Loan guarantee schemes for SMEs - the experience in Malaysia

Government-backed loan schemes have been introduced in many countries to enablesmall and medium-sized enterprises (SMEs) to have access to funding at a reasonablecost. This paper evaluates the schemes offered in Malaysia by the Credit GuaranteeCorporation (CGC). The introduction emphasises the importance placed on the SMEsector in achieving fully-industrialised status for Malaysia, and highlights the fact that theCGC has been charged with a critical role in assisting SMEs. The paper then describesthe operation of the CGC and its place within the spectrum of finance aimed at SMEs,before presenting the findings of an empirical review. Three key areas are explored: therelationship between small firms, banks and the CGC; the level of finance additionality inevidence; and the level of economic additionality generated. In each of these areas, theCGC’s effectiveness in meeting the needs of SMEs, banks and the wider economyappears to have been limited. The paper then describes a radical new Schemeintroduced by the CGC and assesses whether this Scheme will enable the CGC toachieve its objectives, notably a greater degree of finance and economic additionality.Finally, the implications of the CGC's experience for other developing countries aresummarised.