Credit guarantee schemes, MSME access to finance and labour productivity in Africa

One of the ambitions of the ILO STRENGTHEN2 project is to study how credit guarantees impact access to finance for micro, small and medium-sized enterprises (MSMEs) and job creation. This research aims to evaluate how credit guarantee schemes (CGS) affect MSMEs' ability to access money and create decent jobs – filling important gaps in research. It is hoped to gather important insights that can help shape policies and interventions to support MSMEs across Africa.

Data for this analysis comes from three surveys: two conducted with financial institutions at both regional (sub-Saharan Africa) and national (Rwanda) levels, and one survey conducted with businesses in Rwanda. These surveys were designed to assess how credit guarantees impact both financial institutions and businesses. This two-sided approach, looking at both businesses and financial institutions, helps to obtain a comprehensive view of CGS’s effects on MSMEs, providing valuable insights into access to finance and job creation dynamics.

Key findings:

• The credit guarantee leverage ratio shows that for every monetary unit in the CGS, MSMEs get nearly double the CGS size, indicating the positive impact of CGS on MSMEs' access to finance. While CGS help MSMEs’ to access finance, this does not always mean that they get favourable loan terms. Many MSMEs struggle to provide enough security or collateral for loans, and the owners’ educational background also plays a significant role in their ability to secure credit.
• CGS have a positive impact on employment, particularly in wholesale and retail sectors, with significant benefits for women's employment. However, more targeted efforts are needed to improve youth employment.
• Analysis of labour productivity across sectors reveals high productivity in wholesale and retail trade, agriculture and accommodation, underscoring the positive impact of CGS in these sectors. However, there are areas for improvement in other sectors.

This paper is not a full survey on CGS or a comprehensive assessment of their effectiveness but provides a factual analysis of their role in MSMEs’ access to finance and to labour productivity. It is important to interpret the results carefully due to limitations in data collection, such as reliance on estimates by microfinance institutions (MFIs) and MSMEs. To address these limitations in future studies, alternative data collection methods such as business diaries could be explored.

Effective policymaking requires the provision of technical assistance throughout the development, implementation, and evaluation phases of CGS. The ILO can leverage its expertise to ensure that the socio-economic outcomes of CGS are optimized and suggests some policy recommendations in this report.