How to solve the eternal credit problem? (NR Online Session 1)

July 13, 2020 | Blog
Home > How to solve the eternal credit problem? (NR Online Session 1)

By Ruben Peeters (Utrecht University)

This research is due to be presented in the first New Researcher Online Session: ‘Finance, Currency & Crisis’.


The decreasing numbers of new covid-19 cases in the EU has allowed governments to plan for restarting public and economic life. The plans often place a lot of emphasis on ensuring funding for SMEs. This is important because, while SMEs make up the majority of firms and are drivers of innovation and growth, they often have insufficient access to credit and are the first to suffer during crises. How can we solve this problem and what can leaders learn from history?

When studying the history of SMEs, we find recurrent complaints about insufficient access to credit. The contemporary literature on SME financing does not pay a lot of attention to the continuous resurfacing of problems. But why do these problems keep recurring? Why can financial systems not simply solve them?

I argue that while these complaints are all seen as indicating “SME funding problems”, they in fact often signal different problems, each of which requires a specific solution. To prove this point I study the history of Dutch SMEs between 1900 and 1940. During this period small firms associated in lobby-groups and attempted to identify and remedy small firms funding problems.

Picture 1
Interior of perfumery “Maison Rimmel” with sales woman behind the counter, Amsterdam 1913.  Source: Spaarnestad Foto, SFA002000477.

Looking at the financial landscape in the Netherlands at the turn of the twentieth century, small firms had several options to obtain debt funding, depending on the size of the loan and the type of collateral that firms could offer. Credit was not provided by joint stock banks as is usually the case today, but rather specialized local institutions, each having a different target audience or segment. A small firm with collateral needing a medium-size short term loan could go to a credit union. A small firm in need of a small short-term loan but lacking collateral could consult a Help Bank which accepted guarantors to secure the loan. And most firms made do with private savings, retained earnings, and trade credit.

The first thing that associations did was to improve the available information about small firms and small firms’ bookkeeping capabilities. This made it easier for firms to give an overview of their financial situation and reduce screening costs for financial institutions. Secondly, associations set up banks geared towards SMEs (middenstandsbanks), who provided small to medium size, short term loans. These banks received government subsidies to serve as wide a group as possible.


Picture 2
Branch of the Middenstandsbank of Limburg
Source: Yearly Report of the Middenstandsbank of Limburg, 1920
(Dutch National Archive: 2.25.68/9184)

Despite these initiatives, crisis situations created new problems that the middenstandsbanks were incapable of solving. During the First World War, suppliers suddenly wanted to be paid cash. Many small firms got into trouble and needed credit to pay suppliers and the middenstandsbanks demanded collateral, which many small firms did not have. The government stepped in and guaranteed the losses on these loans.

A similar situation occurred during the Great Depression when firms needed credit to survive the crisis, but financial institutions did not provide this. By then the Dutch government had control over the middenstandsbanking-system and they set up a patchwork of credit guarantees, each with its own target segment in terms of size, sector, or use. This ensured that viable firms, no matter how small or informationally opaque, had access to credit and that in case those firms grew, they could easily graduate into a higher segment. This system remained in place until the early 1970s and contributed to the post-war economic boom by ensuring credit to small firms, even when monetary policy was restrictive.

The elephant in the room was the position of the government. I found that in every example, the Dutch government was instrumental in getting the initiative off the ground and running through subsidies. The costs of providing affordable credit to informationally small firms are simply too high. Unfortunately, subsidies without oversight created multiple problems and situations of abuse and excessive risk-taking. These negative experiences made the Dutch government increasingly opt for more direct intervention in credit markets, with the guarantee system as the pinnacle.

This historical case study provides some ideas on what governments can do to help SMEs weather the Great Lockdown:

  1. Take action
  2. Design specific programs with the situation of the target group in mind
  3. Mentor small firms and help them prosper
  4. Provide government guarantees on loans funded with private money (This keeps down strains on government budgets)
  5. Align interests between the government and lenders, to prevent excessive risk-taking

Italy seems to be leading the way.[1]




Ruben Peeters

Twitter: @RLMPeeters