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Monday, November 23, 2009

Lending to small businesses

During the financial crisis, banks withdrew credit to small businesses, as they do not wish to see bad debts. The governments had to step in to provide cheap funds to the banks, so that they can continue to lend to small businesses, as these businesses create jobs.

The banks took the cheap funds, but did not lend to small businesses. Instead, they use the cheap funds to invest in the stock market and earned a big profit, on the inflated asset prices.

Is there a better way for the government to provide credit to small businesses, instead of relying on the banks, which are profit driven - and are not concerned about helping small businesses to create jobs.

I can think of two ways:

a) The cheap funds from government has to be tied to actual lending by the banks. If the banks do not lend to small businesses, they cannot get the cheap funds. This lending can be backed by partial guarantees by the government. (If I am not mistaken, this is the approach adopted in Singapore).

b) The government create another agency to provide the lending to small businesses, which is tied to the number of people employed, The entrepreneur is personally liable for the loan, but can have access to low cost credit. This should provide control over moral hazard, and serve the purpose of giving credit to small businesses, which in turn creates jobs.

Tan Kin Lian

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