Is the Small Firms Loan Guarantee Scheme Hazardous for Banks or Helpful to Small Business?

Loan guarantee schemes are an integral part of SME policy in both developed and developing countries. Yet little has been done to evaluate such programmes, particularly in terms of their ability to correct for capital market imperfections. This paper uses individual loan data from some 42,000 UK SFLGS backed debt contracts to empirically test the default specification outlined in the seminal credit rationing paper of Stiglitz and Weiss (1981). The results show that default (failure) does increase with the banks cost of capital, but not with the government premium. In addition, default appears to be determined by a whole host of other factors not typically considered in the credit rationing literature.