The small firm loan guarantee scheme in Jordan : an empirical investigation
In Jordan around 98 percent of manufacturing and service sector firms are small and medium-sized enterprises (SMEs), while around 80 percent of the Jordanian labour force is employed by S MEs. However, SMEs face considerable difficulties in obtaining sufficient funds, especially from external sources such as commercial banks. This has been recognized in Jordan by the establishment of a loan guarantee scheme in 1994. However, neither this nor any other similar scheme introduced by a developing country has b een fully evaluated to establish its impact and success. The purpose is to evaluate the effects of the Jordanian loan guarantee scheme to establish its role in improving the supply of funds to SMEs, and to suggest policies and procedures for the improvement of the scheme. The methodology for the study is based upon an interview questionnaire survey of 142 Jordanian firms receiving loans from the commercial banks backed by a guarantee. It covers firms in different types of business (manufacture, services, retail and agriculture) and in different locations (Amman, Zarqa, Irbid, Balqa and Aqaba). The study also utilizes interviews with the credit managers of commercial banks participating in the loan guarantee scheme. The thesis is organized around nine chapters including on the Jordanian economy, SMEs in Jordan, a literature review of loan guarantee schemes and the qualitative and quantitative results of the surveys. The main findings are that younger borrowers and newer SME firrns are more able to receive commercial bank ftinding under the scheme than they would otherwise obtain. The scheme also helps firms with uncertain profitability and projects that are traditionally viewed as 'low quality' (e. g. low level of education or female entrepreneurs) to obtain extra finance. These projects have low default rates and do not have high failure rates suggesting a substantial market failure. However, the study finds that the commercial banks tend to use the scheme as an additional source of security in their lending, and do not necessarily lend to riskier projects, as they require similar levels of collateral. Further, the study draws attention to the management of the scheme, so that it needs to be better marketed to the target group and there needs to be better monitoring and follow-up of projects. Lessons could also be leamt from other guarantee schemes, such as in the UK, including the introduction of a premium charge for firms.