise mechanisms to prevent opportunistic measures and to establish an information system for evaluating results. In the medium term, consideration should be given to the impact of the measures taken during the COVID-19 pandemic on productivity, innovation, and the fiscal deficit.
“Once we start moving toward the new normal, we can’t carry on as if nothing has changed,” Gili concluded. “We need to make our financial instruments more sophisticated.”