Governments worldwide invest heavily in programs designed to improve small and medium-sized enterprises’ (SMEs) access to finance, with the expectation that better credit access will boost firm growth, employment, and economic diversification. However, evidence from Kazakhstan shows that the effectiveness of these programs depends heavily on how they are designed, not just how much money is spent.
SMEs often struggle to access credit due to limited collateral, weak credit histories, and higher perceived risks. To address this, governments typically use tools such as interest rate subsidies, which reduce borrowing costs, and credit guarantees, which reduce lender risk by covering part of potential loan defaults. While these tools are widely used across countries, comparing their effectiveness is difficult due to differences in financial systems and economic conditions.
A study using detailed administrative data from Kazakhstan compares three government SME support programs implemented through the development finance institution DAMU. These include interest rate subsidies, fully subsidized credit guarantees, and market-aligned partial guarantees where both lenders and borrowers share risk. The analysis tracks firm-level outcomes such as employment and sales using rigorous evaluation methods across regions and time periods.
The findings show that interest rate subsidies have no positive impact on firm performance and may even reduce employment by around 10 percent, as they often benefit firms that would have borrowed regardless. Fully subsidized guarantees also show limited effectiveness because they reduce lender incentives to carefully screen borrowers, leading to weaker outcomes for firm growth.
In contrast, market-aligned partial guarantees produce strong positive results. By ensuring that both banks and firms retain some financial risk, these programs encourage better credit screening and support more productive firms. As a result, employment increases by about 24 percent and sales rise by roughly 21 percent, with particularly strong effects among formally registered firms and women-led businesses.
The study also finds that local labor market conditions influence outcomes. Job creation effects are significantly stronger in regions with higher unemployment, where firms are more likely to hire new workers rather than compete for existing ones. This suggests that such programs can generate genuine net employment growth under the right conditions.
Overall, the evidence highlights that program design is more important than the size of spending. Subsidies that weaken market incentives tend to deliver weak results, while risk-sharing mechanisms that align incentives between lenders and borrowers are more effective in supporting productive firms. These lessons are relevant not only for Kazakhstan but also for other middle- and low-income countries using SME finance programs as part of broader economic development strategies.
