Saudi Arabia's SME credit guarantee scheme reports its first loss numbers, and they are better than expected

Saudi Arabia's SME credit guarantee scheme has reported its first loss numbers — the losses the guarantee fund has absorbed on the loans it has backed — and the numbers are below the levels the scheme was capitalised against. The result is significant, because the loss rate is the number that determines how much lending a guarantee fund can support.

A guarantee fund operates on a simple arithmetic: it holds capital, it guarantees loans, and it absorbs losses. The amount of lending it can guarantee is a function of the loss rate it expects — a fund that expects a 5% loss rate can guarantee more lending per dollar of capital than one that expects a 10% loss rate. A loss rate below expectations means the fund can guarantee more lending than it planned to, and the lending it enables is larger than the scheme's capital implied.

The reason the loss rate is low is that the scheme is, in effect, underwriting the guarantee rather than blindly backing loans. The guarantee is not automatic; it is granted against loans that meet defined underwriting standards, and the standards are producing a loan book with a lower default rate than the fund's conservative assumptions. That is the outcome a well-designed guarantee scheme produces, and it is the outcome the Saudi scheme is showing.

The implication is that the scheme's capital is supporting more SME lending than its initial design assumed, and the lending capacity can be expanded without additional capital. That is good news for the SME borrowers who depend on the scheme, and it is a validation of the scheme's design. The first loss numbers are the first real test of the guarantee, and the guarantee is passing it.