2016/17 Knowledge Sharing Program with Jordankodit.co.kr/workingMgt/working_20180314171124.pdf · 2018-03-14 · 2016/17 Knowledge Sharing Program with Jordan Project Title Prepared

2016/17 Knowledge Sharing Programwith Jordan:

Improvement of SMEs Financing andCredit Guarantee Facility of JLGC

2016/17 Knowledge Sharing Program

with Jordan

2016/17 Knowledge Sharing Program with Jordan

2016/17 Knowledge Sharing Program with Jordan

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Improvement of SMEs Financing and Credit Guarantee Facility of JLGC

Korea Credit Guarantee Fund Ministry of Strategy and Finance (MOSF), Republic of KoreaKorea Development Institute (KDI)

Jordan Loan Guarantee Corporation

Central Bank of JordanEuropean Bank for Reconstruction and DevelopmentFrankfurt School of Finance and ManagementKorea Trade-Investment Promotion Agency

Kwangeon Sul, Executive Director, Center for International Development (CID), KDI Siwook Lee, Professor of KDI School of Public Policy and Management, Former Executive Director, CID, KDI Song Chang Hong, Director, Division of Planning and Evaluation, CID, KDI

Bora Nam, Research Associate, Division of Policy Consultation, CID, KDI Wooinn Park, Assistant Manager, Korea Credit Guarantee Fund

Se Young Ahn, Former President of National Research Council for Economics Humanities and Social Sciences of the Republic of Korea

Yunghwan Lim, Director General, Korea Credit Guarantee Fund

Yunghwan Lim, Director General, Korea Credit Guarantee FundJong-goo Lee, Director, Korea Credit Guarantee FundSunyoung Hong, Deputy Director, Korea Credit Guarantee FundTaehyun Lee, Deputy Director, Korea Credit Guarantee Fund

Sarah Lee, Green ServiceYeon Ju Kang, Green Service

Government Publications Registration Number 11-1051000-000794-01ISBN 979-11-5932-253-2 94320 979-11-5932-227-3 (set)

Copyright ⓒ 2017 by Ministry of Strategy and Finance, Republic of Korea

2016/17 Knowledge Sharing Programwith Jordan:

Improvement of SMEs Financing andCredit Guarantee Facility of JLGC

Government Publications Registration Number

11-1051000-000794-01

Preface

The Knowledge Sharing Program (KSP) was launched in 2004 by the Ministry of Strategy and

Finance (MOSF) of Korea to share Korea’s development experiences with partner countries. KSP offers

comprehensive policy consultations tailored to the needs of partner countries encompassing in-depth

analysis, policy consultation, and training opportunities.

Since its establishment in 1976, Korea Credit Guarantee Fund (KODIT) has consistently contributed

to Korea’s economic development by enhancing the growth potential of enterprises and the

competitiveness of financial markets. Credit guarantee scheme is widely recognized as one of the most

effective SME support policy and many foreign countries are benchmarking the experience of KODIT for

its successful operation.

Starting with 2007 KSP with Vietnam, KODIT has made a big success in 8 countries and 20 projects

over the last 10 years. Especially, the government of Vietnam adopted policy recommendation of KODIT

to introduce a public guarantee scheme similar to the one in Korea and the government of Kazakhstan

comprehensively restructure its credit guarantee scheme, after policy consulting from KODIT.

2016/17 Jordan KSP was designed to improve SME financing and credit guarantee facility of JLGC

(Jordan Loan Guarantee Corporation). This project officially began in September last year. In October

and November pilot study was conducted in Jordan, followed by the interim reporting and policy

practitioners’ workshop in December in Korea to review the progress of the project. During the interim

reporting, KODIT signed an MOU with JLGC for a mid to long-term mutual cooperation. April this year,

the final reporting was held in Jordan to review the results of the project and senior policy dialogue

among high-level officials of the two countries was also held on the sideline to accelerate the execution

of policy recommendations.

This report is designed to suggest policy recommendations most suitable for Jordan, based on

the outcomes of the study conducted by KODIT researcher and relevant institutions in Jordan over

the past 8 months. However, considering the internal and external economic environments and the

development stage of financial market of Jordan, there remains a long way to go before the credit

guarantee system that can provide effective financial support to SMEs Therefore, the government of

Jordan and relevant institutions need to make continuous efforts to improve the system.

In general, the success of a KSP is greatly influenced by strong interest and active participation of

the partner country. In Jordan, based on extensive support from CBJ (Central Bank of Jordan), JLGC

showed strong commitment and actively participated in the project to enhance the quality of research

studies. I sincerely hope research conducted through this KSP contributes to the development of credit

guarantee scheme and SME financing policy in Jordan and foster mutual friendship between the two

countries.

I extend my sincere gratitude to KODIT researchers’ dedication and hard work to draw insightful

study outcomes. I also wish to thank Mr. Ahn Se-young, Dean of GSIS (Graduate School of International

Studies), Sogang University for joining the project to share his valuable experiences of Korea’s economic

development despite his busy schedule and Mr. Lee Bom-yon, ambassador of Korea to Jordan, and the

embassy staffs for their generous support and help for the research team.

Furthermore I would to convey my gratitude to the reviewers and advisory members who provided

valuable advices and many others who contributed to completion of the report. I would also like to

thank all the members of the CID (Center for International Development) of KDI (Korea Development

Institute) for their extensive supports in planning and executing KSP.

Finally, I would like to inform that the contents included in the reports are the findings and opinions

of the experts participating in the project and do not reflect any official opinion of KODIT.

Hwang Rok

Chairman & CEO

Korea Credit Guarantee Fund

2016/17 KSP with Jordan .................................................................................................. 009

Executive Summary ......................................................................................................... 012

1. Introduction ............................................................................................................ 016

1.1. Background ..................................................................................................... 016

1.2. Content of the Study ......................................................................................... 017

2. Status of SMEs and Finance in Jordan ........................................................................... 018

2.1. Status of Economy and SMEs ............................................................................... 018

2.2. Status of the Banking Industry ............................................................................ 019

3. Credit Guarantee System in Jordan .............................................................................. 022

3.1. Overview of the Credit Guarantee System in Jordan ................................................ 022

3.2. Status of the Jordan Loan Guarantee Corporation .................................................. 023

3.3. Challenges of Improving Credit Guarantees in Jordan .............................................. 033

4. Credit Guarantee System in Korea ............................................................................... 036

4.1. Background and Necessity .................................................................................. 036

4.2. Korea Credit Guarantee Fund ............................................................................. 036

4.3. Operation of the Credit Guarantee System ............................................................ 041

4.4. Business Performance ........................................................................................ 049

4.5. KODIT Success Factors and Insight Analysis ............................................................ 052

4.6. Major Differences between JLGC and KODIT ......................................................... 053

5. Policy Recommendation ............................................................................................ 054

5.1. Diversification of Funding Sources ....................................................................... 055

5.2. Enhancing the Public Nature of Credit Guarantees .................................................. 057

5.3. Strengthening Risk Management with the Adoption of a Credit Evaluation System ...... 059

5.4. Improvement in the Guarantee Operation System .................................................. 061

6. Conclusion .............................................................................................................. 067

References ..................................................................................................................... 068

Contents

<Table 1> Major Economic Indicators of Jordan ............................................................... 019

<Table 2> Major Banks in Jordan as of 2014 .................................................................... 020

<Table 3> Credit Guarantee Program to Support SMEs in Jordan ........................................ 022

<Table 4> Major Shareholders ...................................................................................... 023

<Table 5> Summary of Financial Management (Profit/Cost) ............................................... 025

<Table 6> SME Loan Guarantees ................................................................................... 027

<Table 7> Productive Loan Ceiling by Financial Institution ................................................. 029

<Table 8> Outstanding Guarantee by Fund Type .............................................................. 030

<Table 9> New Guarantee Supply by Productive Loan Type ................................................ 031

<Table 10> New Guarantee Amount by Fund Type for Industrial Finance Loans ...................... 032

<Table 11> Subrogation and Recoveries .......................................................................... 032

<Table 12> Cumulative Collected Amount and Portion since Founding (1994-2015)

by Guarantee Type ....................................................................................... 033

<Table 13> Change of KODIT’s Organization Structure ....................................................... 037

<Table 14> Major Changes in the Contribution Scheme ...................................................... 039

<Table 15> Status of Underlying Asset upon Founding ....................................................... 040

<Table 16> Business and Industries Excluded from Guarantee Services ................................... 042

<Table 17> Types of Credit Guarantees ............................................................................ 042

<Table 18> Guarantee Fee Structure ............................................................................... 044

<Table 19> Guarantee Evaluation and Letter of Guarantee Issuance Procedures ...................... 046

<Table 20> Credit Guarantee Supply from 2011 to 2015 ..................................................... 050

<Table 21> JLGC Dividends ............................................................................................ 058

<Table 22> Documents to be Submitted Online to Credit Guarantee Institutions in Korea ......... 064

<Table 23> JLGC Outstanding Guarantees by Region ......................................................... 066

Contents | List of Tables

[Figure 1] Enterprises’ Greatest Obstacles ....................................................................... 020

[Figure 2] Distribution of Bank Credit Facilities by Borrower as of 2014 Year End ................... 021

[Figure 3] JLGC Ten-Year Stock Price Trend (Stock No. on Stock Market: 131071) .................... 024

[Figure 4] Organizational Chart of the Jordan Loan Guarantee Corporation ......................... 024

[Figure 5] JLGC Guarantee Service Operation Mechanism .................................................. 026

[Figure 6] Comparison of Islamic Finance and Conventional Finance .................................... 028

[Figure 7] Amount of JLGC Guaranteed Loans ................................................................. 034

[Figure 8] Percentage of Guaranteed Loans out of all SME Loans in MENA Countries ............. 034

[Figure 9] Challenges for JLGC ...................................................................................... 035

[Figure 10] HQ organization at the Time of KODIT Founding ............................................... 037

[Figure 11] KODIT Loan Guarantee Procedure (Direct Guarantees) ........................................ 045

[Figure 12] Outstanding Credit Guarantee Trend ............................................................... 049

[Figure 13] KODIT’s Outstanding Guarantees against GDP ................................................... 050

[Figure 14] Percentage of Guarantees over SME Loans ....................................................... 051

[Figure 15] GDP Growth and KODIT Insolvency Ratio Trend ................................................. 052

[Figure 16] Major Differences between JLGC and KODIT ..................................................... 054

[Figure 17] Jordan Loan Guarantee Corporation Shareholders ............................................. 057

Contents | List of Figures

The 2016/17 Knowledge Sharing Program (KSP) for Jordan was the first project implemented in 2016. The Central Bank of Jordan submitted the demand survey to the Embassy of the Republic of Korea, and the project began in September 2016. The Central Bank of Jordan applied for the KSP for Jordan in order to provide financial support Jordan’s SMEs and establish a development plan for a credit guarantee facility.

Research Topic

Improvement of SME Financing and the Credit Guarantee Facility of JLGC

Role Name

Senior Advisor Dr. Seyoung Ahn

Principal Investigator (PI) Mr. Yunghwan Lim

Researcher Mr. Jong-goo Lee

Researcher Ms. Sunyoung Hong

Researcher Mr. Taehyun Lee

Program Officer (PO) Mr. Wooinn Park

Composition of 2016/17 KSP with Jordan

2016/17 KSP with Jordan

Wooinn Park (Project Officer, Korea Credit Guarantee Fund)

2016/17 KSP with Jordan • 009

In order to carry out the policy consultation project of the 2016/17 KSP for

Jordan, a detailed survey of the real conditions was conducted to analyze the status

of the Jordan Loan Guarantee Corporation (JLGC)'s credit guarantee system, and a

demand survey was conducted to derive policy recommendations. Both surveys were

conducted in Amman, Jordan between October 2 and 7, 2016. The surveys were

carried out by five people on a research team from the Korea Credit Guarantee Fund

and two people as project managers from the Korea Development Institute (KDI).

During the project period, extensive opinions from all walks of life were collected

regarding the local financial conditions and the development plan for the credit

guarantee system from meetings with the JLGC, nine local Jordan banks, various SME

support institutions, and Korean institutions located in Jordan, including the Korea

Trade-Investment Promotion Agency (KOTRA). In addition, about 80 people from

financial institutions and relevant institutions in Jordan were invited to hold local

seminars to disseminate information about the credit guarantee system, as well as

enhance the understanding of the credit guarantee system for persons concerned.

Between November 6 and 10, 2016 in Amman, Jordan, a detailed survey on the

real conditions was conducted for additional further discussion. Two people from a

research team of the Korea Credit Guarantee Fund, including Dr. Seyoung Ahn as

a senior advisor, were in attendance. During the project period, the research team

identified the development status of new products and the operation status of

various guarantee products at meetings with each JLGC department. In addition, the

financial support status of international organizations and the requirements of SMEs

in Jordan were identified while visiting international organizations (EBRD) and the

Jordan SME Association.

From December 18 to 23, 2016, JLGC President Dr. Al Ja‘fari, two executives

from the board of directors, and four working-level staff were invited to Korea

for an interim briefing session and a working-level policy training session. At the

interim briefing session, the Korean research team shared its interim findings by

delivering theme presentations, discussed the future research directions and the

final policy recommendations, and held a capacity-building training session on

the countermeasures of credit guarantee institutions in response to the changing

financial environment. Additionally, to learn from Korea’s development experiences

and get some hands-on experience, the Jordan delegation visited some of the major

financial institutions for SMEs including the Bank of Korea, the Industrial Bank of

Korea, industrial sites like POSCO, as well as SMEs that benefitted from Korea Credit

Guarantee Fund guarantees. The Korea Credit Guarantee Fund and the JLGC also

signed a MOU on mutual cooperation to discuss ways to continue exchange and

cooperation in the future.

010 • 2016/17 Knowledge Sharing Program with Jordan

As the last phase of the project, a briefing session was held to share the final research results of the 2016/17 KSP for Jordan with Jordan’s high-level policy officials and personnel from relevant institutions. The KSP research team headed by Senior Advisor Dr. Seyoung Ahn visited Jordan to give a presentation on the final policy recommendations of the KSP for Jordan.

At the meeting, Central Bank of Jordan Vice President Maher Hasan agreed that developing a credit guarantee system was necessary to improve SME access to finance. He also generally agreed with the Korea Credit Guarantee Fund’s policy recommendations and stressed that the JLGC’s change and progress should continue through them. Afterwards, at the working-level meeting held with the JLGC, the research team directly received the working-level staff’s opinions on the final report and discussed the minor revisions that were needed to reflect these opinions in the report.

At the final briefing session for approximately 70 people from Jordan’s commercial banks, related government agencies, and the JLGC, the detailed content of the KSP for Jordan final report was announced, with recommendations on the necessity of developing a credit guarantee system in Jordan and its specific plans. It was also announced that it was essential to have a credit information system in place with a detailed credit evaluation system and then discussions were held on these topics.

2016/17 KSP with Jordan • 011

Jordan acts as a bridgehead for Western countries to enter the Middle East, and it also serves as a buffer zone between neighboring countries such as Iraq, Israel, and Palestine. Additionally, its geographical advantage is used to develop the service industry, which includes finance, real estate, logistics, and communications. However, Jordan has insufficient natural resources, such as petroleum, so that most raw materials, capital goods, and consumer goods are imported from overseas. The recent economic growth also remains at 3% due to the political instability of Jordan’s major trading nations, including Syria and Iraq, as well as the inflow of a large number of refugees.

The government of Jordan announced “Jordan 2025” as its economic development policy to increase the GDP growth rate and reduce the poverty and unemployment rates, while also recognizing the fostering of small and medium enterprises (SMEs) and startups as important policy tasks. There are about 185,000 SMEs doing business in Jordan, accounting for a high percentage of Jordan’s economic activity by creating 71% of all jobs, 40% of GDP, and 45% of exports.

Meanwhile, Jordan’s SMEs do not have easy access to financing. Banks tend to avoid lending to SMEs because of lending practices based on collateral, limited SME information, and the lack of a credit risk evaluation system for SMEs. As a result, there is a mismatch between the SME funding demand and supply, resulting in delays in SME growth and development.

Executive Summary

Yunghwan Lim (Korea Credit Guarantee Fund)


In order to improve the imperfect financial markets and restricted financial access, the Jordan Loan Guarantee Corporation (JLGC) was established in 1994. The JLGC provides various services to improve access to finance for Jordan’s SMEs, including credit guarantees for SME loans, housing and personal loans, and exports. The Central Bank of Jordan (CBJ) is the JLGC’s major shareholder with a 47.75% share, and 21 financial companies and private investors also own shares. The JLGC’s major revenue sources are guarantee fees received from partner banks and reinvestment of capital gains. The JLGC’s income exceeds their operating costs and payments by subrogation, making it a financially sound institution. As a result of focusing on financial soundness, it is more likely to manage the guarantee funds sustainably, but it can impose restrictions on guarantee use and additionality. Currently, the JLGC’s SME loan guarantees account for less than 4.5% of all SME loans; therefore, the most important task is to expand its outreach and additionality.

In the case of Korea, the guarantee system started with the establishment of the Korea Credit Guarantee Fund in 1976. Initially, there were only USD 200 million credit guarantees outstanding, and in 40 years, they increased more than 200 times to USD 43 billion as of the end of 2016. Now, the credit guarantee system is an integral part of the SME financial support system. Korea’s credit guarantee system plays a pivotal role in fostering competitive SMEs through sufficient funding and supporting economic growth. It has also contributed to expanding SME financing and led the development of the financial industry, including bank growth. From the macroeconomic aspect, the credit guarantee system supported a quick economic recovery by complementing the private financial markets and preventing a credit crunch whenever there was an economic crisis.

In this KSP, we make policy recommendations in four important areas in order to enhance guarantee use and additionality of the JLGC.

First is the diversification of fund raising. In order to ensure continuous operation while also achieving the government’s policy goals, it is essential for the credit guarantee institution to secure stable financing. The credit guarantee institution receives financial support from the nation to make up for losses that arise during the process of carrying out public functions such as compensating for market failures and supporting loans in the field of policy. The Central Bank of Jordan provides strong support for expanding SME lending and credit guarantee funds. In 2016, the JLGC increased its capital from JOD 10 million to JOD 30 million by issuing new stocks of the Central Bank of Jordan and financial institutions. However, the JLGC lacks stable funding sources, and it is difficult to receive funds regularly from the central bank. Therefore, it is necessary to determine ways to get funding from stakeholders other than the central bank, such as banks, companies, and international organizations.

Executive Summary • 013

Second is the need to expand the public interest of credit guarantees through corporate governance changes. As a listed company, the JLGC has private investors as its shareholders and pays stock dividends based on pre-tax profits. In addition, the government’s shareholding ratio is restricted to less than 50% and operated as an organization based on market principles. This can cause problems of public policy that aims to support SMEs, as it conflicts with the commercial goal of maximizing shareholder value. In particular, it can result in a tendency to avoid high-risk startups and venture companies that need political support the most. To improve SME access to finance, it is necessary to minimize the share of private investors in order to strengthen public interest. In 2016, the JLGC reduced the shareholding ratio of private investors to less than 5% through a capital increase, while it also identified ways to expand public interest and improve corporate governance, such as not paying dividends and using them as guarantee funds. In order to reduce the burden of creating profit, JLGC can consider delisting in the medium and long terms.

Third is the need to adopt a credit evaluation system for systematic risk management. Adopting a credit evaluation system to manage risk is the key factor in the guarantee institution’s ability to deliver results and expand its business areas. Currently, the JLGC does not have an in-house credit evaluation system and relies on the banks’ credit evaluations. The JLGC should use a scoring system to accumulate data during the initial stage of developing its credit evaluation system. Collecting and managing credible data is the most important part of a credit evaluation system, which is why trustworthy data should be acquired from financial institutions and credit bureaus. In addition, internal risk management specialists should be developed.

Last is the need to improve the credit guarantee operation system. In order to expand the guarantee supply, it is necessary to increase the bank’s guarantee demand by enhancing the marketability of credit guarantees. To achieve this, it is necessary to determine ways to expand guarantees by adopting portfolio guarantees, simplifying the business process, speeding up the process for subrogation, and improving regional SMEs’ access to finance.


2016/17 Knowledge Sharing Program with Jordan:Improvement of SMEs Financing and Credit Guarantee Facility of JLGC

Improvement of SMEs Financing and Credit Guarantee Facility of JLGC

Yunghwan Lim (Korea Credit Guarantee Fund)Jong-goo Lee (Korea Credit Guarantee Fund)

Sunyoung Hong (Korea Credit Guarantee Fund)Taehyun Lee (Korea Credit Guarantee Fund)

1. Introduction

1.1. Background

1.1.1. Background and Context of Policy Advice

The Central Bank of Jordan applied for the Knowledge Sharing Program (KSP) of the Korean government to expand financial access for SMEs and address the pressing issues that the Jordan Loan Guarantee Corporation (JLGC) was facing.

SMEs in Jordan play a key role in driving economic growth, accounting for 99% of the entire corporate sector and 64% of job creation. Despite their primary role in the economy, banks tend to avoid issuing loans to SMEs due to lack of information, the SME credit evaluation system, and collateral-based loan practices. This led to a significant gap between SME loan demand and the loan supply, and this restricted access to financial capital is likely to hinder the growth and development of SMEs.

In an effort to address the restricted financial access of SMEs and the incomplete financial market, many countries have been introducing and running credit guarantee systems. Jordan also joined the move, establishing the Jordan Loan Guarantee Corporation in 1994 and running a credit guarantee system, but with limited government support and insufficient funds for guarantees, the expansion of guarantee services has been delayed. The JLGC had a paid-in capital increase in 2016 and launched new guarantee products to increase both the supply of guarantee services and accessibility. However, to ensure the seamless operation of an efficient and financially sustainable guarantee system of the JLGC, it is essential to reorganize the guarantee service system and conduct risk management to expand the guarantee service supply.

With this understanding, the JLGC applied for KSP, recognizing Korea’s credit guarantee system as one of the world’s best. Under this backdrop, this report provides recommendations for the improvement of Jordan’s credit guarantee system in order to increase SME access to financial services by reviewing the experiences and operation of KODIT and considering the SME business and financial environments in Jordan and intrinsic restrictions in the JLGC.

1.1.2. Demand Assessment, Scope, Study Method,and Study Direction

In its KSP expectation survey, the JLGC requested a SME demand analysis of the financial market, improvement in guarantee procedures, development

016 • 2016/17 Knowledge Sharing Program with Jordan Improvement of SMEs Financing and Credit Guarantee Facility of JLGC • 017

of new products, improvement in subrogation performance, enhancement of risk management, and measures for organization and personnel management improvement. Considering the study period, among the items requested in the expectation survey, this study will focus on the high-priority items, including the measures to expand guarantee outreach and improvement in the risk management and guarantee operation systems.

The study methods include the following. First, we review the overall status of Jordan’s economy and SMEs and analyze the JLGC’s business environments, including SMEs and the financial system and banking environments. Based on the overview, a comprehensive assessment is made, the key issues are identified for SME finance, and the basic direction is defined for credit guarantee system improvement.

Second, the issues are identified with an in-depth analysis of the JLGC’s status and the causes of an insufficient supply of credit guarantees. More specifically, the governance, operation, and product lineup will be extensively reviewed to detect the primary causes that hinder the expansion of guarantee services.

Third, considering the JLGC’s governance, the nature of financial service in an Islamic country, and the loan practices of Jordan’s local banks, a policy proposal and road map will be drawn based on study and the analysis of the best practices of Korea and other countries. To this end, along with Korea’s development and success cases of its public credit guarantee system, the challenges in operation and the subsequent solutions that Korea experienced in a similar development stage will be reviewed to draw insights for Jordan.

1.2. Content of the Study

The study consists of the following. In Chap. 1, we provide a background and outline the request from the applicant country and study methods. In Chap. 2, Jordan’s financial environments, including SMEs and the country’s financial status, are analyzed. In Chap. 3, we analyze the issues of Jordan’s credit guarantee system. In Chap. 4, we introduce some cases of Korea’s credit guarantee system and other benchmark cases, with a focus on KODIT. In Chap. 5, policy insights are drawn based on Korea’s experiences, and in Chap. 6, we make our conclusions based on the policy insights.

Improvement of SMEs Financing and Credit Guarantee Facility of JLGC • 017

2. Status of SMEs and Finance in Jordan

2.1. Status of Economy and SMEs

As of 2015, Jordan’s GDP was USD 37.6 billion, which is relatively small among the Middle Eastern countries. The country has no natural resources such as petroleum and is highly dependent on foreign countries for commodities, capital resources, food, and consumer goods due to a weak manufacturing base caused by persistent deficiencies of water and electricity. Looking at the industry structure, the service sector, e.g., banking and tourism, accounts for a major portion of the economy, and, more specifically, in 2013, the service sector accounted for 39% of the GDP, followed by public service at 32%, manufacturing at 17% and agriculture at 3%.

Jordan’s economy was activated with the economic boom of the Gulf nations, as active investment was made in the midst of high oil prices in the late 2000s. However, the economy was hit by political uncertainty with the Arab Spring ignited by the Tunisian Revolution in 2011. With the recent oil price stabilization, the fiscal deficit declined as energy costs decreased, and the economy is growing annually at approximately 3% with international support. Yet the political uncertainty of major trade partners like Syria and Iraq and the massive inflow of refugees remain as persistent obstacles of economic growth.

Jordan’s government announced its economic development plan “Jordan 2025” in May 2015, and it is implementing the plan under the leadership of the King of Jordan. In the plan, Jordan outlines the major goals to promote GDP growth (3.1%→7.5%), reduce the poverty rate (14%→8%), pull down the unemployment rate (12.2%→8%–9.25%), promote women’s economic participation (15%→24%), and reduce public debt (81%→47%) by 2025. To support these plans, the government is planning to turn the country into the gate nation of the Middle East economy and promote export based on the FTAs Jordan has signed. In addition, to address the energy issue, which is the main cause of Jordan’s fiscal deficit, it is planning to increase energy self-sufficiency to 39% by 2025 by constructing nuclear power plants and developing new renewable energy.

In the SME financial environments, it aims to rank 75th in the “ease of doing business” category and 70th in the “getting credit” category by 2025. According to the “Doing Business Report 2015” released by World Bank, Jordan ranked 117th among 189 countries in the “ease of doing business” category, and the nation was 185th (last) in the “getting credit” category. The major causes of the low scores include the fact there is no efficient way of protecting and liquidating collateral, and there is no sufficient credit data as the CB (credit bureau) is still in its infancy.


<Table 1> Major Economic Indicators of Jordan

Economic Indicator 2011 2012 2013 2014 2015

GDP Growth (%) 2.6 2.7 2.8 3.1 2.7

Unemployment (%) 12.9 12.2 11.0 12.0 13.0

Inflation (%) 3.3 7.2 2.7 2.5 -0.8

Imports (USD billion) 16.9 18.5 19.6 20.4 17.6

Exports (USD billion) 8.2 7.9 7.9 8.5 7.9

Trade Deficit (USD billion) -8.7 -10.6 -11.7 -11.9 -9.7

FX Rate (USD/JD) 0.709 0.709 0.709 0.709 0.709

Source: KOTRA.

There is no clear legal definition of SMEs in Jordan, but the Central Bank of Jordan defines SMEs as companies with (a) JD 1 million or less in assets or annual revenue and (b) 5–20 employees, while midsized businesses are defined as companies with (a) JD 1–3 million in assets or annual revenue and (b) 21–100 employees.

As of March 2016, there were 185,000 companies with business registrations in Jordan, and 99% of them were SMEs. SMEs make up a significant portion of the economy, accounting for 71% of employment (SMEs 33%, microbusiness 39%), and they also account for 40% of the GDP and 45% of the exports. According to the Ministry of Industry, Trade and Supply, the types of SMEs based on business registrations are trade (57.5%), service (26.2%), manufacturing (14.4%), and others (1.9%). At the regional level, 82% of SMEs are in Amman while the remaining 18% are scattered across other regions.

2.2. Status of the Banking Industry

The size of Jordan’s banking industry is relatively big for the economy. As of 2015, the total assets held by the banking sector stood at 170% of total GDP. There are 25 commercial banks and Islamic banks in the nation. Looking closer, there are 13 commercial banks in Jordan, four Islamic banks, and eight foreign-based banks, and the three leading banks (Arab Bank, The Housing Bank for Trade & Finance, and Jordan Islamic Bank) accounted for 44% of total assets.


<Table 2> Major Banks in Jordan as of 2014

(Unit: JD million)

Category ArabBank

HousingBank

JordanIslamicBank

JordanKuwaitBank

Cairo Amman

Bank

Total(five bankscombined)

Total Assets 8,726 6,509 3,855 2,369 1,885 23,344

Deposits 2,918 2,176 2,630 1,160 842 9,725

Loans 6,189 4,642 3,471 1,887 1,166 17,354

Source: Association of Banks in Jordan.

More than 90% of adults in Jordan have bank accounts and 20% have loans, showing a higher banking penetration rate than other countries in the MENA region. Despite the advancement in Jordan’s financial industry, SME access to finance is relatively low. According to the Enterprise Survey by the European Investment Bank, companies stated that the biggest obstacle in running their businesses was access to finance. Despite the political uncertainty and refugee issue, companies responded that they were experiencing greater difficulties with financing (33%) than with political instability (10%).

Jordan FEMIP

(Unit: %)

Access to Finance Tax Rates Political Instability Labour Regulation Access to Land

40

30

20

10

0

[Figure 1] Enterprises’ Greatest Obstacles

Source: European Investment Bank.

The EBRD Jordan MSME Framework report said that 73% of enterprises stated that they needed a loan, but only 25% received loan in the last two years, indicating a major gap between demand and supply.


Bank loans are the primary financing channel for enterprises, and loans to SMEs account for 6%–12% of the banks’ loan portfolios. Banks tend to focus on public loans, loans to enterprises, and retail loans, as they have relatively lower risk and the CAGR of loans to SMEs from 2009 to 2012 was 7.7%, staying lower than the average of other MENA countries such as Saudi Arabia, Egypt, and Lebanon. However, with fierce competition and loan market saturation, local banks are expanding their lending to SMEs by securing funds for low-rate loans to SMEs from the Central Bank or leveraging the guarantee system.

Government and Public Sector

7.9

Retail20.5

Corporate Entities41.7

SMEs8.5

Real Estate21.3

(Unit: %)

[Figure 2] Distribution of Bank Credit Facilities by Borrower as of 2014 Year End

Source: CBJ, Financial Stability Report, 2014.

According to the CBJ, the average deposit interest rate in 2015 was 3% or lower, while loan rates were in the range of 8%. More specifically, time deposits yielded 3.06%, savings deposits 0.62%, and demand deposits 0.32%. Loans and advances were charged 8.24%, discounted bills and bonds 8.7%, and overdraft accounts 8.01%.

Meanwhile, the SME loan rate was higher than the general loan rate. According to a report by the European Investment Bank (2016), the SME loan rate in general was in the rage of 9%–11%, modestly higher than the home loan rate of 6%–7% and other enterprise loans of 7%–8%. The SME loan rate even differs by bank, and according to the survey by the Association of Banks in Jordan (ABJ, 2016), loan rates stayed in the range of 8%–14%, depending on the financing method. At Islamic Bank, it was in the range of 5%–12%. Banks request collateral when extending loans, and generally, land, machinery, sales receivables, and personal security are used as collateral. Among them, land and machinery account for more than 60% of collateral. Meanwhile, banks cited a lack of financial statements, shortage of collateral, and lack of understanding in using bank services as the major obstacles in extending loans to SMEs.


3. Credit Guarantee System in Jordan

3.1. Overview of the Credit Guarantee Systemin Jordan

The Jordanian government approved the establishment of a credit guarantee institute to facilitate loan extensions to SMEs in an August 1993 Cabinet meeting. Since then, after eight months of preparation, the Central Bank of Jordan founded the JLGC, a public corporation with capital of JD 7 million, in March 1994. The JLGC is a public guarantee service provider established to ensure sustainable economic development of Jordan with improved access to finance for SMEs and guarantee services for exporting companies.

Other than the JLGC, there is one other credit guarantee provider, the Overseas Private Investment Corporation (OPIC) program of the Jordan Loan Guarantee Facility. The Jordan Loan Guarantee Facility was founded in 2011 with a USD 25 million investment by USAID and OPIC, and since its founding, it has been providing USD 87 million (324 cases so far) of guarantee services as of the end of June 2016. The Jordan Loan Guarantee Facility aims to support USD 300 million new loans to SMEs and create more than 31,500 jobs with the OPIC program.

<Table 3> Credit Guarantee Program to Support SMEs in Jordan

Category Investor Loan Amount

Loan Period

Guarantee Rate Support Target

JLGC Credit Guarantee Program

CBJMaximum

JOD 550,0008 years

max 70%

SMEs(wholesale and

retail O)

JLGF OPIC Program

OPICUSD 2

50,000 ~ 750,000

84 months

max

60%–65% in Amman, 75%

outside of Amman

SMEs(wholesale and

retail X)

Source: JLGC Annual Report, 2015 and others.


3.2. Status of the Jordan Loan Guarantee Corporation

3.2.1. Overview

The JLGC is registered as a public company incorporated based on the commercial law of Jordan, and since its founding in 1994 with capital of JD 7 million, the business scope was expanded in 1995 to include export credit insurance with an expansion of capital to JD 10 million. The corporation provides credit guarantee services for SMEs, personal credit guarantees, and export credit guarantees to improve SME access to finance.

As of 2015 end, a 47.75% share of JLGC was held by the Central Bank, the corporation’s major shareholder, and the remaining shares were held by 21 other financial institutions and individual investors. Different from general credit guarantee institutions, the JLGC was listed on the Amman Stock Exchange in July 2004, and it has unique governance where 25%of the shareholders are individual investors. The JLGC has been generating pretax earnings since 2012 and providing more than JD 300,000 in share dividends to investors. It is uncommon to see a fully independent credit guarantee institution generating profits consistently like the JLGC, even in the global market.

W

<Table 4> Major Shareholders

Shareholder End of 2015

No. of Shares Equity Share (%)

Central Bank of Jordan 4,775,000 47.75

Cities & Villages Development Bank 525,000 5.25

Social Security Corporation 524,000 5.24

Arab Bank 350,000 3.50

Jordan Kuwait Bank 300,000 3.00

The Housing Bank 278,500 2.785

Total 6,752,500 67.525

Source: JLGC Annual Report, 2015.


Pric

e(JD

)

2.33

1.94

1.55

1.16

0.77

0.38

02 Jan 2006 26 Aug 2007 12 Apr 2009 14 Aug 2011 28 Apr 2013 21 Dec 2014 30 Oct 2016

<Figure 3> JLGC Ten-Year Stock Price Trend (Stock No. on Stock Market: 131071)

Source: Amman Stock Exchange.

The JLGC does not have separate branches for its credit guarantee services, and the headquarters based in Amman consists of seven departments under two divisions with 42 employees. The major decisions are made by the BOD consisting of the management of major financial institutions as members, and the deputy governor of the Central Bank of Jordan serves as the chair of the BOD as a non-executive director.

The Jordan Loan Guarantee Corporation

Board of Directors

Internal Auditor Director General

Deputy Director General

Compliance officerDirector General office manager

Export Credit Advisor

Support ServicesDepartment

FinancialDepartment

Export Credit Guarantee Department

Market Research & Product

DevelopmentDepartment

Follow-up, Indemnifications

& Recoveries Department

Industrial & Services Loan

GuaranteeDepartment

1- Administration section2- I.T. Section3- Public Relations Section

1- Underwriting Section2- Marketing Section

1- Market Research Section2- Product Development Section

1- Follow-up Section2- Indemnifications & Recoveries Section

1- Industrial Loans Section2- Services Sector Loans Section

LoanGuarantee

Department

1- SMEs Loans Section2- Housing & Personal Loans Section

Assistance Director Generalfor Support & Backup Group

Assistance Director Generalfor Technical & Operational Group

<Figure 4> Organizational Chart of the Jordan Loan Guarantee Corporation



It is worth mentioning that the JLGC generates net profits every year, which is rare for a public credit guarantee institute that supports SMEs. The primary profit sources are guarantee fees collected from banks and profits from the reinvestment of capital. The profits are more than enough to cover operational costs and reserves for performance by subrogation. This means that the JLGC is a self-sufficient financial institution with robust financial soundness.

<Table 5> Summary of Financial Management (Profit/Cost)

(Unit: JD)

2012 2013 2014 2015

Profit

A. Operating Profit 759,712 843,044 874,048 969,996

B. Reinvestment Profit 720,109 824,879 819,920 712,866

C. Others 74,516 5,362 61,330 30,220

Total Profit 1,554,337 1,673,285 1,755,298 1,713,082

Costs

A. Operating Costs 956,772 927,154 992,725 1,130,147

B. Reserves for Performance by Subrogation

314,338 245,101 306,824 251,807

C. Income Taxes 7,943 81,334 35,413 (265,566)

Total Costs 1,279,053 1,253,589 1,334,962 1,116,388

Net Profit 275,284 419,696 420,336 596,694


3.2.2. Credit Guarantee Support System

The JLGC takes an individual approach to delivering credit guarantees and a mixed approach to screening entities. It is a system of double screening by the bank and the guarantor. When the loan documents are delivered from banks, the loan underwriters in two of the JLGC’s divisions (the Loan Guarantee Division and the Industrial Finance and Services Loan Guarantee Division) review the documents for one to two business days to determine guarantee eligibility.


Jordan Loan GuaranteeCorporation(JLGC)

Central Bank FinancialInstitution SME

[Figure 5] JLGC Guarantee Service Operation Mechanism

Source: KODIT presentation, 2016.12.19.

The Central Bank of Jordan does not make periodic contributions or provide support funds for the JLGC. On the other hand, the JLGC collects 1.25%–1.5% of the guarantee limit as guarantee fees under the name of contribution when signing the guarantee agreements with financial institutions and this becomes the financial resources for guarantee services.

3.2.3. Operation of Credit Guarantees

3.2.3.1. Guarantee Targets

Guarantee targets are generally categorized into financial institutions and companies. In the case of the JLGC, the financial institutions eligible for guarantee services are limited to those signing guarantee agreements. The companies eligible for credit guarantees are all companies except for those on the negative list. Yet for industrial finance loans, wholesale and retail businesses are not eligible for guarantee application.

3.2.3.2. Guarantee Products

The JLGC’s guarantee products are categorized into three groups: SME credit guarantees, individual credit guarantees for home purchases, and export credit guarantees to support exportation. Among the three products, the guarantees for SME loans are divided into productive loans and industrial finance loans, depending on the guarantee fund sources and loan objectives. The biggest difference between productive loans and industrial finance loans is the source of guarantee funding. Productive loans leverage the resources of the JLGC (capital) directly and include the Entrepreneurship Financing Program operated with a JD 1.25 million fund supported


by the Ministry of Planning and Development, and do not include general SME loans and microbusiness loans. An 80% preferential guarantee coverage ratio is applied to the Entrepreneurship Financing Program. After a recent capital increase, a preferential guarantee program is now available for startups and renewable energy companies.

The guarantees for industrial finance loans (EJADA) are leveraged through a JD 5 million grant extended from the European Commission 2006. The grant was extended to the Central Bank of Jordan as a loan with no interest and no maturity, and it is leveraged by the JLGC to be used as resources for industrial finance loans. Guarantees for industrial finance loans (EJADA) are available only when they directly contribute to production that creates added value with the expansion of production facilities and purchase of raw materials.

<Table 6> SME Loan Guarantees

Category Maximum Loan Limit

Maximum Loan Period

Guarantee Coverage Ratio

SME loan guarantees JD 250,000 72 months 70%

Microloan guarantees JD 15,000 36 months 70%

Industrial loan guarantees (EJADA) JD 550,000 96 months 70%

Lease guarantees (EJADA) JD 550,000 96 months 70%

Kafala Program: Islamic financing JD 550,000 96 months 70%

Entrepreneurship Financing Program JD 75,000 96 months 80%

Startups Guarantee Program JD 100,000 60 months 85%

Renewable Energy Program JD 500–250,000 36–60 months 70%


Under the Kafala Program, which is based on Islamic finance, guarantee services are available both for productive loans and industrial finance loans through the Islamic International Arab Bank, who signed an agreement with the JLGC. Islamic finance stipulates that financial transactions and products must be consistent with the principles of Shariah, and banks running business in the framework are called Islamic banks. Jordan Islamic Arab Bank was established in 1978, and it is the first Islamic bank established in Jordan. Since then, Islamic International Arab Bank and two other Islamic banks were founded, and as of 2015 end, these four banks had about 140 branches across the nation. In Islam finance, (1) they do not take interest (or


Riba), (2) they share risk with the debtors, and (3) they do not collect delay penalties. Sharing the risk with debtors in Islamic finance is considered a new solution to improve SME finance access that is blocked by the high-risk high-return approach.

Ninety-four percent of Jordan’s population is Muslim. In a survey by the International Finance Corporation 2015, 25% of SMEs answered that they wanted to have financial transactions only through Islam finance. Additionally, compared to general commercial banks, they show strong preference for Islamic banks. However, since Islamic banks do not collect interest at all, sometimes they also do not permit payment of guarantee fees to the guarantee institution, and for this reason, several Islamic banks prohibit guaranteed loans with credit guarantee services. In the JLGC’s Kafala Program, the guarantee fees are collected directly from the SMEs when loans are extended.

lSlamic finance

No Riba

No Late payment fees

Conventional finance

No risk sharing

Riba

Late payment fees

Risk sharing

Risks

Tornado

Eminent domain

Fire

[Figure 6] Comparison of Islamic Finance and Conventional Finance


3.2.3.3. Guarantee Fees

Financial institutions signing an agreement with the JLGC must pay guarantee fees as contributions to the institution. The method of collecting guarantee fees differs depending on the type of fund. For productive loans, financial institutions and the JLGC set the guarantee limit in advance and collect fees for the limit regardless of the outstanding guarantee. On the other hand, guarantee fees are collected based on the outstanding guarantees for industrial finance loans.


<Table 7> Productive Loan Ceiling by Financial Institution

(Unit: JD)

CategoryEnd of 2015

Maximum Loan Amount Utilized Guarantee

Jordan Kuwait Bank 350,000 160,074

Jordan Ahli Bank 950,000 329,830

Jordan Commercial Bank 1,100,000 446,636

Islamic International Arab Bank 0 7,622,980

Arab Bank 2,500,000 2,397,219

Egyptian Arab Land Bank 27,000 0

Ahli Microbalance Company 500,000 176,207

Bank of Ethical 1,300,000 696,366

Bank of Jordan 500,000 142,293

Arab Jordan Investment Bank 150,000 0

The Housing Bank 11,500,000 7,181,436

Cairo Amman Bank 1,100,000 1,440,953

ABC Bank 200,000 81,948

Societe Generale Bank 700,000 28,549

Capital Bank 1,500,000 206,682

Bindar Trading &Investment Co.

250,000 53,415

Development & Employment Fund

0 1,983,374

Microfund for Woman 800,000 850,259

Total 23,427,000 23,798,229



The Islamic International Arab Bank does set a specific limit in its Kafala Program. This means that they do not receive guarantee fees as contributions from banks. Instead, they collect guarantee fees 0.55%–0.85% from SMEs using the guarantee services when issuing the letters of guarantee. The guarantee services leveraging the Development & Employment Fund (DEF) funded by the Ministry of Planning and Development are also operated without setting specific guarantee limits.

3.2.4. Performance of Credit Guarantees

3.2.4.1. Outstanding Guarantees

There is a distinct difference between the JLGS’s outstanding guarantees of SME loans and individual loans. While SME credit guarantees rapidly grew over the past five years, credit guarantees for individual home purchases continued declining. In particular, the outstanding guarantees for productive loans grew an average of 61% annually, and guarantees for industrial finance loans grew 14%. On the other hand, credit guarantees for individuals declined 6.6%. This can be seen as an outcome of the JLHC’s commitment to contribute to Jordan’s economic development by improving SME access to financing.

<Table 8> Outstanding Guarantee by Fund Type

(Unit: JD)

2011 2012 2013 2014 2015

SME Credit Guarantees

A. Guarantees for Productive Loans

Loans 690 908 1,205 1,647 1,725

Amount 3,561,892 8,882,143 13,647,798 19,684,294 23,798,229

B. Guarantees for Industrial Finance Loans

Loans 129 152 157 179 211

Amount 10,447,535 12,296,875 14,682,928 16,394,131 17,355,527

Individual Credit Guarantees

Loans 2,244 2,119 1,944 1,773 1,631

Amount 35,191,118 33,388,076 30,764,259 28,558,531 26,742,374



3.2.4.2. New Guarantee Supply

The JLGC’s new guarantee supply for SMEs increased last year from the previous year, and the growth trend is particularly obvious in industrial finance with an increase of approximately 32%. Overall, the new guarantee supply rose 25%, and most of all, the Kafala Program increased, which is the Shariah-based Islamic guaranteed loan founded on the agreement with the Islamic International Arab Bank in 2012. Considering more than 90% of Jordan’s population is Muslim, further expansion of the Kafala Program is expected. The Kafala Program defines the clear purposes of the loans, e.g., factory construction or purchase of machinery, and the insolvency rate is near zero with thorough credit research and restructuring of the payback schedule. Thus, the growth of the guarantee supply under the Kafala Program is welcome news for the JLGC’s risk management.

<Table 9> New Guarantee Supply by Productive Loan Type

2014 2015

No. of Cases Amount (JD) No. of Cases Amount (JD)

Pharmacy Loans 4 32,000 4 43,000

SME Loans 244 4,921,303 408 8,153,869

Business Loans 159 3,251,934 66 1,351,700

Microloans 162 448,525 71 181,206

Kafala 169 5,910,426 222 8,042,757

Entrepreneurship (DEF) 27 545,911 21 711,405

Total 765 15,110,099 792 18,483,937



<Table 10> New Guarantee Amount by Fund Type for Industrial Finance Loans

2014 2015

No. of Cases Amount (JD) No. of Cases Amount (JD)

Industrial Finance 26 4,504,270 25 4,178,130

Leasing 7 990,518 3 664,948

Business Vehicles 10 152,600 7 99,260

Kafala 16 817,880 45 3,592,355

Total 59 6,465,268 80 8,534,693


3.2.4.3. Subrogation and Collected Amount

When a guaranteed loan becomes insolvent, financial institutions can make subrogation claims 180 days after the insolvency takes place. After assessing the claim, the JLGC pays back in subrogation, and except for guaranteed loans under the Entrepreneurship Financing Program, delay penalties shall not be provided. In assessing subrogation claims, when the funds have been used for purposes other than the original purpose stated in guarantee evaluation, it can be exempted from indemnification, and, in general, it takes about ten business days from claim to actual subrogation. Currently, debt collection activities after subrogation are performed by banks and the Follow-Up, Indemnifications & Recoveries Department of the JLGC monitors the process. In the long-term management plans of the JLGC, it will directly collect the amount indemnified starting in 2019.

<Table 11> Subrogation and Recoveries

(Unit: JD)

Category

2014 2015

Subrogation Amount Recoveries Subrogation

Amount Recoveries

Guarantees forProductive Loans

208,490 287,933 762,564 226,636

Guarantees forIndustrial Finance Loans

90,120 66,211 420,992 357,082

Total 59 6,465,268 80 8,534,693



The subrogation and collected amounts for SME credit guarantees at the JLGC fluctuated every year. In some cases, the collected amount exceeded the subrogation amount, resulting in a negative net subrogation amount. Since its founding in 1994, 56.7% of the total subrogation amount has been collected, which is quite high. The collection rate is high because the equipment fund accounts for a high proportion of the loans guaranteed by the JLGC, meaning that the financial institutions have collateral securing the loans. After subrogation for the guaranteed loans, the financial institutions exercise their rights to the collateral to recollect the amount paid out in subrogation.

<Table 12> Cumulative Collected Amount and Portion since Founding (1994–2015) by Guarantee Type

Category Subrogation (JD) Collected Amount (JD) Collection Rate (%)

Guarantees forProductive Loans

5,365,405 3,430,935 63.95

Guarantees for Industrial Finance Loans

1,755,342 609,918 34.74

Total 7,120,747 4,040,853 56.75

Source: JLGC.

3.3. Challenges of Improving Credit Guarantees in Jordan

According to the survey of Jordanian SMEs by the Association of Banks in Jordan (2016), SME loans accounted for approximately 13% of all loans in Jordan, staying lower than 16%, the average of developing countries, and 22%, the average of advanced countries. Despite the recent increase in the JLGC’s guarantee supply, the portion of guaranteed loans out of all SME loans in Jordan remains at 4.5%. In Korea, with an advanced guaranteed loan system, the percentage stays at around 13%–14%, and Jordan’s percentage of 4.5% is one of the lowest among MENA countries.

The most urgent issue in Jordan’s credit guarantee system is how to expand the bases of credit guarantees and increase guarantee service use. Guarantee use is the number of guarantees supplied to SMEs and the guarantee amount. A higher guarantee use means that the credit guarantee system has greater impact on the SME sector.


Because of some internal and external challenges that JLGC is facing, various indicators of outreach such as amount of guarantees newly provided, outstanding guarantees and weight of guarantees in GDP are in a low level. Also additionality indicators such as production amount and profitability of the enterprises supported with credit guarantee or through comparative analysis of financial performance of enterprises with or without the support of credit guarantee are also in a low level. JLGC is one of the institutions that seek both profit and public role. In order to expand use of credit guarantee, enhancing the public nature of credit guarantee might be a good solution to increase the outreach and additionality.

65.0

60.0

55.0

50.0

45.0

40.0

35.0

30.0

25.0

20.0

2012 2013 2014 2015 2016(estimated)

(Unit: million JD)

[Figure 7] Amount of JLGC Guaranteed Loans

Source: JLGC presentation, 2016.12.19.

12.00

10.00

8.00

6.00

4.00

2.00

0.00

LEBANON10.0 EGYPT

9.0 TUNISIA8.1

MOROCO4.2

JORDAN4.5

[Figure 8] Percentage of Guaranteed Loans out of all SME Loans in MENA Countries


The reason of low outreach and additionality could be explained in both external and internal factors. First, in terms of the macro level, limited government support is the biggest restriction. The credit guarantee institution needs to secure a reasonable


level of capital and financial support from the government to run the guarantee system efficiently and achieve meaningful guarantee use, financial sustainability, and additional goals. A guarantee institution established with insufficient resources will inevitably lose the trust of financial institutions, including banks, and it will unlikely be able to achieve its policy goals due to limited impacts and weak financial stability. The JLGC increased its capital from JD 10 million to 30 million with a recent paid-in capital increase to secure additional guarantee funds that will support startups and green businesses. Even in the future, continuous efforts are required to secure guarantee funds from long-term loans from international organizations as well as government investment.

Second, SME business culture is not developed enough to run credit guarantee schemes. In other words SMEs in Jordan usually submit fraudulent accounting materials to obtain guarantee. This will result in a high default ratio to JLGC. That is why JLGC is sometimes offer guarantee to the SMEs with a good credit rating which already could receive a loan from the bank without any guarantee letter. Third, many kind of misconceptions such as scope of work between banks and JLGc, bank risk avoiding attitude, moral hazard of financial institutions and collateral preference lending practices are another challenges that JLGC is facing at the macro level.

At the corporate level factors that restrict guarantee use and additional use of the JLGC include (1) limited capital base, (2) financial stability, (3) capacity building, (4) low risk capacity, and (5) low risk appetite. Financial instability from limited capital and risk aversion tendency are expected to be addressed by securing sufficient guarantee funds and improving governance and expertise. The professional capabilities of staff would be strengthened by recruiting consultants and external professionals from international organizations, etc., and also in the process of talent development.

At the Macro Level

□ Limited Government support

□ SME Business Culture

□ Misconceptions

Scope of Work

Bank Risk Appetite

Moral Hazard

Lending Practices

At the Corporate Level

□ Limited Capital Base

□ Financial sustainability

□ Capacity Building

□ Low Risk Capacity

□ Low Risk Appetite

Outcome

□ Limited Outreach

□ Limited Additionality

[Figure 9] Challenges for JLGC



4. Credit Guarantee System in Korea

4.1. Background and Necessity

In 1976, with the growing recognition of the needs for policy support for SME finance since the early 1970s, KODIT was founded in Korea. At that time, the export-oriented Korean economy was hit hard by the first oil price hike, many exporting companies went bankrupt, and the trade deficit widened in the balance of payment. In particular, policy consideration for SMEs was relatively weak. In the early 1970s, the financial market conditions for SMEs seriously worsened, and banks hesitated to lend money to SMEs, as the actual interest rate plummeted, and SMEs had to turn to the unregulated black market to finance capital at higher rates. To address the situation, the government decided to introduce a credit guarantee system for SMEs to ensure easier access to finance.

In most countries around the world, SMEs play the key role of underpinning economic development. Korea is no exception, where SMEs account for 87% of employment and contribute 51% to the GDP. Without the robust business of SMEs, it would not have been possible for Samsung Electronics and Hyundai Motors to grow into global enterprises. Despite their significant roles in the economic arena, it is not easy for SMEs to have sufficient funding under the autonomous mechanism of the private financial market. To overcome discriminative restrictions against SMEs in the private financial market, government-led financial policy for SMEs is required, and a credit guarantee system is one of the most efficient and direct solutions.

4.2. Korea Credit Guarantee Fund

4.2.1. Overview

KODIT was founded in 1976 to provide credit guarantees for SME loans and is one of the key public financial institutions in Korea. As of 2015 end, KODIT issued KRW 49 trillion 186.2 billion guarantees for 205,361 businesses. The underlying asset for guarantee coverage is KRW 5 trillion 438 billion, indicating a leverage ratio of 9.

4.2.2. Organization

There are 17 divisions in the organization’s headquarters and 106 branches under nine local business headquarters across the country that perform credit guarantee and debt management activities. The top-level decision-making bodies are the board of policy and board of directors. The board of policy is in charge of setting higher-


level policy for the overall business of KODIT, and the board of directors overseas the establishment and revision of internal regulations of the institution’s practical operation.

The actual guarantee activities are managed by the branches, the sales unit. At the time of KODIT’s founding, just as it is now for the JLGC, there was only a headquarters, but the organization expanded gradually along with the growing scope of the guarantee business.

<Table 13> Change of KODIT’s Organization Structure

Category 1976 1986 1996 2006 2010 2015

Headquarter4 divisions1 office

14 departments

11 divisions 4 offices



4 divisions12 departments

3 offices

4 divisions13 departments

4 offices

Branch 41 81 85 99 106

Source: KODIT.

Boardof Policy BOD BOD

Chairman

SeniorExecutive Auditor

Executives Audit Office

PlanningDivision

Planning

System

Actuary

CreditGuarantee

Division

Admin.

Guarantee

Management

CreditResearchDivision

GeneralResearch

Research 1

Research 2

Research 3

GeneralAffairs

Division

HQ

Document

Accounting

SafetyPlanning

[Figure 10] HQ Organization at the Time of KODIT Founding

Source: KODIT 30 years report.


4.2.3. Legal Framework and Supervision

KODIT operates based on the Credit Guarantee Fund Act. It is a non-profit specialty incorporation and does not have shareholders or equity ownership since it is not a corporation. KODIT earns credibility based on financial soundness by securing sufficient underlying assets, but, in addition, the provision in the Credit Guarantee Act to define the government’s compensation for loss is another key factor. Decisions on KODIT’s internal operation are made independently by the BOD, but for credit guarantee policy decision-making, the supervisory body and the Financial Supervisory Commission actively participate. Additionally, the Ministry of Strategy and Finance directly oversees the budget and workforce planning.

4.2.4. Capital Financing

4.2.4.1. Mandatory Contributions

One of the key factors in KODIT’s operation is securing funds for a sustainable credit guarantee supply by ensuring fund stability. The provision of mandatory contribution in the Credit Guarantee Fund Act states, “Underlying asset of KODIT shall consist of contribution by the government, financial institutions, companies and others.” In fact, the largest portion of the underlying asset comes from government and financial institution contributions. The government contribution is finalized by resolution of the National Assembly after KODIT’s request and government review. As the government decides on its contribution in accordance with the guarantee supply plan based on macroeconomic considerations, the decision-making is flexible, depending on the circumstances. For example, when the private financial market was seriously hit by the 2008 financial crisis, the government made a huge contribution to expand the credit guarantee supply.

On the other hand, the Credit Guarantee Fund Act stipulates that financial institutions shall make regular contributions to KODIT, and, thus, it is the most stable source of the underlying asset. Currently, all local banks in the nation have to make a monthly contribution of 0.225% of their annual average outstanding loan amount. Since the banks include the amount of loan interest charged to companies, in practical terms, the companies using bank loans are contributing to the fund. The mechanism of making contributions through local banks is unique to Korea, not commonly seen in the credit guarantee systems of other countries.

Financial institutions began contributing to the fund in 1972, even before KODIT was founded. The financial institutions’ obligation to make mandatory contributions to the fund was stated in the Credit Guarantee Fund Act established in 1974. At first, the contribution scheme was operated temporarily for five years.


The contribution period was extended every five years, and in 2000, it became a permanent contribution scheme as the five-year term was abolished. In addition, the system had been settling down, changing the loans that were subject to mandatory contributions, contribution rates, separation of contribution with foundation of KODIT, and differentiated rates for each financial institution. The current contribution rate of 0.225% has been in effect since 2007.

<Table 14> Major Changes in the Contribution Scheme

(Unit: %)

Year Contribution Rate (%) Description

1972 0.5Credit guarantee fund was introduced at all financial institutions.

1974 0.5KODIT began managing contributions from financial institutions (trust bank, IBK; contribution period: by 1980 end)

1978 0.5 Individual loans excluded from the contribution target

1979 0.3Contribution rate reduced (0.5 → 0.3) (contribution period: by 1985 end)

1989 0.2 Contribution rate reduced (0.3 → 0.2)

1992 0.17 Add 0.03% contribution to KODIT

1994 0.2 Contribution rate increased

2000 0.2Provision on contribution period deleted (five-year contribution term abolished → became permanent contribution)

2006 0.25Contribution rate increased (differentiated rate introduced by financial institution)

2007 0.225 Contribution rate reduced


At the time of KODIT’s founding, KRW 2.4 billion was carried over from the government contribution, and since its founding in 1976 until 1982, no additional government contributions were made for the underlying asset. However, in 1979, with social and economic uncertainty due to the severe domestic economic depression, many SMEs went bankrupt and subrogation soared. Under this situation,


losses began accumulating from 1981, the leverage ratio went out of its acceptable range, and the government decided to resume contributions, starting with KRW 25 billion in 1983. Since then, the contribution scheme has gone through multiple changes in line with the changes in the economic and financial environments.

<Table 15> Status of Underlying Asset upon Founding (as of June 1, 1976)

(Unit: KRW million)

ContributionEarned Surplus Forwarded (B)

Underlying Asset (A+B)Government Financial

Institution Total (A)

2,350 25,563 27,913 4,470 32,383


Since KODIT’s founding until now, contributions from the government and financial institutions and guarantee fees from companies have been the primary sources of the cumulative underlying asset. Until 2015 end, the cumulative contribution by the government and banks accounted for 44% and 56%, respectively, of the entire fund.

4.2.4.2. Special Contribution

Another factor was the agreement-based guarantee system introduced to support SMEs after the global financial crisis, contributing to the expansion of the underlying asset. Guarantees based on the special contribution agreements by financial institutions were first introduced in December 2008, starting with the Shinhan Bank agreement right after the global financial crisis. Shinhan Bank agreed to make gradual contributions up to KRW 100 billion in total until the end of 2009 and signed a capital call agreement to make a KRW 10 billion contribution in December 2008, followed by a follow-up contribution in line with the guarantee amount. In an effort to overcome the financial crisis, KODIT executed guarantees based on special agreements with 13 banks including Kookmin Bank and IBK by the end of 2009, and the total contribution amounted to KRW 372.1 billion to provide KRW 4 trillion 152.7 billion guarantee support.

KODIT also implemented mutual benefit agreement guarantees to support partner SMEs. The Mutual Benefit Guarantee Program matches big enterprises and financial institutions to make special contributions to KODIT, and KODIT provides guarantees for partner vendors recommended by big enterprises. Big enterprises like POSCO, Hyundai Motors, and Samsung Electronics and local banks participated to provide guarantees for the recommended vendors.


The Regional Benefit Guarantee Program was also implemented where municipal governments and banks joined hands to make contributions to KODIT, thus, supporting regional SMEs. The municipal governments of Incheon City, Gyeonggi Province, Daegu City, Gyeongsang Namdo, Chungcheong Namdo, Jeonla Bukdo, and Chungcheong Bukdo and local banks together contributed to and leveraged the fund, bringing the leverage ratio to 5 and providing regional SMEs with guarantees.

4.3. Operation of the Credit Guarantee System

4.3.1. Overview

When the Credit Guarantee Fund Act was first established in 1974, there were only four types of guarantee services: loan guarantees, payment guarantees, bond guarantees, and tax payment guarantees. Since then, with introduction of new financial products, changes in B2B transactions, and economic necessity, additional types of guarantees were added, and there are 11 types offered now.

Currently, guarantee support is allowed for almost all types of financial and commercial transactions including indirect and direct finance, B2B transactions, and taxation. Loan guarantees are the most general type of guarantees provided to banks as collateral for loans to companies, accounting for more than 90% of outstanding general guarantees.

4.3.2. Basic Structure of Credit Guarantees

4.3.2.1. Guarantee Targets

In principle, individuals and companies running businesses for profit, as well as groups of these entities are all eligible for credit guarantees. Yet, since guarantees for big enterprises are restricted for policy purpose, guarantees for SME loans are the absolute majority. The Credit Guarantee Fund Act designates 60% of loan guarantees for SMEs.

Instead of listing up all types of eligible industries, only those excluded from guarantees are listed up. For example, those having minor or negative impact on the economy, such as speculative and unsound gambling or speculative real estate investment are excluded from guarantee services.


<Table 16> Business and Industries Excluded from Guarantee Services

Category Description

Guarantees Prohibited or

Restricted

•Companies receiving subrogation from KODIT or KIBO•Companies on business suspension•Companies with poor credit ratings •Companies with outstanding loans

Industries Restricted from Quarantees

•Gambling and gaming•Adult entertainment and real estate investment•Liquor, tobacco, and luxury goods

No Eligibility•Companies in long-term guarantee use or with high outstanding

guarantee amounts•Large enterprises

Source: KODIT internal regulations.

4.3.2.2. Guarantee Products

Basically, guarantee services are available for all companies seeking profit, but in compliance with the government policy, the priority beneficiaries are companies likely to have greater economic impact. KODIT’s guarantee products include loan guarantees, payment guarantees, commercial-transaction-backed guarantees, and SPC guarantees.

<Table 17> Types of Credit Guarantees

Guarantee Types Description

Loan GuaranteesGuarantees for companies borrowing money from financial institutions for operation or equipment funds

(Collateral) Bill Guarantees

Provides the collateral required for continuous commercial transactions between companies

Performance Guarantees Provides collateral to companies for construction project agreements, supply of goods, or provision of services

Payment Guarantees Guarantees for companies to open L/C for exports and others

SPC GuaranteesGuarantees for bonds issued by the SPC to finance capital for companies


Most guarantees are provided operating funds for the purchase of goods, settlement payments and general management, equipment purchases, or facility investments. Loan guarantees for operating funds account for more than 90%.


KODIT has been developing and launching diverse new products that have adapted to changes in the financial market. One of the most widely used products is the SPC guarantee. The SPC guarantee generally uses the structure of asset-backed securities and can be categorized as direct guarantees for financial products such as corporate bonds.

4.3.2.3. Guarantee Limits

In general, KODIT’s maximum guarantee limit per company is KRW 3 billion. However, when preferential treatment is required for the nature of the company or funds, the guarantee limit can be raised to KRW 7 billion. Exceptions are made for equipment funds for which up to KRW 10 billion in guarantees can be provided.

Different from the maximum guarantee limit, the guarantee limit for operating funds is determined based on the company size and the required fund. Generally, guarantees for operating funds are allowed in the range of 17% (1/6) to 50% (1/2) of the company’s annual revenue, depending on the nature of the business or funds. If required, equity capital can be applied to determine the limit. For operating funds, guarantees up to 3 times the equity capital are allowed.

4.3.2.4. Shared Guarantees

Shared guarantees are applied to loan guarantees. The shared guarantee system is the key approach to preventing moral hazard of financial institutions by sharing the guaranteed loan liabilities based on a predetermined ratio between the guarantee institutions and financial institutions. KODIT applies a differentiated guarantee coverage ratio based on each company’s credit rating and guarantee utilization period. Generally, a maximum coverage rate of85% is applied, and depending on the guarantee period and credit rating, a lower ratio might be applied. In extraordinary situations with special policy objectives or economic crisis, the guarantee coverage ratio could go higher than 85% to increase the acceptance of banks. Currently, the average guarantee coverage ratio stands at just above 80% for the overall guarantee portfolio.

4.3.2.5. Guarantee Fees

The companies that receive guarantee services pay guarantee fees to have their loans guaranteed. The fees are based on an annual rate, just as loan interest is. In general, guarantee fees are paid one full year in advance when the guarantee letter is issued. There is a base rate for the guarantee fee, and depending on the company’s credit rating, the fee can go up or down from the base rate. The final guarantee rate ranges from a minimum of 0.5% to a maximum of 3.0% except for exceptional cases such as guarantees for disasters. For guarantees for big enterprises, another 0.5% is added.


<Table 18> Guarantee Fee Structure

By Credit Rating Added With (+) Deducted With (-) Final Guarantee Fee

0.5% –2.5%

- Companies with long-term use 0.1%–0.2% p

- Companies with high outstanding guarantees 0.1%–0.2% p

- Startups in infancy stage 0.3% p

- Green growth companies 0.2% p

0.5%–3.0%


4.3.2.6. Evaluation Methods and Authorization

The methods of guarantee evaluations are categorized in four different stages depending on the guarantee amount: simplified, general, standard, and in-depth. For small guarantees, if several simple requirements are met, then guarantee approvals are automatically made on the system. For higher-level evaluations, a checklist and various credit evaluation systems are applied in combination. The checklist for guarantee evaluations consists of verifying essential items pertaining to a company’s credit status and business.

The guarantee authorization depends on the guarantee amount and credit rating. However, in most cases, the guarantee approvals are made at the branch level. For applications less than KRW 300 million, if the applicant has a robust credit rating, then the team head at the branch has the authorization to approve guarantees up to KRW 1.5 billion, and the branch manager makes the decision. For larger guarantees or when there is a violation of items on the checklist, the application goes through the specialized investigation team at headquarters, and the decision is made by various committees. Since there are not many cases of high guarantee amounts, it is safe to say that most decisions are made at the branch level.

4.3.3. Basic Procedures of Credit Guarantees

4.3.3.1. Credit Guarantee Method

Every country running a credit guarantee system has its own way of operating its system, but in general, there are two types: a direct guarantee scheme and an indirect guarantee scheme. In the direct guarantee system, regardless of the credit evaluation or loan review by the lending bank, the guarantee institution assesses the credit status of the applicant company based on its internal criteria. On the other hand, in the indirect guarantee system (consignment guarantee), the guarantee


institution provides the banks with guidelines on credit ratings and the guarantee scope in advance and then they sign an agreement. After that, the banks conduct internal evaluations of the companies to provide both loans and guarantees at the same time.

In Korea, KODIT had to adopt an indirect guarantee system as a transit approach since it did not have sufficient business capability when it was founded in June 1976. Under the indirect system, the banks conduct the guarantee evaluations and then obtain approval from KODIT for guarantees above KRW 20 million for one company, while the bank has the discretion to make decisions for guarantees less than KRW 20 million. Even after KODIT grew enough to have sufficient business capabilities, it adopted both the direct and indirect (consignment) guarantee systems. Yet, indirect guarantees were limited to small operating funds. Afterwards, as the rate of insolvency soared for indirect guarantees due to the moral hazard of companies and banks, the indirect guarantee system was abolished in phases and it transitioned to the direct guarantee system. The indirect guarantee system still exists, but it is not used by most banks.

SME

② Credit Research / Guarantee Evaluation

③ Guarantee Agreement ① Guarantee application (document submission)

④ Letter of Guarantee Issuance

BANK

⑤ Loan Agreement

⑥ Loan Extension, Supply of goods Contract Signing

[Figure 11] KODIT Loan Guarantee Procedures (Direct Guarantees)

Source: KODIT / Applicant Company KODIT Bank.

4.3.3.2. Guarantee Procedures

The general procedures of credit guarantees are as follows. SMEs in need of operating funds or equipment funds apply for guarantees through banks or by visiting KODIT. The SME management, including the CEO, is interviewed at the branch, and the basic credit information is checked. If the applicant company has a sound credit rating and is confirmed as an eligible guarantee beneficiary, the company is asked to prepare the documents for guarantee evaluation. When the company prepares and submits the documents to KODIT, a reviewer is designated at


the relevant branch. The reviewer conducts credit research based on the documents and available external data and visits the company’s office or factory for an in-depth interview and field research. When credit research is completed, the research results are posted online to carry out the credit evaluation, and then the final guarantee evaluation report is completed, including the opinion of the reviewer. When the authorized person, such as the branch manager, gives the green light, the guarantee evaluation procedures are complete.

Once a guarantee is approved for the applicant company, KODIT signs a credit guarantee agreement with the company, collects the guarantee fee, and issues the letter of guarantee to the bank. In general, the CEO of the applicant company is the co-guarantor and has shared responsibility in case the loan becomes insolvent. In accordance with the advance agreement between KODIT and the bank and the terms and conditions stated on the back of the letter of guarantee, no separate agreement needs to be made. Since the letter of guarantee between the bank and KODIT and the notification on the loan execution are all processed online, it is not necessary to exchange separate documents offline.

<Table 19> Guarantee Evaluation and Letter of Guarantee Issuance Procedures

Application and Consultation

•Apply for guarantee on website or by visiting KODIT•Guarantee amount and period assessed through

consultation

Data gathering and Credit Research

•Collect data for credit research and guarantee evaluation •Credit research through field visits and other methods

Guarantee Evaluation and Approval

•Calculate comprehensive credit rating and assess guarantee limit

•Decide whether to approve guarantee

Sign Agreement and Issue Letter of Guarantee

•Sign credit guarantee agreement and collect fee•Issue letter of guarantee (online)

Source: KODIT regulations.

The guarantee evaluation report covers the overall information required for evaluation including eligibility for guarantee, violation of the guarantee limit, existence of a co-guarantor, status of meeting the credit rating requirements, credit


rating grade, and the reviewer’s opinion. Among the data, the matters relating to the credit rating are reviewed against the guarantee evaluation checklist. The checklist covers the key matters relating to the company or the individual credit rating, including the company credit rating, existence of overdue loans, status of any infringement of rights over the relevant real estate including provisional attachments, overdue tax payments, and individual credit rating, financial matters such as debt ratio, capital impairment, and cash flow, and matters relating to management including reduction of revenue, business operating loss, and any change in representatives.

Using the guarantee evaluation checklist enables swift and clear decision-making and ensures the decision is not dependent on the reviewer’s subjective judgment. Yet, it is required to have thorough consideration of the reviewer’s opinion to make sure his/her judgment is properly reflected in the decision-making.

4.3.3.3. Credit Evaluation

KODIT conducts internal business credit evaluations to make key decisions including guarantee approvals. Internal credit evaluations affect various aspects of the actual credit grade, ranging from authorization right, guarantee limit, guarantee coverage ratio, guarantee fee, and the final evaluation.

KODIT first introduced the Corporate Credit Rating System (CCRS) in 2001. Since it is required to have a cumulative corporate DB and extensive credit information to build such a system, KODIT was able to introduce the system quite a while after its founding. Generally, credit evaluation outcomes are in the form of credit ratings, and the credit ratings are calculated based on the possibility of bankruptcy within one year to decide grade for each notch. Currently, the CCRS grades of KODIT range from K1 for the lowest bankruptcy risk toK15 for the highest risk.

To enable precise bankruptcy prediction, it is essential to secure extensive credit information and financial information. The CCRS calculates the final grade based on a combination of financial information, credit research data, CB information of the company representative, and qualitative information from the reviewer. KODIT’s CCRS is the most general form of credit rating model with wide applicability to most applicant companies.

Among the information required to calculate the CCRS grade, financial information is based on the company’s financial statements for the past two to three years. To ensure data credibility, the statements are compared to tax report data, and sometimes they is reviewed against the original copies during the field visit. To further the scope of the credit research, documents submitted by the company


and data collected by the reviewers are also used. The company representative’s individual credit rating data are collected in real time from external CB agencies and used in the evaluation process. Lastly, for non-quantitative information, the reviewer makes his/her judgment and enters subjective information or objective information based on the credit research outcomes.

KODIT selects 25 variables from more than 100 financial variable candidates by analyzing the significance through simulations and by considering correlations and employs them to calculate the financial ratings. Quantitative non-financial models are constructed with 21 final factors that are selected based on the differentiation analyses of 150 collectable data sources such as credit investigation reports, credit information from other institutions, data from the Korea Federation of Banks, confirmation of financial transactions, value-added tax information, and CB ratings of the representatives. Qualitative non-financial factors are selected through a three-level survey of expert practitioners, and the models are constructed with each factor weighted based on an analytic hierarchy process.

Since there is no extensive business or company information available for start-ups, a separate credit rating system, the Start-Up Business Scoring System (SBSS), has been developed and applied for the start-ups that have been in operation less than three years. The SBSS was developed in 2007, in line with the government policy to support business start-ups. Compared to the CCRS, the SBSS puts less emphasis on the financial assessment but more on the quantitative and non-financial factors in order to reflect the characteristics of start-ups better.

4.3.3.4. Subrogation and Exercise of Right to Indemnity

When KODIT-guaranteed companies do not pay their back loans, KODIT repays the bank. When the bank provides guaranteed loans in compliance with the terms and conditions stated in the letter of guarantee, it will pay back the loans with no strings attached. Yet, when the loan principal or interest is not paid, a 90-day “cooling-off period” is set to suspend repayment. The cooling-off period gives some time for the company’s possible business normalization, and if it is sure that the case will cause subrogation due to business shutdown or bankruptcy, it goes directly to subrogation without a cooling-off period.

After KODIT pays back the loan to the bank in subrogation, it will exercise its right to indemnify in order to collect the debt. Since KODIT’s guaranteed loans are mostly provided based on credit guarantees, the debt recollection ratio is not very high. Since it is not common to resort to auction or compulsory execution on collateral, in most cases, they request that the borrower voluntarily repay the loan.


When banks fail to meet the subrogation requirements, KODIT may reject performance by subrogation. However, since there are not many requirements for the banks to meet and most loans are guaranteed, it is not common to reject the repayment of loans in subrogation. Additionally, considering the credibility of the letter of guarantee, they generally do not apply excessively stringent standards on subrogation.

4.4. Business Performance

At the time of its founding, KODIT’s outstanding guarantees were less than KRW 20 billion, but 40 years later, as of 2015 end, they grew almost 250 times to KRW 48.5 trillion. This means that KODIT has made a presence as a stable and reliable financial support system for SMEs. It is also noticeable that the guarantee size has grown in line with the speed of economic growth.

60.0

50.0

40.0

30.0

20.0

10.0

-0.2

48.5

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

(Unit: KRW trillion)

[Figure 12] Outstanding Credit Guarantee Trend


The figure above shows that the size of outstanding guarantees dramatically increased in 2009. This indicates that KODIT expanded credit guarantees to prevent a SME credit crunch, as private financial institutions were not able to provide capital for SMEs as the external and internal economic conditions worsened.


<Table 20> Credit Guarantee Supply from 2011 to 2015

2011 2012 2013 2014 2015

General Guarantees

A. No. of Guarantors 233,827 230,252 223,075 215,685 205,322

B. General Guarantee Outstandings (KRW billion)

38,431 39,281 40,581 41,157 41,101

C. Average Outstanding Guarantees (KRW million)

164 171 182 191 200

SPC Guarantees (KRW billion) 6,660 5,773 6,855 7,297 8,085

Underlying Asset (KRW billion) 6,480 6,181 5,769 5,702 5,438

Leverage Ratio 7.0 7.3 8.2 8.5 9.0

Note: Parts of the P-CDO guarantee s, including the bond market stabilization fund, are excluded.Source: KODIT presentation, 2016.12.19.

Comparing the outstanding guarantees of KODIT against the GDP would make it easier to understand the role of KODIT in the macroeconomic environment. When the economy was plagued by drastic changes in global environments, the government deployed a strategy to expand credit guarantees rapidly. In particular, during the Asian financial crisis in 1997 and the global financial crisis in 2008, KODIT’s outstanding guarantees soared to 5% of GDP with a massive increase in the credit guarantee supply. This means that the credit guarantee system is not just a system to provide funds to SMEs, it is also a policy tool to ensure flexible responses to economic situations.

6.0

5.0

4.0

3.0

2.0

1.0

0.076 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Asian financial crisis & Bond market crisis

Global financial crisis

(Unit: %)

[Figure 13] KODIT’s Outstanding Guarantees against GDP

Source: KODIT presentation.


Korea’s credit guarantee system has become one of the key capital funding sources for SMEs. As of 2015 end, the outstanding loans to SMEs across all local banks in Korea stood at USD 500.5 billion, and 12.7% of the loans used credit guarantees as collateral. As mentioned earlier, KODIT expanded the credit guarantee supply during the 2009 global financial crisis, and at that time, more than 80% of new loans to SMEs were collateralized by credit guarantees.

SME Loans Guarantee over SME Loans

USD billion

35

30

25

20

15

10

5

0

600

500

400

300

200

100

-

262

13.4

2006

320.8

11.0

2007

367.2

10.6

2008

385.6

13.9

2009

383.5

14.7

2010

395.5

14.2

2011

401.2

14.3

2012

422.5

14.4

2013

500.5

12.7

2015

453.2

13.5

2014

%

[Figure 14] Percentage of Guarantees over SME Loans


Meanwhile, even for a public financial institution like KODIT, managing the risk of the guarantee portfolio and loans is very important, just as in the private sector. When KODIT has to resort to subrogation as loans go insolvent, it is likely to threaten its financial sustainability by depleting its guarantee fund. Thanks to the competent its credit evaluation model, CCRS, KODIT has maintained an annual insolvency ratio of around 4% despite the growing volatility of the external and internal economic environments.


8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

7.2

6.2 6.46.7

5.2 5.14.8 4.7

6.2

4.7

4.9 4.84.2 4.0

4.04.2

2.8

4.64.0

5.0

4.1

2.3

0.3

3.6

2.32.9

3.32.6

GDP Growth Rate Default Rate

(Unit: %)

[Figure 15] GDP Growth and KODIT Insolvency Ratio Trend


4.5. KODIT Success Factors and Insight Analysis

There have been several key success factors that have enabled KODIT’s stable operation and key role as a public institution to support the government policy. First, it is essential to secure stable financial resources. Since the early stage of its founding, KODIT established supporting laws to ensure funding sources, and with stable financial resources, it was able to provide guarantees in a stable and efficient manner, earning public confidence. In the early stage, the government contribution was higher than the financial institution contributions and the guarantee fees collected from companies, but nowadays, as the financial market and economic scale increase, the portion of government contributions is declining while the financial institution contributions and guarantee fees account for a higher portion.

Next, systematic risk management is another key factor. Assessing the credit risk and reducing the insolvency risk is the key to building basic competitiveness for financial institutions. KODIT has also been improving the coherence of its internal credit evaluation system based on cumulative data. In addition to the evaluation system, nurturing the staff’s credit evaluation expertise is another key factor. The staff’s competence in professional evaluations plays the pivotal role in preventing moral hazard of the guarantee beneficiary companies and banks and reduces the guarantee insolvency rate. At the same time, to reduce the risk of moral hazard among internal staff, KODIT is running a stringent audit system and operating a risk management system.


Additionally, developing a guarantee system in compliance with the government’s policy direction and customer needs is also important. KODIT has been playing the key role by actively responding to changes in external conditions, including the domestic and global economic environments, macroeconomic policy, and the government’s SME policy. It has also been striving hard to support the nation’s sustainable growth and assist in improving SME competitiveness. When the private financial sector failed to live up to its original function in the wake of multiple financial and economic crises, KODIT stood by to help overcome the economic crises earlier, with a preemptive and massive guarantee supply. It also has been operating diverse support schemes customized to the growth stage of companies to promote business sector growth, including specialized guarantee products for start-ups.

4.6. Major Differences between JLGC and KODIT

There are five major differences between JLGC and KODIT. 1) KODIT highlights its role as a government relevant public financing institution. However JLGC is more profit seeking and as a result JLGC is listed in Amman Stock Exchange. Enlisted in the stock market is a unique case for a credit guarantee institution. 2) JLGC is a profit making institution. In case of KODIT, without the contributions from the government and banks it will be very difficult to manage the institution because of lack of capital. 3) The concept of guarantee fee is very different. KODIT’s guarantee fee is collected from the user SMEs. However JLGC guarantee fee is collected from the bank. 4) Marketing target of each institution is different. KODIT believes SME and Bank are both the beneficiary of credit guarantee scheme and both are marketing targets of KODIT. However JLGC only focuses to banks. Some of the SMEs do not even know the fact that they are using credit guarantee of JLGC while receiving the bank loan. 5) Debt collection is conducted by KODIT itself but JLGC case it is conducted by the banks.

These kinds of differences come out with a result of strong and weak point of JLGC compared to KODIT. The strongest part of JLGC is the profitability. It means that JLGC could be run without any kind of government support. This will be a very strong point especially in the time of recession when the Jordanian government do not have sufficient budget to support JLGC. However, when JLGC seek for too much profit, the outreach of the guarantee will be limited and this is the challenge what JLGC is facing nowadays. JLGC target SMEs are those which has a good credit rating which are in the blue zone. However credit guarantee also has a role to support the gray zone SMEs which do not have good enough credit rating but has potential. The SME credit market is generally considered as a high-risk market with asymmetric information, lack of collateral, and high transaction costs.


[Figure 16] Major Differences between JLGC and KODIT


5. Policy RecommendationExpecting growth of national economy without properly functioning financial

market is difficult. SMEs in developing countries are facing serious hurdles because of the ineffective financing system. SME lending is considered to be high risk and high cost because of its characteristics that is why SMEs are facing disadvantages in the finance market. Anke Green mentioned four major reasons; high administrative costs of small scale lending, asymmetric information, high risk perception, and lack of collateral. Credit guarantee scheme could be a powerful solution to support the SMEs and financial institutions by ensuring the repayment of a SME loan. Credit guarantee system is regarded as one of the best methods especially in developing countries to resolve credit restrictions for the economically weak SMEs due to lack of collaterals.

In order to alleviate the inherent market failure and incompleteness of the SME finance market in Jordan, government should intervene in the market. Credit guarantee system is not designed or is not expected to be designed to generate profit. JLGC should also recognize and understand that support for SMEs with limited credit may incur financial loss. Four major policy recommendations have been made in the background of this understanding.


5.1. Diversification of Funding Sources

A sound financial basis is essential for a credit guarantee institution to help the government meet its policy goals and create meaningful economic benefits. Financial bases are resources for subrogation, being the ground to determine the capability of supplying credit guarantees and building public confidence in the credit guarantee institution. In general, credit guarantee institutions receive financial support from the government for the loss incurred in the process of carrying out a public function, including supplementing failures of the market and providing loan support for policy-driven sectors.

KODIT was founded based on the Credit Guarantee Fund Act, and the government established the legal framework for financial institution contributions. According to the Credit Guarantee Fund Act, financial institutions are required to make contributions to the fund. Every month, a certain portion of the outstanding amount of SME loans is contributed to the fund to build stable financial resources for guarantee services. There is no mandatory contribution obligation for companies, but since the global financial crisis, an “agreement-based guarantee “was adopted where credit guarantees were provided by leveraging contributions from big enterprises as resources for credit guarantees for their vendors. In addition, Article 41 of the Credit Guarantee Fund Act stipulates that the government shall compensate for losses incurred in the Credit Guarantee Fund. This means that the government guarantees there is no risk of default by the Credit Guarantee Fund, and this has become the key to improving the credibility of the credit guarantee system.

In many countries, the credit guarantee system is operated as part of public financial support policy. Thus, rather than following the market principle to cover losses with earned profits, the government intervenes to provide partial compensation for loss from subrogation. Accordingly, it is essential to have a consistent fund supply from the outside and to increase the sustainability of the system, securing regular and planned funding. In the JLGC’s case, the Central Bank makes the largest contribution to the underlying asset. Even though Central Bank is strongly commitment to support JLGC, it cannot provide stable financial support every year. Under this situation, The JLGC needs to find other funding sources from stakeholders other than the Central Bank. SME specialized government agency could also support JLGC by supporting extra funding. Korea’s Small & Medium Business Administration and United States Small Business Administration are doing this role. However, in Jordan pointing out a certain Ministry which is in charge of SME policy is difficult. So establishing a new SME Ministry and making the Ministry support funding to JLGC would also be a good solution to solve the lack of capital problem in JLGC.


Other candidates for additional funding may include banks, companies, and international organizations. In the case of banks, it is worth reviewing a plan to have regular bank contributions. They are the direct beneficiaries of credit guarantees. By extending guaranteed loans, banks can expand profits while reducing their credit risk. Furthermore, in the mid- to long term, development of SME finance will lead to an expansion of the loan market. For more direct impact, it will increase the BIS ratio, the Basel requirement to cut the cost of financing. In particular, looking at the case of Korea, since KODIT’s founding in 1976 until 2015 end, financial institutions have made cumulative contributions of KRW 14.1 trillion and an additional KRW 30.8 trillion was collected through subrogation. In other words, banks saw KRW 16.7 trillion in direct economic benefits through the credit guarantee system. Contribution requests may seem burdensome to banks in the short term, but once the credit guarantee system settles down, it will generate diverse direct and indirect economic benefits. It is recommended to convince banks with these grounds and introduce regular bank contributions.

SMEs are other beneficiaries that enjoy the direct benefits of the credit guarantee system. Along with the additional benefit of receiving loans with credit guarantees, which would not have been extended due to the lack of collateral, they also enjoy the benefit of lower interest rates. Therefore, it seems reasonable to state clearly SMEs’ obligation to pay guarantee fees. Guarantee fees are similar to commissions to the guarantee institution, collected instead of holding collateral and also risk premium against risk covered by the institution. For a guarantee institution to run the system without external contributions from the government or companies, a reasonable solution would be to collect guarantee fees from the beneficiary companies, meeting market principles, to reflect the insolvency risk of the guarantee portfolio and cover the cost of organizational operation. However, the guarantee institution also has a public mission to nurture SMEs along with the function to supplement market failure and asymmetry of information. Considering its role in policy support, in many countries, guarantee fees stay in the range of 1.25%–1.5% per annum, a significantly lower level for the SME credit risk. Currently, the JLGC is applying an annual rate of 1.25%–1.5% for guarantee fees. Considering that most countries where the credit guarantee system is very active collect an annual rate of 1%–2% in guarantee fees, the JLGC guarantee fee rate seems to be reasonable.

The special contribution from international organizations can be an alternative for funding. The initial capital of JLGC was contributed by Central Bank, but the capital was largely funded by USAID. Also, the World Bank provided JLGC with funds to support start-up companies. International organizations more focus on the policy purpose rather than market-based performance. Accordingly, the development of program with international organizations will greatly contribute to the guarantees for companies that have high growth potential but high risk.


5.2. Enhancing the Public Nature of Credit Guarantees

The JLGC is a listed company with multiple governance schemes. Multiple governance schemes mean that the government allows private investment in a credit guarantee institution or establishment of the institution jointly with the private sector to leverage the experiences of the private partners. Voluntary equity participation by loan extenders or SMEs can contribute to building a basis for efficient operation, such as financial independence. On the other hand, with private participation, it becomes difficult to stick to public nature. In other words, the multiple governance scheme of the JLGC has restricted the guarantee supply expansion.

The Central Bank is the majority shareholder of the JLGC with 47.75% equity share, and the remaining shares are held by financial institutions and individual investors. Different from typical credit guarantee institutions, the JLGC is a listed company with individual shareholders, and this governance structure causes conflicts between the public nature to support national policy and its mission as a listed company that aims to maximize shareholder benefit.

Individual,238

Financial Institution, 20Mutual Fund, 1

Public Institution, 4

[Figure 17] Jordan Loan Guarantee Corporation Shareholders

Source: Amman Stock Exchange.

When the market interest rate declines and the guarantee fund’s return on investment drops, in the future, it will not be easy for the JLGC to maintain its current yield structure and dividend payments. Guarantee institutions seeking profits may experience conflicts between public nature and profit seeking, and this may undermine the base of credit guarantee services. Credit guarantees may be extended based on excessively stringent credit standards to maximize profits. The World Bank report also pointed out that guarantee institutions with extremely low levels of


insolvency may not be fulfilling their roles of providing credit guarantees to support public policy.

<Table 21> JLGC Dividends

(Unit: JD)

Category 2012 2013 2014 2015

Pretax profits 304,997 535,650 482,547 365,580

Shareholder dividends

300,000 400,000 400,000 300,000


In Korea, KODIT is also not a profit-seeking entity. KODIT’s operation is based on the Credit Guarantee Fund Act, and as a non-profit special incorporation, it does not have shareholders or ownership. This indicates that KODIT is committed to providing guarantees to companies that may not have enough collateral but have ample potential for further growth.

JLGC differs in ownership from KODIT, which is established and operated by the government. The Central Bank’s share in the JLGC cannot exceed 50%. When JLGC was funded by USAID (United States Agency for International Development) and established, it was required to maintain financial sustainability without additional funding and keep the proportion of government share less than 50%. This condition limits the share of Central in JLGC.

It would be desirable for the JLGC to reduce the profit-making burden with a change in governance with the individual investors’ shares or capital increase by financial institutions. In 2016, the JLGC reduced the share of individual investors to less than 5% through capital increase by the central bank and financial institutions. JLGC is changing its ownership in the right direction to expand the public interest. With this, profitability may worsen from 2015 with a possible increase in subrogation. In order to reduce the burden on the public nature of credit guarantees and profit-making, it is possible to consider delisting in the long term.

The JLGC is expanding the guarantee supply with a recent capital increase. With this, profitability may worsen from 2015 with a possible increase in subrogation. However, it is an expected outcome in the process of strengthening the public nature of credit guarantees, and it would be desirable if the JLGC reduced the profit-making burden with a change in governance with measures including the buyout of the individual investors’ shares.


5.3. Strengthening Risk Management with the Adoptionof a Credit Evaluation System

Improving risk management with a sound system to manage the operational risk is the key to fulfilling the mission of guarantee institutions, and it expands the business scope. Most guarantee institutions have built an internal risk management scheme, leveraging their internal control system. Credit risk is the biggest risk for credit guarantee institutions. Credit risk management methods differ by the nature of the guarantee institution or guarantee type. In particular, for institutions like the JLGC that conducts guarantee evaluations internally, introducing a credit guarantee evaluation system based on qualitative and quantitative mechanisms is essential. KODIT introduced its internal evaluation system, the CCRS, in 2001 to define the credit ratio and calculate guarantee limits, coverage ratios, and guarantee fees. Meanwhile, the JLGC has yet to adopt an internal credit evaluation system. It is currently applying a checklist to assess qualification for guarantee services, and so it would not be appropriate to adopt KODIT’s CCRS directly at this level.

It would be better to introduce a credit scoring system first and then gradually develop it into a credit evaluation system. Introducing a quantitative scoring system like the Comprehensive Company Assessment Table developed and used by KODIT in 1989 would be helpful to enable more organized risk management. In the beginning, data collection is necessary. The Credit Guarantee Fund has developed a CCRS model based on data accumulated from the scoring system over a decade. Since KODIT deals with direct guarantees, it can more easily collect SMEs data through on-site visits and interviews. However, JLGC has many challenges in data collection. Since Credit Bureau in Jordan is in the early stages of establishment, enough reliable credit information has not accumulated. Also, data collected from SMEs are not reliable. JLGC collects most of the information through banks. Accordingly, JLGC should closely work with banks to improve the quality of accumulate data through regular workshops on how to deal with SMEs and how to access SMEs.

[Box] KODIT 「Comprehensive Company Evaluation Table」 (1989–2000)

□Categorization of Company Size

In terms of total assets, companies are categorized into five groups of less than KRW 500 million, from KRW 500 million to 1 billion, from KRW 1–3 billion, from KRW 3–6 billion, and greater than KRW 6 billion.

□Business Type

Categorized into three groups: manufacturing, construction, and others (wholesale and retail included).


[Box] Continued

□Model Structure

Evaluation variables are applied differently by business size and type, and for each business type, the weight of the non-financial factors is differentiated to calculate the overall evaluation score.

□Primary evaluation targets (sample: manufacturing)

Category Evaluation item Points

Financial(50)

StabilityCapital adequacy ratio, fixed ratio, leverage dependence

20

Liquidity Quick ratio 5

ProfitabilityReturn on assets, net return on sales, financial expenses to sales

15

ActivityTotal operating capital turnover ratio, inventory turnover ratio

6

Productivity Added value to total assets 4

Non-financial (50)

Businesspotential

Purchase of raw materials, product potential, quality, and technology competence

17

Credibility Transaction status with financial institutions, business stability

11

Management capability

Management capability, career history of representatives, working conditions

12

Business size Revenue, company type 10

Add/deduct points

AddSubsidiary of large corporate group, longer than 15-year business history

6

Deduct“Grade E” in cash flow, impairment of total capital

-6

Source: KODIT.

□Grade System

Grade Points Definition

A 75–100 Excellent

B 74–65 Good

C 50–64 Average

D 35–49 Not sufficient

E 0–34 Poor

Source: KODIT.


For the successful risk management of a sound credit guarantee evaluation system, the following is essential. First, the management of JLGC should realize the importance of risk management and show strong commitment to the introduction of a credit evaluation system. Even at KODIT, there was resistance against the CCRS in the early stage of the internal system development, but with the CEO’s strong drive and commitment, it was applied to the actual credit guarantee business in six months after model development. Without management’s challenging spirit and commitment, it would not have been possible to respond properly to the rapidly growing needs for a guarantee supply and establish the efficient risk management system that is currently in operation. This shows that building consensus of management on the necessity of a risk management system and strong leadership to act on the consensus are key factors in the survival and success of guarantee institutions.

Second, data management and information collection are important. No matter how advanced and sophisticated a credit evaluation system is, poor management of the data input and poor confidence in the data will make the evaluation system useless. To improve the judgement capability, KODIT continually collects information from public institutions, financial institutions, and credit rating agencies and reflects it in the evaluation system.

Third, it is required to nurture professionals in risk management. Most financial institutions build credit evaluation models with external consultants, but in the end, it is up to the internal capabilities of the institutions to use and further develop the model. To build an efficient risk management system with strong validity customized to the nature of the institution, it is highly important to secure human resources with extensive expertise and knowledge. KODIT is running a Risk Management Department as a separate unit, and it recruits professionals to work in the department independently to ensure tailored HR and training programs for positions requiring special expertise.

5.4. Improvement in the Guarantee Operation System

5.4.1. Introduction of Portfolio-Based Guarantees

To develop a strategy to expand the JLGC’s guarantee supply, a two-track approach can be considered whereby portfolio-based guarantees are provided for small operating funds and existing individual guarantees are provided for large amounts or equipment funds. Guarantee type is the key element of a guarantee operation that affects the screening methods and risk management. Guarantees can be divided into individual guarantees and portfolio guarantees, depending on the


guarantee approval method. Individual guarantees are approved based on credit research and screening on a case-by-case basis. On the other hand, for portfolio guarantees, the guarantee institution sets the eligibility criteria for the guarantee target, and the guarantees are approved for individual companies without additional research or screening when they meet the criteria. Under portfolio-based guarantees, operating costs of the workforce or branch expansion can be minimized while expanding guarantee coverage rapidly. In addition, since the limit of the guaranteed loan repayment is set in advance with portfolio guarantees, when the subrogation amount reaches or exceeds the limit, the financial institutions are liable for the excess amount, and this becomes an effective tool to prevent the moral hazard of financial institutions.

During the early days of KODIT’s founding, a consignment guarantee scheme was introduced in Korea to leverage the extensive network and loan evaluation capabilities of local banks. Afterwards, as KODIT expanded its internal branch network and adopted an in-house evaluation system, it moved over to a direct system where KODIT conducted company research and screening on its own.

The Credit Guarantee Corporation in Thailand is a global best practice example which adopted a portfolio-based scheme in 2009. The Credit Guarantee Corporation in Thailand signed a comprehensive deal with 19 banks for credit guarantees, and based on the agreement, it offers guarantee services with full coverage for individual companies that are approved by the loan portfolio. The corporation sets the maximum loss rate of subrogation and annual subrogation limit in advance with banks, and the gap between the expected income from guarantee fees and maximum subrogation limits is covered by government subsidies.

Portfolio guarantees in Thailand are processed as follows. In the case of the most recently implemented PGS5, the maximum loss rate from subrogation stands at 18%, and the maximum guarantee period is seven years. The Credit Guarantee Corporation of Thailand provides subrogation in installment within 3% annual rate. Assuming that the guarantee fee rate is 1.75%, the total income from guarantee fees would be 12.25% for seven years (portfolio guarantee period). The 5.75% gap between the 18% maximum loss rate and the 12.25% income from guarantee fees is covered by the government contribution, meaning the loss would not be incurred by the corporation.

Yet, to run a portfolio guarantee program, securing financial resources to pay back guaranteed loans would be a prerequisite. Guaranteed loans in portfolios are mostly covered by fees collected from companies and government contributions. Accordingly, for productive loans, it is not that banks would pay a certain amount of fees in proportion to the designated guarantee limit, instead, it should be changed


to a system where guarantee beneficiary companies pay guarantee fees for each case to make it clear who should be the fee payers. Since it is not feasible for the JLGC to receive consistent government contributions as the corporation in Thailand does, it should build a portfolio based on the expected return on investment. In other words, since the JLGC has to cover the gap between the maximum limit of guaranteed loans and the collected fees from operating income, it is likely to incur losses with its current asset size when the fund’s operating income becomes insufficient. To cover the gap, it is required to receive subsidies from the Central Bank or fees from long-term loans to increase its operating income.

In addition, since financial institutions tend to build a pool of mostly robust SMEs in their portfolios, considering the subrogation limit, it is less effective as a policy tool. To compensate for this, it is required to run individual guarantees in parallel to ensure data accumulation and screening capability improvement with swift support and research and evaluation.

5.4.2. Improving Efficiency in Business Processing

When the standard screening procedures are in place and the IT system is well established, it is possible to process things swiftly, as it can reduce the screening process time. It will help the evaluator to process things efficiently, as they will review documents based on consistent standards. In the case of the JLGC, it takes time to receive documents, as the documents that are collected for guarantee evaluation are not standardized, and the documents collected by banks from customers are delivered via personal delivery to the JLGC. If the number of guarantee cases increases in the future, it may not be possible to handle the procedure with the current document delivery system. First of all, the list of documents should be streamlined and reduced to only the essential documents for screening and the document format and delivery means should be standardized. In addition, for the information that is essential for company credit evaluations, the documents issued by reliable institutions should be used, while the documents filled out by companies should be minimized.

The key documents that KODIT collects includes documents of the company’s establishment, national resident registration to show change in residence of the representative, property registration documents for the representative’s residence and business place, original copy of ID with photo of the ID holder to confirm management, national tax service documents relating to tax payment, and financial statements issued by public institutions to assess financial status. For documents to be filled out by companies, guarantee institutions should prepare a standardized format for the companies to fill out, and other documents to be filled out by companies should held to a minimum.


<Table 22> Documents to be Submitted Online to Credit Guarantee Institutions in Korea

Documents Issued by Type

Credit Information Search Korea Federation of Banks Public

Resident Registration Ministry of the Interior Public

Local Tax Payment Statement Ministry of the Interior Public

Financial Transaction Statement Entire Bank Private

Financial Statements Tax Accountant Private

Buyer/Seller Information Tax Accountant Private

Source: KODIT prsentation, 2016.12.19.

The documents submitted by banks should also be standardized to apply process manual. This can reduce the time required by the JLGC as well as banks to process loans. In Korea, standardized credit guarantee procedures are already in place, and based on mutual agreement with banks, the procedures have been established for repeated key factors. To establish and introduce standardized procedures for guaranteed loans at banks, it is essential to accumulate experience in running a guaranteed loan program and build strong trust between banks and guarantee institutions. To minimize conflicts between the banks and guarantee institutions and ensure a seamless process, it is required to hold regular workshops with banks and the JLGC to build mutual trust and improve the understanding of each other’s business procedures.

5.4.3. Speeding-up Procedures of Guaranteed Loan Repayment

The biggest reason banks need the letter of credit guarantee is that it makes it easier to recollect the debt. To promote such benefit, it is important to run efficient procedures to pay back guaranteed debt. Usually, it is not easy and takes time to sell and pay back with real estate or machinery, the most commonly used collateral in Jordan. On the other hand, letters of guarantee are not likely to depreciate like collateral such as real estate, and collecting insolvent debt is relatively fast. Therefore, even with the credit risk associated with partial guarantee coverage, collecting on a letter of guarantee could be a better collateral option.

To facilitate banks in Jordan to expand SME loans by leveraging the JLGC’s letter of guarantee as collateral, it is essential to build trust and reliability as a public institution and ensure swift debt execution procedures. Public confidence in and


reliability of the guarantee institution can be earned with sufficient liquidity secured from government contributions and other measures to make sure that it can pay back debts even in the case of a large-scale default. Only when banks and guarantee institutions repay guaranteed loans within the pre-agreed period, will banks be able to expand loans backed by letters of guarantee.

In Korea, the causes of guaranteed loan insolvency are stated in the terms and conditions of the letter of guarantee, and it is defined in the Credit Guarantee Fund Act that claims for guaranteed loans can be made after more than 90 days have passed since the insolvency. The evaluation procedure for guaranteed debt repayment is very simple. In most cases, it takes a week to complete the evaluation and deposit the repayment amount into a bank account. In assessing guaranteed loan repayments, an evaluation table is applied to make sure there is no violation of obligations defined in the terms and conditions of the letters of guarantee, and when there is no breach, they are paid back without delay. As both principal and interest of the loans are paid back in fulfilling the loan obligations, if repayment is delayed, it will be disadvantageous to guarantee institutions, as the total subrogation amount increases with growing interest.

In the case of the JLGC, subrogation claims can be made 180 days after the insolvency. Currently, the activities to recollect the repaid amount are performed entirely by banks, and the JLGC only monitors the process. To make sure that the guaranteed debt system settles down, swift debt repayment is the key. Given this, it is worth considering easing the requirement for guaranteed loan repayments and ensuring swift repayments when there is no breach in procedures.

5.4.4. Improving Access for Rural SMEs

A measure is required to expand loans to SMEs in Jordan’s rural areas. The JLGC’s guarantee supply heavily focuses on companies located in Amman, the country’s capital. Looking at the outstanding guarantees by region, among the 12 regions in total, the companies in Amman showed a dominant presence, accounting for 73.8% of the total outstanding amount. Except for the neighboring cities of Amman like Irbid (8.1%) and Zarqa (7.5%), the outstanding guarantees for other regions remain at 10.6%. This shows a clear imbalance between the urban and rural areas, even compared to KODIT’s outstanding guarantee percentage for the Seoul metropolitan region at 20.3% and 51.2% for the all companies in Seoul, Gyeonggi, and Incheon combined. This is related to the country’s economic structure in which most SMEs are located in Amman or neighboring regions. Therefore, it is required to seek balanced development across the country as national policy with improved finance access for SMEs in the non-Amman areas. The JLGC’s expansion of the credit guarantee supply in the region can be a way of achieving the policy goal.


<Table 23> JLGC Outstanding Guarantees by Region

Category

Guarantees for Productive Loans

Guarantees for Industrial Finance

LoansTotal

No. of Cases

Outstanding Guarantees

(JD)

No. of Cases


(JD)

No. of Cases


(JD)

Amman 1,101 17,171,515 164 13,206,144 1,265 30,377,659

Irbid 206 2,096,771 16 1,254,917 222 3,351,688

Zarqa 176 1,581,494 13 1,503,617 189 3,085,111

Others (9) 242 6,626,714 18 4,149,383 260 10,776,097

Total 1,725 23,798,229 211 17,355,527 1,936 41,153,756

Source: KODIT.

In the short term, it is recommended to increase the coverage of guaranteed loans to SMEs and debtors in rural areas and reduce their guarantee fees. In fact, in the OPIC program of the Jordan Loan Guarantee Facility a rival of the JLGC, guarantee coverage is increased to 75% for companies outside of Amman (70% for companies in Amman). Overall, in the OPIC guarantee program, guarantees for companies outside of Amman account for about 28%, far higher than the rate at the JLGC. Readjusting the guarantee fee rate for creditor institutions, reflecting the ratio of guaranteed loan use, is another way to facilitate creditors’ support for companies in rural areas.

In the long term, it is recommended to build a partnership to support SMEs in the non-Amman areas, with institutions having extensive networks across the region such as Cairo Amman Bank with 88 branches across Jordan through diverse measures, including dispatch of loan underwriters to key branches outside the urban areas. As the JLGC does not have a separate branch network, other than its headquarters located in Amman, it has weakness in terms of access to SMEs outside the urban areas. If an underwriter dispatched from the JLGC carries out training and helps bank employees in the region improve their capabilities, as well as conduct field inspections, it is expected to make huge contributions to improving SMEs access to finance in rural areas.

According to a report by the Frankfurt School, one of the obstacles in financial institutions using guaranteed loans is the excessively long screening process. In principle, it takes one to two business days to the complete the evaluation process at the JLGC, but all loan applications have to go through the head office of the


banks in Amman, and then the documents are delivered to the JLGC, which takes up to an average of one to two weeks. Currently, banks have to visit the JLGC to submit documents for evaluation, but by using a fax machine, the time for document delivery would be significantly reduced. In addition, if loan evaluation and guarantee evaluation can be conducted at the local branch of creditor bank working with dispatched staff from the JLGC, it would be a win-win strategy for both creditor banks and the JLGC.

6. ConclusionThe JLGC has been contributing to nurturing SMEs and national economic

development by providing credit guarantees. For the JLGC to play a bigger role in SME financial support, it is required to develop and implement more systematic strategies to expand the bases of credit guarantees.

In this report, four major policy recommendations have been made. The first to consider is the diversification of financial resources. This is because although the JLGC serves a public function to provide financial support to SMEs, there are not enough ways to raise the capital and ensure sustainable operation of the institution with stable financial resources. Second, it is recommended to expand public nature with changes in governance. As a listed company, the JLGC has individual shareholders, so it has conflicting roles as a public institution as well as an entity seeking to maximize shareholder value. To stay true to its original goal of contributing to national economic growth by strengthening SME access to finance, it is necessary to reduce individual shareholders’ equity and strengthen public nature. Third, risk management needs to be tightened with the introduction of a credit evaluation system. While it provides direct guarantees, the JLGC does not have an internal credit evaluation system. A systematic risk management system is required in line with guarantee supply expansion. Lastly, credit guarantee system improvement is required. It is worth considering an expansion of guarantee bases, with introduction of consignment guarantees, streamlining procedures, speeding up guaranteed loan repayments, and improved finance access for SMEs outside the urban areas.

The credit guarantee system is an efficient tool for the government to facilitate SME growth and develop the private financial market. However, as it requires relatively large-scale investment, it is important to listen to the feedback from government departments, SMEs, and banks and seek continuous advancement of the system.


Association of Banks in Jordan (2016), Survey Study on SMEs in Jordan: Analysis of Supply-Side and Demand-Side Focusing on Bank Financing.

European Investment Bank (2016), Jordan Neighborhood SME Financing.

Frankfurt School (2016), EBRD Jordan MSME Framework: Increasing MSMEs’ Access to Finance in Jordan – What the Market Says.

International Finance Corporation (2014), Islam Finance Opportunities across Small and Medium Enterprises in MENA, IFC Advisory Services in the Middle East and North Africa.

International Monetary Fund (2015), IMF Country Report (Jordan) No. 15/225.

Jordan Loan Guarantee Corporation, Annual Report 2011–2015.

Jordan 2025 A National Vision and Strategy.

Jordan MSME Framework—In-Depth Market study of MSMEs in Jordan, Frankfurt School of Finance & Management.

Konrad Adenauer Stiftung, Research Study on Strengthening Small and Medium Enterprises in Jordan.

Korea Capital Market Institute (2012), Islam Finance Status and Implications.

KOTRA (2016), Jordan national data.

World Bank (2013), IBRD project appraisal document on a proposed loan in the amount of US 70 million to the Hashemite Kingdom of Jordan for the MSME development for inclusive growth project.

World Bank (2015), Doing Business.

References

068 • • 2016/17 Knowledge Sharing Program with Jordan

2016/17 Knowledge Sharing Program

with Jordan

ISBN 979-11-5932-253-2ISBN 979-11-5932-227-3(set)

Ministry of Strategy and Finance Government Complex-Sejong, 477, Galmae-ro, Sejong Special Self-Governing City 30109, Korea

Tel. 82-44-215-7762 www.mosf.go.kr

Korea Development Institute263 Namsejong-ro, Sejong Special Self-Governing City 30149, Korea

Tel. 82-44-550-4114 www.kdi.re.kr

Korea Credit Guarantee Fund7, Cheomdan-ro, Dong-gu, Daegu, 41068, Korea

Tel. 82-1588-6565 www.kodit.co.kr

Knowledge Sharing Program www.ksp.go.kr

Center for International Development, KDIcid.kdi.re.kr

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