Credit Guarantee Scheme and Small and Medium-Sized Enterprise Finance: The Case of Turkey

Abstract

This study examines the recently revived credit guarantee fund (KGF) mechanism in Turkey from a comparative historical perspective and identifies the structural features of the Turkish economy that complicate access to finance for SMEs. The banking-based financial system in Turkey, state banks and the public sector, was unable to resolve the access to finance problem of SMEs in the near past. Consequently, the public authorities revived the KGF in early 2017. The KGF was established in 1993 but stayed idle until recently. Despite these efforts, structural impediments to easing SMEs’ access to finance persist in the Turkish economy. This paper identifies the chronic current account deficit, high inflation, large size of the informal economy, and bank-based financial system as the major structural obstacles to easing SMEs’ access to finance. Moreover, the global financial crisis has exacerbated the access to finance problem of Turkish SMEs. This paper posits that, for Turkey to resolve the financing problem of SMEs, it is necessary to identify clearly the sustainability of the recently revived KGF and its impact on public and private debt. In addition, the KGF mechanism needs to prioritize SME financing in value-added tradeable goods so that it can contribute to long-term, sustainable economic growth in Turkey.