Take Your Loan 2012-03-09 11:35
The Law on Credit Guarantee was approved on 9 February by Parliament, and has since established the Credit Guarantee Fund. This fund is a joint institution between the public and private sectors, and will provide collateral for up to 60 percent on a loan of MNT 20 million at the most for small business. The Small-and Medium Enterprise Development Agency (SMEDA) of the Ministry of Food, Agriculture, and Light Industry acts as an additional backer to the programme. The fund’s board of directors is responsible for approving or rejecting loans, defining the volume of the loans, and regulating the system of responsibility and risk.
“Marketable enterprises with business experiences, sound governance and a good loan history should be granted with loans”, said SMEDA head Ts. Nyam-Osor.
This credit assistance organization is made up of a board of directors, an executive director, and a loan granting committee. The board of directors has nine to 11 seat holders. On the board are representatives from the Ministry of Finance, the SMEDA, the Mongolian National Chamber of Commerce and Industry (MNCCI), The Mongolian Bankers Association (MBA), the German organization GIZ, and experts from various sectors.
“It is possible to participate in increasing shares of capital, and have equal representation on the board to minimize conflicts of interest”, said the deputy director of GIZ’s Regional Economic Development Programme, S. Baigalmaa. She added that according to international experiences on funds of this nature the state involvement is with less commitment.
“Let the Law on Loan Guarantee be efficient”
The Credit Guarantee Fund plans to allocate MNT 3 to MNT5 billion as start-up capital to potential small business owners. The advantage is that it can provide collateral to companies and individuals with assets to could increase capital by as much as 20 times.
Speaking on the credit fund. GIZ made the following estimation: “The SMEDA has granted soft loans amounting to MNT 285 billion for a total of 4,572 enterprises and individuals. If the [Credit Guarantee Fund] starts its operation with MNT 3 billion, then in five years 1,600 business entrepreneurs could be provided with loans”.
The efficient implementation of this program would lead to big results. Director of SMEDA D. Dembereldorj has reminded the public, however, the risks posed to the state. The risk allocation principles are one safeguard put in place by the law. These guidelines ensure that 40 percent of the risk from an entrepreneur’s loan is covered by commercial banks and 60 percent by the credit fund. In other countries with similar programs, they cover up to 80 percent, while their governments will cover an additional 60 to 70 percent.
“The more risk the Credit Guarantee Fund covers, the more loan friendly environment for small businesses will be created, to the benefit of many business entrepreneurs”, said M. Bayarmagnai, head of Light Industry’s Department for Policy Regulation at the Ministry of Food, Agriculture and Light Industry.
Credit Guarantee Fund on the international stage
In Germany the Loan Guarantee Bank operates to foster small businesses and start-ups. Here is an example of a fund put into good practice that supports not only small business but has increased the gross domestic product by EUR 3.6 billion (USD 4.727), created 23,000 new jobs, and contributed to the state budget by EUR 830 million in tax revenue. Another efficient practice for the implementation of a credit system is to provide collateral for loan through cooperatives, as is done in Italy. In Indonesia, the Philippines, and Japan complementary guarantee funds have been founded. These institutions enable the banks to grant loans to entrepreneurs from the state. However, these types of system have gone bankrupt because of conflicting interest, the governments’ refusal for repayment, and so on. Therefore donor institutions will not support this kind of system anymore.
For more than 20 years, public-private guarantee funds have been accepted as the most sustainable and efficient method for backing loans. This system is widely used in countries in Northeast Asia. The public-private guarantee is a system to provide loans for small business through a fund set up with joint capital from public and civil institutions, banks, and international organizations. GIZ has emphasised that this form of loan guarantee has a good history of success in 70 countries worldwide. Small business plays a key role in developing countries with sustainable economies, and make up 70 to 90 percent of all commercial organization in the world. Mongolia has over 66,500 commercial organizations with 559,000 people running them.
“The small business sector is comparable to a new born baby. It needs care”, said the SMEDA head Dembereldorj. “There are many challenging issues to the legal environment, policy, and financing”.
Potential entrepreneurs cannot take out loans because the stakes are too high, and they lack the collateral. Ts. Ariuna, an officer for the SMEDA of Uvurhangai Aimag described her experience in her province: “In our province, 70 to 80 percent of loan applicants cannot take out a loan due to insufficient collateral. The Law on the Guarantee Fund is a chance to improve the lives of many”.