Privatizing profits and socializing losses in Turkish economy: The example of Credit Guarantee Fund

This thesis examines the loan guarantee system developed in order for banks to encourage lending Small and Medium Sized Enterprises in Turkey. Credit Guarantee Fund Inc. (KGF) was established in 1991 to provide collateral for the purpose of taking the credit risk of a firm which cannot meet the criteria of the bank because of lack of collateral or corporate credit rating, by offering guarantee on the amount agreed with exposed creditor. The largest part of its capital is based on the state Treasury. The examples from the other countries and the international principles of credit guarantee schemes are explained as comparisons on both country and timely basis. This thesis approaches to the loan guarantee schemes as a system of privatizing gains while socializing losses. The terms that Akerlof and Romer gained to the literature which are asymmetrical information, adverse selection, moral hazard and bankruptcy for profit are used to explain this argument. The informational advantages of banks compared to Credit Guarantee Fund enable banks to cheat the Fund about the financial situation of the customers who they demand for guarantee. This situation paves the way for the main argument of this thesis.