The UAE's SME credit guarantee scheme expands, and the lending capacity rises

The UAE's SME credit guarantee scheme has been expanded — additional capital, a wider perimeter of eligible loans, and a higher guarantee share — and the expansion raises the lending capacity the scheme can support. The expansion is the intervention that enables more SME lending, and the lending is the point.

A credit guarantee scheme's lending capacity is determined by its capital and its loss expectation: a fund with more capital and a lower expected loss rate can guarantee more lending. The expansion increases the capital and, by widening the perimeter to include loans the scheme previously excluded, increases the lending the capital can support. The combined effect is a material increase in the scheme's capacity, and the capacity is what the SME lending market needs.

The reason the expansion matters is that the SME lending gap in the UAE, as in the rest of the region, is a function of the risk the banks will not bear and the guarantee will not absorb. The expansion of the guarantee increases the share of the risk it will absorb, and the increase changes the bank's calculation on a larger set of loans. The loans that become viable because of the expansion are the loans that were not made before, and the making of them is the lending the expansion enables.

The implication is that the UAE's SME lending market will see more lending, not because the banks' appetite has changed but because the guarantee that supports the lending has expanded. The expansion is the structural intervention, and the lending that follows is the structural effect. The scheme's expansion is a small policy change and a large market enabler, and it is the kind of change that, by raising the guarantee capacity, raises the lending that depends on it.