A Model for Calculating the Optimal Credit Guarantee Fee for Small and Medium-Sized Enterprises
Guarantee fee rates should be more flexible and vary depending on creditworthiness and the macroeconomic state of the economy.
Small and medium-sized enterprises (SMEs) have difficulties in accessing finance because of information asymmetry and a lack of collateral. A credit guarantee scheme is a suitable method to unlock lending to SMEs; however, it involves SMEs paying a fee, which needs to account for their risk. The question is how to calculate the optimal fee. We provide a theoretical model for calculating the optimal credit guarantee fee. In the empirical part, we investigate whether selected macroeconomic variables and the financial health of SMEs have a statistically significant impact on the default risk ratio of SMEs, which is the main determinant of the fee. We use selected macroeconomic variables and the financial profiles of 1,363 SMEs that are customers of an Iranian bank. We use principle component analysis and two vector error correction models, and we provide a robustness test using the generalized method of moments. The empirical results support our hypothesis that the credit guarantee fee should be different for sound (lower) and unsound (higher) SMEs to avoid moral hazard but also according to the macroeconomic state (a decrease in a recession and an increase in a boom).