Study on Credit Guarantee in China Based on Interest Conflict

Abstract

Credit guarantee is the main method to solve SMEs’ financing problem. In practice in China, the cooperation between bank and credit guarantee institution is not satisfying and guarantee institutions are exposed to excessive risk. Based on Bester’s model, this paper aims to study the behavior of guarantee participants under the hypothesis of interest maximization and how such behavior lead to problems mentioned above. It turns out that there exists interest conflicts among the participants when banks take the dominant place and ask for a guarantee proportion as high as possible. Credit guarantee has a rather limited effect on financing problem on condition that it earns enough to run smoothly. Finally, this paper suggests that guarantee institution should enhance its own capability to distinguish the type of SMEs and develop industrial guarantee in order to increase the bargaining ability with banks.