Chairman Yoon Dae-hee of Korea Credit Guarantee Fund (Kodit)

A scene from the 2nd meeting of the regional headquaters managers of the Korea Credit Guarantee Fund(Kodit) on June 2 at Kodit head office in Daegu. (Photos: Kodit)

Korea Credit Guarantee Fund (Kodit) will issue 4.9 trillion won worth of credit guarantees on businesses undertaken by SMEs in the second half of the year in a bid to support their reformed growth.

Kodit’s policy decision came at a meeting of its regional heads across the country held on July 2 at its Daegu head office to select the credit organization’s key policies for the second half. The plans are intended to support the government policy to create jobs and realize social values while also helping SMEs reform their business structures and operations.

The scale of the credit guarantees to be issued in the second half is up 500 billion won in the area of general credit guarantees compared to the first half to cope with changes in the financial market.

Kodit early this year decided to set up a social economic enterprise team in each of its eight regional offices and a social value promotion center at the head office in Daegu. The fund also set up the Future Development Committee to strengthen the national economic growth potentials after listening to the voices of the people while changing its future image as a key financial organization.

President Yoon Dae-hee often urged that Kodit should be a key financial policy organization under a new future vision with its mission closely related to SME’s reform growth, job creation and social values.

South Korea in recent years has demonstrated incredible economic development mostly though the rapid growth of well-known large enterprises (the so-called chaebols). However, there are still about three million SMEs accounting for 99.9% of all Korean enterprises with their 10.5 million employees accounting for 87.5% of the nation’s employment. In total, the SMEs’ industrial output value is 49.4%, obvious showing that the development and contributions of SMEs act as a key factor in the growth of South Korea’s economy.

According to OECD (2012) data, SME loans account for more than 80% of all loans there. In addition, the volume of outstanding guarantees amount to 6.2% of GDP, or second only to 7.3% in Japan. In view of this, this study takes South Korea as the research subject. Small and medium-size enterprises (SMEs) create various positive externalities on economies and social benefit, because they make important contributions to investment, innovation, employment, and social stability.

SMEs are the engine that accelerates economic growth in both developed and developing countries. However, as SMEs have significant gaps in information and skills needed to access external finance, they are often subject to more stringent credit restrictions as compared to large enterprises, making it hard for them to obtain funding from the market. Financing gaps exist in SMEs and are more pervasive in emerging markets than in developed countries.

Governments worldwide actively encourage banks to make loans available to SMEs, and the credit guarantee scheme has become the most widely used method.

A large portion of banks’ profits comes from loan interest rates, owing to the banking industry mainly depending on accepting deposits and making loans. When doing business with an opaque SME, a bank faces problems such as adverse selection and moral hazard.

The biggest risk for a bank making a loan to a SME lies in loan default. Although SMEs make up a large proportion of a bank’s credit accounts, lending to SMEs still implies a certain degree of credit risk.