MUTUAL GUARANTEE SOCIETIES AND THEIR FUTURE POSITION IN THE EUROPEAN UNION

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1 MUTUAL GUARANTEE SOCIETIES AND THEIR FUTURE POSITION IN THE EUROPEAN UNION Magdaléna Kudelová VŠB TU Ostrava Faculty of Economics, Department of European Integration Sokolská Ostrava Czech Republic Abstract Small and medium sized companies mainly in Western Europe often lack financial resources but do not have sufficient collaterall for credit financing. This market gap was in some European countries filled by mutual guarantee societies, i.e. non-profit organisations that help SME to better access to loan financing. The societies are founded by the SMEs. They help them with the credit application because they know specifics of economic sector they represent. Thus, they can provide banks with information on local economic situation, technical knowledge and prediction of future revenues. These organisations therefore overcome the information asymmetry. Public fund guarantee is often granted to the mutual guarantee societies, too. Protective members of these societies are common. The paper analyses economic and legal foundation of mutual guarantee societies and consideres possible support of their creation by European Union institution, resp. the Czech Republic. Keywords: mutual guarantee society; financing; SME JEL codes: G21 1. Introduction Small and medium sized companies that lack financial resources can take advantage of different types of financing. Two basic sources of financing are private equity/venture capital and credit financing. Financial support can be identified in national and European schemes that either provides guarantees or direct financial aid to SME. The article is focused on the traditional form of financing, i.e. credit financing, and possible solution of the lack of collateral in the form of credit guarantees from mutual guarantee societies. These operate in several EU member states. 442

2 2. SME and financial resources Financial schemes and mechanisms are often aimed at small and medium sized of companies. These face specific problems. Mainly small companies often lack financial resources and are not able to provide sufficient collateral. Most of European companies are small and medium sized. Mainly small companies have specific features; they are very sensitive and need support for their development. SME are typical for: Value-creation Job creation Progress and innovation factor Stabilization of democratic values 1 Thus, small companies are essential for vital development of the region and economic growth as well as for safeguarding of certain social stability and traditional values. Usually, small companies lack specific entrepreneurial knowledge of accounting, administration of business, etc. Mainly small companies lack access to finance or sufficient collateral for the credit. Though the offer of credit may be sufficient in some European countries, small companies hardly access good credit (interest rate) conditions that large companies can negotiate and credit may become very burdensome. European Union is aware of these problems and pays steady attention to SME financial support as expressed in the Lisbon strategy as well as other documents related to SME support. Recent document focusing on the support of SME financing is the Multianual program Competitiveness and Innovation (CIP) Company law and financing of SME Though direct financial support to SME is important and meaningful, the same importance should be laid on creating a good institutional environment for SME development. There are specific legal forms of companies that associate SME and create self-help for their access to finance. If the legal and institutional framework is well adjusted to meet the needs of financing of SME, i.e. if such companies or associations can be created under existing legal framework, direct support can become rather a supplementary instrument. 1 AECM. Les systemes de garantie members de l association europeenne du cautionnement mutuel. Access from : 2 This programme will be discussed later in the text. 443

3 Mutual guarantee societies are one of the examples of self help for SME; however, they are not traditionally present in all EU member states. The efforts of the European Union should therefore be focused on attracting SME to this possibility of financial (guarantee) support. In the following text, possibilities of institutional support in the framework of EU law will be investigated. 4. Mutual Guarantee Society (MGS) Mutual guarantee societies (MGS) are non-profit organizations that help SME to better access to loan financing. The societies are founded by the SMEs. They have however usually protective members these can be chambers of commerce, banks or local and state authorities. We must distinguish between guarantee facilities and guarantee societies. The latter are founded by the entrepreneurs themselves whilest the first are supported by state institutions. Usually, producers or entrepreneurs from one or several related sectors take part in such a grouping and are able to offer tailor made services and meeet specific needs of the sector. The society can be helpful as a bridge between the SME and the bank in many ways. It can help the SME with the credit application because of a deep knowledge of specifics of economic sector they represent. Therefore, the MGS can provide banks with information on local economic situation, technical knowledge and prediction of future revenues. Thus, these organizations overcome the information asymmetry. Public fund guarantee is often granted to the mutual guarantee societies, too Features of a mutual guarantee society As said above, mutual guarantee society is founded by the entrepreneurs. Its aim is to provide guarantees for its members. They can be founded as a specific legal form or in scope of an existing legal form of business such as cooperative in France. There are two basic types of members: protective members and participants. Protective member are usually banks, chambers of commerce etc. These cannot get guarantee. Participants must pay the membership share 3. The mutual guarantee societies operate in several EU member states. Their basic features are nevertheless the same. The organization is founded as a non-profit organization 3 These naturally vary e.g. to become a member spanish SOGARTE, you would have to invest at least 150,25 euro 444

4 by the SMEs. It can be founded according a special law having particular legal form (example of Spain) or by choosing from one of the existing legal forms suitable for non-profit organizations (e.g. cooperative). The MGS typically provides guarantees for credits thus, supervision by banking supervision body is suitable. The MGS often cooperate with banks, chambers of commerce and with public bodies often as protective members. They often obtain guarantees or other kind of support from public funds. Features of a MGS: 1 Nonprofit organization 2 Founded by SME 3 Providence of guarantee for credits (such as supplementary financial services, including more competitive interest rate) 4 Protective members are common (such as national bodies, banks, chambers of commerce) 5 Cooperation with state institutions and banks 6 Supported from national and supranational schemes However, mutual guarantee societies can offer supplementary help they can coordinate companies access to finance by searching out and giving contact on business angels or other forms of private equity Current MGS in Europe European Union encourages the activities of MGS by financial support. A possible step for future development of MGS is creating a European legal framework for European (supranational) MGS. The European Commission financed feasibility studies on the creation of mutual guarantee companies themselves in countries where they are not active yet 4. In some EU countries, such guarantee societies are already active (Austria, Belgium, France, Germany, Italy and Spain). Examples of such societies are: France (SOCAMA), Austria (AWS GmbH), Spain (CESGAR). 4 Mutual Guarantee Schemes: Small companies helping each other Enterprise Europe No 2, January March Access from: 445

5 Spanish system of mutual guarantee societies Spain has a good tradition of mutual guarantee societies. The MGS is founded according the law on mutual guarantee societies 5. The MGS have a particular legal form. The name of the company shell include the indication Sociedad de Garantía Recírpoca, or the abbreviation S.G.R. Aim of the company is to facilitate access to credit of its members as well as connected services. The company shall not provide credit for its members. Founders of the MGS must be small and medium sized enterprises (i.e. up to 250 employees). There are however two types of partners: participant partners and protective partners. The letter ones needn t be SME. The companies (partners) are not liable for debts of MGS. Registered capital of the MGS shall be at least pesetas 6. Prior its foundation, MGS shall be authorized by the Ministry of Economy and Finance 7. MGS are regarded as financial entities and are under supervision of Bank of Spain. The capital of the company is variable. The society must fulfill liquidity and solvency criteria according to legal requirements 8. Bodies of the society are: general meeting (junta general) and managing board (el Consejo de Administración). General meeting takes place ate least once a year and is the supreme body of the society. General meeting appoints and revokes members of the managing board. Managing board is an administrative body of the society. Managing board names the general director. The MGS in Spain have some tax advantages, premium grants for certain programs, public counter-guarantee by CERSA 9, and certain counter-guarantees given by the Autonomous Regions 10. At national level, CESGAR operates as an association of Spanish mutual guarantee societies. Its functions are coordination, cooperation, defense and representation of its members interests. Two basic groups of companies are eligible to obtain guarantee: SME not eligible to bank financing but with a rentable and attractive project or a company that has a sufficient guarantee for obtaining a credit but with guarantee of MGS can obtain a credit under better conditions. In the year 2004, SMEs used the guarantee of CESGAR. 5 LEY 1/1994, de 11 de marzo, sobre el régimen jurídico de las Sociedades de Garantía Recíproca. 6 i.e. 1,803, eur 7 Ministerio de Economía y Hacienda 8 law 26/1988 on the discipline and intervention of credit entities 9 Compañía Española de Reafianzamiento S.A. See 10 See European Commission. Guarantees and Mutual Guarantees. Access from: 446

6 In Spain, special mutual guarantee society was founded for the financing of audiovisual industries. French system of mutual guarantee societies In France, the tradition of mutual guarantee societies dates back to 1917 (law on mutual guarantee societies sociétés cooperatives mutuelles). The SOCAMA is a grouping of regional guarantee societies founded as private companies. The society groups 42 local societies having members. Its aim is to protect the interests of its members craftsmen. The society guarantees % of the credit. Each year, the society gives guarantees in the amount of more than 500 million euro. SOCAMA gives guarantees in cooperation with Banque Populaire. The mechanism of providing the guarantee doesn t involve any state aid. The guarantee is given to enterprises with a good project but lack of collateral. The decision of granting a guarantee is taken at the lowest possible level. Basically, the services can be used by the members of the Banque Populaire, but the credit guarantee may be provided also to non members upon request on condition that they open an account at the Banque Populaire. German system In Germany, a chain of guarantee banks 11 exists that are hold by the entrepreneurs and offer guarantee for credits. The banks are founded under Kreditwesengesetz as Ltd. The bank is usually owned by financial institutions and SME organisations (such as chambers of commerce, enterprise associations etc.). The banks offer credit guarantee to entrepreneurs or freelancers who don t have sufficient collateral but do have a meaningful investment project. 12 Such bank exists in each of the 16 Lands (Bundesländer). Aim of the guarantee banks is mainly to support the creation of new entreprises. Verband der Bürgschaftsbanken is an association of there regional guarantee banks. The banks cover about 80% of the credit risk, they give a guarantee for 15 years. These favourable conditions are enabled due to larger support by public institutions (Federation, lands). Some tax advantages for counter guarantee are also available. 11 Bürgschaftsbank (formerly Kreditgarantiegemeinschaft)

7 According to the latest report, the member banks of the association provided guarantees in the total volume of 1,61 mld euro and helped entrepreneurs. The guarantees helped to create or save labour places. Great Britain In Britain, mutual guarantee societies are associated in The National Association of Mutual Guarantee Societies (NAMGS) 13. The association was founded in 1993 with the financial support of the European Commission. MGS in Britain bring together within a region or economic zone small and medium enterprises (SMEs) that will conduct themselves as a cooperative group creating the power to negotiate cheap bank loans, reductions in bank charges and importantly gain access to professional mentoring, business and mutual support. Thus, MGS in GB do not have a special legal form but are founded as cooperative societies. The NAMGS is supported by two banks - Co-operative and Unity Trust Banks, who provide discounted loans and other services to members. European Mutual Guarantee Association At European level operates an association of companies that support SME financing. The association is founded under Belgian law on non profit organizations. It is totally independent on political groups and represents 26 societies or federations that are active as a network of guarantee systems in 16 countries. The association communicates with European bodies regarding problems of SME financing. The Association represent both mutual guarantee societies (as private societies) and mutual guarantee schemes (that represent public funding of SME). Recent outcome of the activities of the association was the Madrid declaration Advantages of membership in a MGS for SME To become a member, the SME usually have to invest some amount of money to pay the membership share. Is it therefore worth it to become a member of a MGS? Mainly small companies are often excellent in their specific field of enterprise but lack experience and knowledge of economy and communication with bank institutions. Obtaining a credit and chosing good method of financing is sometimes a hard task to do

8 Membership in a MGS is therefore very helpful. MGS provides not only guarantee but also communication with bank institution, thus being helpful for both entrepreneurs (who lack experience) and bank institutions that lack specific knowledge of the field of enterprise. The most important thing is that MGS are organized by the entrepreneurs themselves, the entrepreneurs are members of the MGS and thus the company meets their needs as much as possible. SME can therefore get: 1 Credit collateral 2 Access to credit under better conditions 3 Negotiation with banks, elaboration of necessary documents 4 Supplementary service such as contact on private equity founds, business angels 5 Support from institution that is aware of the specific problems of their field of business. 5. European Union and Mutual Guarantee Societies As proved above, mutual guarantee societies represent an interesting form of SME financial support. The basic principle shall be that they are created according to needs of the entreprises and comply with their demands. Mutual guarantee societies don t have a larger tradition in all EU member states. The European Union shall create a legislative as well as informative framework to support the creation of such guarantee institutions. An information campaign on the functioning of such companies under current legislative framework could create a much better environment for credit guarantees. At EU level, several effords have been made to create supranational forms of companies. Mutual guarantee society could well function as European Economic Interest Grouping. Mutual guarantee societies can however gain financial resoucres under the current CIP programme. The European Invesment Fund is involved in the SME guarantee facility for microcredits. The guarantee window of the SME Guarantee Facility (Micro Credit Window) is aimed at the support of micro-entreprises. The purpose of financing covers investment financing, working capital and financing for the acquisition of of tangible and intangible assets, including innovation activities, technological development and acquisition of licences. 449

9 The European Union could give incentives for the support of the creation of mutual guarantee systems by support of tax advantages for such societies as well as by provision of counterguarantees. 6. Conclusion Mutual guarantee society is a good concept for support of SME access to finance. It is a way of self help. Advantages of this kind of support for SME were listed above good knowledge of the field of enterprise, provision of collaterals, support in communication with bank institutions, etc. The MGS don t operate in all EU member states. However, it is feasible to create them under existing legal framework the entrepreneurs are often not aware of this type of activity. EU shall act as incentive of information spread and institutional support for the creation of such self-help institutions. 450

10 References [1] AECM - Association Européenne du Cautionnement Mutuel. Access from: [2] AECM. Les systemes de garantie members de l association europeenne du cautionnement mutuel. Access from : [3] BIERDÜMPEL, E. ERCIM - History, Overview and Outlook. Dostupné online: [4] CESGAR. Confederación Española de Sociedades de Garantía Recíproca. Access from: [5] Communication from the Commission to the Council and the European Parliament. Access to finance of small and medium sized enterprises. Brussels COM(2003) 713 final. [6] CONFIDI. Access from: [7] CONSEN EEIG EURO-GROUP. Dostupné on-line: [8] Consultation Document for a Community Support Programme for Entrepreneurship and Enterprise competitiveness ( ) succeeding the current multiannual programme for enterprise and entrepreneurship,and in particular for small and medium-sized enterprises (SMEs) ( ). Access from: n_document.pdf#search='consultation%20document%20for%20a%20community%20su pport%20programme%20for%20entrepreneurship%20and%20enterprise' [9] Council Regulation (EEC) No 2137/85 of 25 July 1985 on the European Economic Interest Grouping [10] DĚDIČ, J. Evropské právo společností. Praha: Boa Polygon, ISBN [11] European Charter for Small Enterprises. Access from: [12] European Commission. Guarantees and Mutual Guarantees. Access from: port.pdf [13] European Microfinance Network. Access from: [14] European Observatory of SMEs. Access from: 451

11 [15] La SOCAMA - Le cautionnement mutuel des entreprises artisanales. Access from: [16] La SOCAMA - Le cautionnement mutuel des entreprises artisanales. Access from: [17] LEY 1/1994, de 11 de marzo, sobre el régimen jurídico de las Sociedades de Garantía Recíproca. [18] LEY 1/1994, de 11 de marzo, sobre el régimen jurídico de las Sociedades de Garantía Recíproca. [19] NOVOTNÁ, M. Venture Capital Environment in the European Union. In ECON 05 (selected research papers). Technical University of Ostrava, Faculty of Economics. Volume 12, s ISBN [20] Report on the activities of the European Union for small and medium-sized enterprises (SMEs) - SME Envoy Report - SEC(2005)170. SME envoy report. Access from: [21] SCHUMPETER, J. S. Teória hospodárskeho vývoja: analýza podnikateĺského zisku, kapitálu, úveru, úroku a kapitalistického cyklu. Bratislava: Pravda, 1987, 478 s. [22] VODÁČEK, L. et al. Malé a střední podniky: konkurence a aliance v Evropské unii. Praha: Management Press, ISBN [23] ZAHORKA, H. J. EEIG. European Economic Interest Grouping. The only transnational legal instrument for co-operation between entreptreneurs in Europe. LIBERTAS European Institute GmbH. Dostupné online Verze