Entrepreneurship Development and Communication Skills

7.2.6.Problems of credit  flows to Micro and Small Enterprises

Banks show their reluctance to extend credit to small enterprises because of the following reasons:

 (i) High administrative costs of small-scale lending;

 (ii) Asymmetric information;

 (iii) High risk perception; and

 (iv) Lack of collateral.

Credit guarantee schemes diminishes the risk incurred by lenders and are mainly a reaction to small firms' lack of collateral. Such schemes do have the potential to reduce the costs of small-scale lending and to improve the information available on borrowers. They enable small firms to access formal credit and also improve the terms of a loan. Such schemes assist small enterprises to obtain finance for working capital, investment and/or leasing purposes at reasonable conditions. This enables SMEs to improve their competitiveness and to extend their economic activity. Weaknesses of credit guarantee schemes can be avoided through proper design and private sector involvement.