Effects of credit guarantee schemes on secured transactions frameworks

The importance of a modern secured transactions framework for movable assets that effectively channels credit to the SME sector has been widely recognised. However, a modern secured transactions framework may not spur market-based collateralised lending if a public credit guarantee scheme disincentivises lenders and borrowers from engaging in it. Improperly designed schemes cause many market distortions, including slower growth, profitability and sustaining zombie companies. As Japan embarks on secured transactions reform, it needs to consider the role of its credit guarantee scheme in facilitating collateralised lending. The lessons this article outlines should be instrumental in other economies.