Downturn puts study on loan guarantee schemes in the spotlight

Market uncertainty has given added urgency to professor Miwako Nitani’s research on the efficacy of credit guarantee schemes in Canada.

Also known as loan guarantee programs, these programs grew in popularity to support business creation and growth in challenging economic times. But their actual effect on mitigating the effects of financial crises on small and medium sized enterprises (SMEs) in Canada has not been studied empirically.

“The OECD calls them governments’ ‘intervention of choice,’ insulating SMEs from liquidity shock,” explains professor Nitani, of the finance section at the Telfer School. She will use a grant from SSHRC to study loan guarantee schemes – in direct collaboration with federal policy makers.

A favoured tool of almost 100 countries to promote access to finance for SMEs, they can make substantial contributions to economic stability and growth, says Nitani, whose doctoral work examined the structure of the Canadian venture capital market and its impact on the performance of market players.  

But, she adds, there’s an important caveat: “They come at a substantive contingent cost for the government guarantors.”

Canada has a national credit guarantee scheme called the Canada Small Business Finance program. The federal government expanded the program after the 2007-08 global financial crisis such that the amount of commercial loans guaranteed by the program increased by $100 million from fiscal year April 2008-March 2009 to 2010-11, to reach $1 billion.

“A slowdown tends to push up demand for the support provided – particularly among young firms that contribute to economic wellbeing and job creation,” she explains. “But downturns also make it even more critical that the money is effectively utilized.”

With the current economic slowdown and greater conservatism among lenders putting such programs under increased public scrutiny, it is essential to understand better their costs and benefits. “Taxpayers bear the costs of honoring the defaults of guaranteed loans,” says professor Nitani.

“The stakes are certainly high, but there’s a window of opportunity now to contribute to Canadian practice and policy on credit loan schemes and also to transfer knowledge to other countries that use them.”