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By Dr. Pietro Calice, Senior Economist, World Bank Group
Small and medium-sized enterprises (SMEs) are the lifeblood of the global economy. They account for roughly 90 percent of all businesses and more than half of total employment worldwide. Yet despite this centrality, access to credit remains their most persistent constraint. Information asymmetries, insufficient collateral and high transaction costs relative to loan size systematically exclude productive firms from formal financing channels—and nowhere is this more acute than in developing economies, where institutional weaknesses and macroeconomic volatility amplify the already formidable barriers to borrowing.
The numbers are sobering. The financing gap for formal micro, small and medium-sized enterprises (MSMEs) in developing countries alone is estimated at US$5.7 trillion, with four in ten such firms classified as credit-constrained. Into this gap—three decades ago and counting—governments worldwide deployed what has become the dominant policy tool in SME finance: credit guarantees.
But do credit guarantee schemes work? And if so, under what conditions? A new landmark study offers the most rigorous attempt yet to answer those questions.
By absorbing a portion of the default risk, guarantee schemes aim to persuade banks to lend to enterprises they would otherwise shun. The logic is elegant, and the policy rationale is compelling. But do credit guarantee schemes work? And if so, under what conditions?
A new landmark study offers the most rigorous attempt yet to answer those questions.
A survey unlike any before it
The research draws on an original global survey of 108 credit guarantee institutions operating across 74 countries—the most extensive cross-country dataset on these institutions ever assembled. Designed and administered by the World Bank Group in collaboration with five major international and regional guarantee networks, the survey captures granular details on institutional structures, ownership models, funding architectures, governance arrangements, risk-management practices, digitalization and—critically—impact-evaluation approaches. Together, the 108 respondents span every major geographic region and income group.
The picture that emerges is simultaneously encouraging and sobering.
A systemically important—but unequal—industry
Credit guarantee portfolios are, in aggregate, material but unevenly distributed. Across the reporting countries, outstanding guarantees represented 2.0 percent of gross domestic product (GDP) in 2024, down from 2.4 percent in 2022—a decline that reflects the gradual unwinding of emergency programs deployed during the COVID-19 pandemic, when many schemes temporarily expanded operations to sustain enterprise liquidity.
High-income countries drive the aggregate, posting guarantee-to-GDP ratios of 2.7 percent. In low-income economies, the figure is a negligible 0.1 percent. The regional dispersion is even starker. East Asia and the Pacific lead by a wide margin, with guarantee portfolios equivalent to 5.1 percent of GDP, driven by several mature, high-volume systems. In some individual countries, guarantee portfolios exceed 8 percent of GDP and in a handful of cases, cover a material portion of all reported SME lending. Sub-Saharan Africa, meanwhile, registers barely 0.1 percent of GDP—a gap that speaks to both the youth of schemes in the region and the structural underdevelopment of the underlying credit markets they are meant to complement.
That last point is not incidental. The analysis at the heart of the study finds that financial-market depth—measured by the ratio of private credit to GDP—is by far the dominant predictor of guarantee-portfolio scale. A 10-percentage-point increase in the credit-to-GDP ratio is associated with approximately 15–20 percent larger guarantee portfolios, even after controlling for income levels and institutional features. Guarantee schemes, it turns out, function primarily as complements to well-developed credit markets, not substitutes for underdeveloped ones. Schemes operating in countries with credit-to-GDP ratios below 30 percent face binding external constraints on expansion, regardless of institutional quality. This finding carries an uncomfortable implication for policymakers in shallow financial systems: Simply launching or scaling a guarantee scheme cannot substitute for a deeper financial-development agenda.
The governance premium
If market reach is largely determined by country fundamentals, what distinguishes high-performing schemes within any given context? Here, the research yields its most striking finding: Governance quality is the single most important institutional determinant of both leverage (or capital multiplier) and portfolio risk—two of the performance dimensions most directly within policymakers’ control.
Capital multipliers—the ratio of outstanding guarantees to scheme capital—measure how intensively a scheme deploys its public resources. Across the sample, the pooled median multiplier stands at 4.4 times capital, with a mean of 8.2 times pulled upward by a long right tail of high-leverage outliers. East Asia and the Pacific exhibit the highest leverage at a median of 15.1 times, while Sub-Saharan Africa registers just 1.1 times, consistent with younger institutions facing binding capital and risk-management constraints.
What drives this variation? Contrary to what might be expected, macroeconomic conditions explain relatively little. Instead, the analysis shows that better-governed schemes operate at significantly higher leverage ratios: A one-point improvement in the governance index—constructed from board independence, accountability structures and external auditing practices—is associated with roughly 30–40 percent higher capital multipliers, holding other factors constant. Scheme age, the use of risk-transfer instruments and risk-based pricing further reinforce the relationship.
The mechanism is intuitive. Sound governance creates conditions in which supervisors and stakeholders are willing to tolerate higher leverage, because they trust the quality of underwriting and the robustness of risk management. A scheme with an independent board, strong disclosure practices and active counter-guarantee arrangements can responsibly operate at a multiplier of 10 or 15 times capital. A scheme without those features should not.
The same logic applies to default rates. Portfolio risk is strongly linked to banking-sector conditions—schemes in countries with high non-performing loan (NPL) ratios predictably exhibit higher guarantee defaults—but once macro-financial conditions are held constant, governance quality and funding diversification are negatively associated with default rates. Well-governed schemes with diversified funding structures experience meaningfully lower defaults, even controlling for the broader credit environment. Higher leverage is associated with modestly higher defaults—a non-negligible trade-off that underscores the centrality of governance as a safeguard against leverage-induced risk accumulation.
The sustainability illusion
Financial sustainability is one of the most contested dimensions of guarantee scheme performance, and the survey results reveal why. Around 20 percent of schemes report being fully financially self-sustaining, covering operating and risk-management costs from their own revenues. A further 58 percent rely on government budget allocations to remain solvent. Around 7 percent are entirely dependent on budget transfers.
These self-assessments likely flatter reality. Definitional ambiguities abound: Many schemes classify themselves as sustainable while implicitly relying on below-market government capital injections, subsidized funding costs or fee structures that fail to build adequate reserves against future claims.
What the empirical analysis reveals is that financial sustainability is not primarily a function of country income or financial depth. Richer countries do not systematically produce more financially self-sufficient schemes. Instead, sustainability practices are almost entirely driven by institutional choices—specifically, funding diversification and the use of risk-transfer instruments. Schemes that combine budget allocations with retained earnings and market-based instruments are far more likely to generate fee income, earn investment returns and apply risk-sensitive pricing. Schemes that depend almost exclusively on periodic budget infusions have weak incentives to price for risk or develop alternative revenue streams—and their sustainability records reflect this. Sustainability, in other words, is not a product of national wealth. It is a product of design choices that policymakers can directly shape.
The accountability gap
Perhaps the most troubling finding in the entire study concerns impact evaluation—or, more precisely, its near-universal absence. Fully 53 percent of schemes in the sample have never conducted an impact evaluation of any kind. Only 26 percent undertake some form of annual assessment. The deficits are most severe in Sub-Saharan Africa, where 90 percent of schemes report never evaluating their impacts, and in lower-middle-income countries, where 73 percent never evaluate them.
This is not merely a technical shortcoming. It is a governance failure with direct fiscal implications. Without rigorous counterfactual analysis, it is impossible to determine whether guarantees are generating additional lending to underserved borrowers or simply subsidizing credit that banks would have extended anyway. The survey finds that default rates in many schemes are broadly comparable to—or in some cases, lower than—banking-sector NPL (nonperforming loan) ratios. While this might reflect sound underwriting, it is equally consistent with schemes primarily serving borrowers who would have qualified for credit without a guarantee: in other words, reallocating public risk-bearing without generating meaningful additionality.
The mandate data compound the concern. Fifty-three percent of schemes report an explicit green-finance mandate, yet only 12 percent measure environmental impact in their evaluations. The gap between stated ambition and measured effect is a four-to-one ratio. For an industry that increasingly mobilizes public capital in the name of inclusive and sustainable development, this is a serious accountability deficit.
Digitalization: ambition ahead of capability
There is cause for measured optimism on one front. Digital transformation has advanced substantially across the global guarantee industry: 86 percent of schemes report at least partial digitalization. But the distribution conceals wide variations in depth. Only 19 percent have achieved full digitalization of core processes, only 34 percent have implemented API (application programming interface) integration with partner financial institutions, and artificial intelligence (AI) adoption remains nascent at just 10 percent.
Digital transformation leads the institutional priority rankings, cited by 51 percent of scheme leaders as their primary improvement objective—significantly outpacing the 31 percent who currently identify technology as a key operational challenge. This gap between ambition and current capability suggests an industry at a strategic inflection point: one that recognizes digital infrastructure as increasingly essential for competitive positioning and risk management but is still building the capacity to realize its potential.
Four reforms the evidence demands
The research translates into four practical imperatives for authorities that design, fund and oversee credit guarantee schemes.
The research translates into four practical imperatives for authorities that design, fund and oversee credit guarantee schemes.
Ambitions to scale must be calibrated to financial development. Efforts to expand guarantee outreach in shallow credit markets will be frustrated by structural constraints that institutional design cannot overcome. Guarantee reform must be embedded in broader financial-sector development agendas—not treated as a stand-alone solution to structural market failures.
Minimum governance standards should be enforced, not merely encouraged. The evidence that governance quality predicts both leverage efficiency and portfolio-risk control provides a strong empirical basis for regulatory requirements on board independence, financial disclosure and external auditing. This is particularly pressing given that 8 percent of schemes in the survey currently operate without any formal supervision whatsoever.
Funding diversification is essential for genuine sustainability. Schemes relying almost exclusively on budget allocations will perpetuate subsidy dependence regardless of their operational performance. Authorities should design funding architectures that create incentives for fee generation, investment income and—where appropriate—market-based risk transfer through counter-guarantees or reinsurance.
Finally, impact evaluation must become a condition of public support, not an optional aspiration. A majority of schemes currently consume public resources without generating systematic evidence of their effectiveness. Policymakers should require rigorous counterfactual evaluation as a condition for continued or expanded capital allocation. Green and social mandates, in particular, must be accompanied by measurable impact indicators—not just output volumes.
The verdict
Credit guarantee schemes occupy a unique position in the global financial architecture: simultaneously ubiquitous and poorly understood, widely adopted and inconsistently evaluated. The evidence assembled here suggests that the best schemes—those with strong governance, diversified funding and active risk-management tools—can operate efficiently at high leverage while containing default risk and building genuine sustainability. The worst can quietly redistribute public risk without generating meaningful benefits to the SMEs they were created to serve.
The question is not whether credit guarantee schemes work. The evidence suggests that, under the right conditions, they do. The harder question is whether policymakers have the governance standards, analytical tools and accountability frameworks to ensure that public resources committed to these programs generate returns commensurate with the scale of the need—and the size of the investment.
On current evidence, many do not. Closing that gap is the most urgent reform priority in SME finance today.
ABOUT THE AUTHOR
Pietro Calice is a Senior Economist in the Finance, Competitiveness and Investment Global Department of the World Bank Group for the East Asia and Pacific region. In this role, he advises finance ministries, central banks and regulatory authorities on financial sector reforms.
Pietro has led several Financial Sector Assessment Programs and has published extensively on financial stability, financial efficiency and financial inclusion, including in peer-reviewed journals. He is widely recognised for his expertise in public guarantees, financial sector competition policy, climate finance, state-owned financial institutions and credit analysis, with experience spanning more than twenty-five countries across five regions.
Prior to joining the World Bank Group, Pietro held various roles at the African Development Bank and also worked with credit rating agencies and investment banks. He holds an MSc in Banking and Finance, an MPhil in Development Studies and a Doctorate in Economics.