RELATIONSHIP BETWEEN THE POLICY OF STRENGTHENING THE FINANCIAL SYSTEM AND GUARANTEE POLICY.

• Author: Lopez, Jorge Lopez-Cubero

1. Introduction

   The development of the business environment is one of the levers that promote economic development. Among the obstacles identified by the economic literature, Ayyagari et al. (2008) observed that difficulties in access to finance, the containment of crime and political stability influence economic growth; access to finance is the obstacle that is the most robust in the various tests computed by authors, which underlines that improving it should be a priority.

   Small and medium-sized enterprises face major difficulties in access to credit because of their dimension. The reasons that explain this vulnerability are, on the one hand, the availability of quality information about these entities and, on the other hand, the lack of sufficient guarantees to deal with the negative evolution of projects with respect to finance.

   The literature on information economics advises that the asymmetry of information between economic operators produces inefficiencies in their relations and results in two types of problems: adverse selection and moral hazard. These inefficiencies determine that finally there is credit rationing in segments of clients with higher levels of asymmetry and, on the credit market, the smaller business units are those that have a higher incidence (Jenkins and Hossain, 2017). Credit rationing leads to a limitation in access to credit, or to the possibility of financing operations of a greater volume or on longer term. This restriction limits the access to financing for capital investments or investments with higher levels of risk with respect to internationalization (Aristei and Franco, 2014), the development of intangibles (Mancusi and Vezulli, 2014), innovation (Alvarez and Crespi, 2015) or start-up funding (World Bank, 2014; Kraemer-Eis et al., 2017). On the other hand, credit rationing can determine an increase in the costs of financing by making projects that, in the case of having the guarantees, would generate economic value in projects that would not allow the investors to be compensated.

   Nations try to alleviate these restrictions through the strengthening of the legal and financial institutions of the country; however, the problem is the long time required for the development of these institutions. On the other hand, innovation in financial instruments (factoring or leasing) or methodologies, such as credit scores, can show their effects in the short term (Beck and Demirgug-Kunt, 2006).

   Credit guarantee institutions are instruments of long-term policy and increase their effectiveness as they gain experience and volume (Pombo et al., 2008; 2013). OECD (2016) pointed out that policy interventions for easing SME finance have been based on Credit Guarantee Schemes (CGS from here on), evolving into structural elements of financial systems; in recent years, they have become the most popular tool to facilitate access to credit for SMEs (World Bank, 2015; OECD, 2017). Granting guarantees contributes to answer several financial development objectives such as overcoming market failures, increasing credit availability to SMEs, and promoting growth and employment opportunities. Recently, they have been also used as a counter-cyclical policy tool mobilizing large amount of credit (OECD, 2016). Despite the aforementioned benefits there are also disadvantages as this policy does not promote the desired policy goal of promoting alternative sources of finance to SME. Additionally, they could support 'zombies' companies. Important initiatives have been put into place for promoting the measurement of CGS impact for balancing costs and benefits from a public policy view (OECD, 2017; World Bank, 2018).

   The development of a policy to support the access of SMEs to finance has to assume the different models of financing of SMEs on the basis of the institutional and financial development of the economy (Beck et al., 2008a). In particular, these authors note that the greater protection of the property rights positively affects access to external finance (banking, leasing or capital) and enlarges its extent in SMEs relative to large enterprises.

   Our research question determines to what extent the level of development of the policy of guarantees has been used as a complementary or substitutive policy to strengthen the financial infrastructure. The observations correspond to a period of 12 years for 39 countries who have developed institutions of guarantees. Our work aims to explain the scope of the guarantee policy, as weighted by the weight of the economy, according to the development of other policies of reinforcement of the financial infrastructure. The mitigation of the asymmetry of information policies has a positive effect on the scope of the guarantee schemes. Conversely, improving the protection of the credit policy rights whose implementation requires greater effort can be replaced by the development of the policy of guarantees. The implications of our results offer the policy makers substitutive or complementary policies with which the reforms of the financial systems and its evolution after the implementation of the guarantees policies can be addressed.

   The rest of this paper is organized as follows: section two is reserved for the literature review and the development of the hypothesis and in section three we explain the methodology and the data used. Section four includes the discussion of the results, and section five is the conclusions.

2. The literature review and hypothesis development

   Lending to SMEs is facing the problem of opacity, which leads to asymmetric information and the derivative consequences, primarily due to its severity, the rationing of credit (Steijvers and Voordeckers, 2009), and the application of higher levels of guarantees (Berger et al., 2001; Beck et al., 2005).

   The literature review of this phenomenon shows that the provision of collateral, personal or real, allows for the reduction of the effects of asymmetry. Under what Kislat et al. (2013) have called the ex-post theory of collateral, a large number of empirical studies have observed that SMEs and entrepreneurs with greater risks have offered higher levels of collateral in trying to discipline the moral hazard. However, Kislat et al. (2013) provide less evidence about the ex-ante theory of collateral, since according to them, employers with lower risks offer greater guarantees to designate their quality, thereby reducing the problem of adverse selection. They also note that there is empirical evidence that did not detect any relationship between the level of collateral and the risk of the entrepreneur. Among the reasons given by them, they point out the need to expand the research model by incorporating other mechanisms that reduce the opacity of the banking relationship, the duration of the debt or the establishment of the covenants. When the protection of rights is weak, Menkhoff et al. (2012) observed that the lack of a real state guarantee for SME is replaced by third-party guarantees through strengthening the banking relationship and contractual conditions, such as the nominal amount of a loan.

   The banking relationship is one of the mechanisms to overcome the opacity; the banking relationship gives an advantage to small financial institutions regarding being closer to larger employers, better understanding their needs and their solvency (Berger et al., 2001; Berger and Udell, 2002; Berger and Udell, 2006; de Haas et al., 2010), and even playing a substitutive effect for guarantees (Kislat et al., 2013). Consequently, the more decentralized the banks are in their lending decisions, the greater the use of soft information on the borrower, who now pays amounts in excess of those paid by SMEs at less decentralized banks (Canales and Nanda, 2012). In brief, when decentralized or with smaller financial institutions, the bank structure would reduce the credit rationing on small companies due to lower quality information.

   However, several papers are starting to show that this model of the banking relationship would not explain the growing interest of banks in developing countries in meeting the profitable market of the credit to SMEs (de la Torre et al., 2010; Jenkins and Hossain, 2017). Among the targeted causes to explain this paradigm shift is the advance in credit rating systems of SMEs, which allowed banks to access this market niche (Berger and Udell, 2006; Berger et al., 2013), the market circumstances with high growth rates of gross national product, the reduction of public debt and the increasing competition in the banking market (Jenkins and Hossain, 2017).

   The financial infrastructure of a country influences the availability of the credit to SMEs and the economic growth, as companies are more dependent on external funding (Rajan and Zingales, 1998). Djanko et al. (2007) argue that information infrastructures and the protection of the rights of credit are associated with higher levels of credit to the private sector, which is the second most important factor in richer countries. In countries with lower levels of income, the protection of the rights of credit can be ineffective, and thus the strategy of reforms should focus on improving the information and tools that allow sharing of this information (for example, the development of public records). By contrast, in countries with higher levels of development, reforms may focus on the protection of the rights of credit (Beck et al., 2009). Using data from 1980 to 2010 that was prepared by the World Bank, de la Torre et al. (2013) observed the positive effects of the protection of legal rights, the rate of bank credit to the private sector and access to financial information when the costs of establishing effective rights are higher than the bank credit decreases. In addition, these authors note how reforms in the protection of legal rights require more time than the improvements in the information environments.

   If the financial information...