Mutual Guarantee Companies of Europe (1994)

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    This document has been made available in electronic format
         by the International Co-operative Alliance ICA 
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(Source: Review of International Co-operation, Vol.87, No.2, 1994,
pp. 44-50)

Mutual Guarantee Companies in Europe
by Etienne Pflimlin*
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Introduction
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The aim of a mutual guarantee in the framework of a Community structure
is to supply a joint guarantee to each of its members when trading with
third parties.

This concept of mutual aid emerged at the end of the 19th Century in the
urban areas of France and Germany to make it possible for craftsmen,
traders and small businessmen to achieve social progress through the
modernisation of their working tools. In other words, to have access
to loans which commercial banks had refused them hitherto. At the same
time, in rural areas, there emerged the savings and credit co-operatives.

A mutual guarantee is ratified in France by a law of 1917 relating to the
provision of loans to small and medium-sized businesses, and craftsmen.
In fact, within Credit Populaire, the same law governs the people's banks
and the mutual guarantee companies (MGCs) i.e., those banks having a
co-operative status to collect savings and redistribute credit and the MGCs
which organise solidarity between the borrowers and guarantee the loans.

Since then, this mechanism has spread to a number of European countries
and has changed under the pressure of competition and technological and
legal changes.

What is the position in Europe today and what are the future prospects?

The Situation in Europe
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To my knowledge, the co-operative system of mutual guarantee exists in
five countries of the European Community. Our European friends outside
the Community must excuse me for not referring to them, but I am not
familiar with the situation in their countries and I would be pleased if they
could complete these gaps in my knowledge.

The mutual guarantee was introduced in Belgium in 1929, in Germany in
1954, in Italy in 1956 and in Spain in 1977, during times of crisis when
there was a lack of objective financial analysis. It enabled small traders,
who at the time did not have the individual guarantees necessary to obtain
a loan to be solvent with respect to the banks.

A census of the strictly mutual MGCs carried out in these countries showed
that there were 593 such organisations, covering almost 830,000 company
members, and holding guarantee funds amounting to 20 billion ECUs.
(See table 1).

The MGC network affiliated to the French banques populaires alone
represents 65% of the European total, 73% of company members and 48%
of SCM. Its average total funds per member is 21,612 ECU., i.e. slightly
below the European average.

The Germany MGCs, which are much less numerous, have entered into
commitments per company member which are more than twice as high as
the European average, because of the number of craft industries in that
country.

In fact, the MGC is marginally different from one country to another, if we
take account of not only the specific statutory, regulatory and tax provisions
of each, but also the economic and social fabric in which they find
themselves. (See table 2).

Thus, in Germany, with the backing of the Lander (County Councils)
which frequently participate in their guarantee funds, the MGCs are
enjoying quasi-total tax exemption; in France on the other hand, the creation
of the MGC is a totally private initiative. Benefiting at the outset from
certain tax advantages, they are now totally in line with the banking
establishments, and must now bear the same financial and prudential
restrictions.

Depending on whether the professional or underwriting organisation
prevails over local or regional ties, the MGC has a sectorial character at
national level, as, for example, in Italy, or a multi-sectorial configuration
at local or regional level, as is the case in Germany, where each Lander has
one MGC  and where five companies of this type have just been established
in the Lander of the former East Germany. In some regions, such as in
France or Spain, the co-existence of these two forms is feasible.

What have all these companies got in common?
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They bring together some voluntary professionals who study the loan
application files and who can supply one of three types of guarantee,
depending on the case:

-	a technical guarantee (knowing the applicant's profession,
	they can appraise the feasibility of the file, bearing in mind the
	projected investments and, in the event of failure, the professionals
	can advise the MGC with a view to obtaining the security under
	the best possible conditions);

-	a moral guarantee (the fact that the administrators share the same
	location and profession, means that they can appraise the
	professional worth of the applicant, bearing in mind the latter's
	background);

-	a financial guarantee until completion, which results both in the
	setting up of a guarantee fund (with the aim of settling outstanding
	debts) and in the commitment of any company assets as a running
	stock for that part of the loan still outstanding.

In this context, the relationships between the mutual guarantee companies
and the banks are limited and frequently depend on the legal status and
composition of the company capital of the MGC.

The Auditors, Peat Marwick, have carried out a study of MGCs on behalf
of the European Commission and make a distinction between:

-	MGCs with loose ties, which most frequently work with several
	types of bank from which they obtain credit under preferential 
	conditions (these are found in Belgium, Germany and France); and

-	those MGCs which are closely dependent on the banking network
	which, generally, is of the shareholding nature. This is the case in
	Belgium and France for those MGCs linked with the banques
	populaires and in Germany for those working with the savings
	banks or leading companies/

The French case is some what special because, since the banking law of
1984 which introduced the first European banking directive in France
the mutual guarantee companies  are the now credit establishments subject
to the same financial and prudential restrictions as the banks with which
they are associated.

Consequently, the French banques populaires have just pushed the
organisational logic to its limits and have obtained for those mutual 
guarantee companies which are affiliated and which work exclusively with
them, collective approval at regional level, as known under the heading
of `RABOBANK system'.

Since then, the MGC has become no more than a specific participating
structure within the banking establishment, which directly mutualizes the 
risks of its clientele and therefore, does more than we are already doing in our credit and savings co-operative networks: Schulze Delitzch has now
joined the Raiffeisen Bank!

What is the future of the MGC in Europe today?
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If we look at the European initiatives, the prospects for the development of
mutual guarantee companies are good. If we look at the consideration of the
National Credit Council+ in France, however, their growth in highly compe-titive countries such as France will remain very restricted. 

Without showing preference, I shall outline the two arguments.

The European Community has rediscovered mutual guarantee following the 
initiative of the Spaniards who found in them a means of supporting the
creation of small and medium sized enterprises (SMEs). This despite the
fact that their own banking establishments were turning away from an altogether too risky sector because of the upheavals introduced into the
market by the opening up of Europe.

Post-Franco Spain was in an ideal position to make use of the mutual
guarantee formula: a strong tradition and a professional organisation which
rejected the former corporatism whilst upholding the knowledge of people;
and a high degree of regionalism which could, hereafter, be expressed at
an economic level.

Knowledge of people, jobs and regions are, indeed, characteristics which
allow the mutualization f risks on criteria which are not exclusively
financial. This approach was also of interest to the Commission which,
at the same time, was faced with the problem of developing an SME fabric.
This alone prevented the desertion of certain regions in the Rhine Valley.

This is why, on 5th September, 1991, the European Commission published
a communication of the Role of the MGC in financing of the SME within
the European Community.

The following principle measures were published:

1.	The promotion of seminars and conferences with a view to
	disseminating information on the aims, financing and methods of
	the MGCs;

2.	Support for the establishment of a European Mutual Guarantee
	Association, which was in fact founded on the basis of the DG
	XXIII 14 months later, chaired by M. Pombo Gonzales, who
	represented the Spanish movement;

3.	The definition of the pilot projects to identify the most efficient
	means of both improving their operations and encouraging the 
	creation of such types of companies in those countries where such
	institutions do not exist.

In fact, the developments we are witnessing today play a major role in
public funds or tax aids which allow a reduction in costs which, as private
funds, would no longer be authorised in the highly competitive environment
we have now come to know.

In fact, how does a mutual guarantee company operate financially? It  was
in answering this question that the National Credit Council voiced some
doubt on the future of independent mutual guarantee companies, whatever
their legal position.

When providing the bank with a guarantee, it is usual that the company's
assets over its commitments, so the company asks the lender to subscribe
the capital (which is what happened with the co-operative MGC) and to 
participate in the establishment of a guarantee. Frequently involved in the
management of following up payment difficulties on behalf of the bank
to which it acts as guarantor, it will change management commission. The
golden key to the job is that these high management commissions,
augmented by the interest on investing the guarantee funds, cover both the
management fees and outstanding amounts, whilst also showing a profit
margin.

As far as the bank is concerned, MGC involvement is ideal. It benefits
from the technical advice of the professionals working for it and also sees
it as a guarantee for repaying outstanding amounts and a satisfactory
conclusion of the loan.

How do things stand for the party standing surety?
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In circumstances where there is scarcity of offers or a lack of guarantee,
the party standing surety has no choice and has to accept this, even if
this leads to additional costs, i.e. the costs incurred by becoming an MGC member. In this instance, the MGC will stand surety for a maximum
number of borrowers, whether they are risky or otherwise and they are
thus able to mutilate the good and bad risks. Those companies whose risks
are difficult to calculate may have access to a loan and may develop: the 
solidarity amongst the borrowers wins hands down.

In circumstances where there is an abundance of offers, as testified by our
economic situation over the past ten years, the competition between the
banks is such that, without exception, the good risks can not only negotiate
their rates but also their guarantees which have now become an element of
competition.

The only things passing through MGCs are those loans whose risks are
badly managed.

This demutualization now restricts the independent SCM operating limits
which should either:

-	be backed by public funds: this is the pattern envisaged by the
	European Commission and currently in force in the majority of
	Member States; or

-	become part of a banking network which will mutualize the good 	and bad risks within the network and also develop privileged links
	with  its professional clients: this is the option adopted by the
	people's banks in France.

If we do not choose either of the first two schemes, a third alternative
would be a type of MGC which is completely private, of a sectorial or a
syndicated character, and which has opted to work with many types
of banks. This is why I think that the only answer possible in an abundant
open economy is to absorb the MGC into the banking network.

To conclude, I must underline the interests of the mutual guarantee
mechanism, without placing any emphasis on its legal or financial structure
but by reminding you that it can only operate if it represents joint
responsibility willing to commit both men and women, since these are the
real driving forces of our economies.

Within this framework, it matters little what the interested parties are
organising in the MGC or savings and credit co-operatives. What is of
utmost importance is the fact that they take direct charge based on our
experience whilst simultaneously adapting themselves to their own environment.

In fact the mutual guarantee company and the savings and credit
co-operatives, whilst fighting the attrition were the promotional tools of
those excluded from the industrial revolution. This is why today, despite
the growth of the exclusion zones both in our own regions and in the
developing countries, these community procedures are now finding
renewed interest and it is our vocation to participate and share our
experience within those organisations like the ICBA.

+ 	French consultative body under the auspices of the Ministry of
	Finance, grouping together representatives of the French Government,
	the banking profession and employers' associations and also the trade
	unions of the various economic sectors of France.

*	Mr.Pflimlin is President of the Confederation Nationale du Credit
	Mutuel, and Vice President of ICBA (International Co-operative
	Banking Association) and ICBA Regional Chairman for Europe.
	This article appeared in the ICBA Journal No.5, 1993.



Table 1 - Mutual Guarantee Companies
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Countries	No.of	     No. of	Average     Total	Average
			Mutual	     Members	No.of	      Guarantee  Running
			Gurantee   	            members/    Funds       Total per
			Companies 		Mutual	       (ECUs.  	member
						Guarantee    000's)
						Companies
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Germany	27	       20,640	     764	       1,160,362   56,203
Belgium	17		?		           132,487  
Spain		26 	       37,125	  1,430            685,129  18,455
France		277	      603,000       2,180      13,032,163   21,612
Italy			246            165,407           672        4,897,776  29,610
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TOTAL	593	      826,172       1,393       19,907,588  24,096
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Table 2: Comparative Study of Mutual Guarantee Companies in
	       Member States of the EEC
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Countries     Security     Inspection     Observations  Amount of   Characte-
Column        on Loans   Bodies                                 surety           ristics
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Fed.Rep.     -Craftsmen   Federal       Counter-gua-    80% of     Inter-bank
of Germany -Traders       Credit Insti- rantee of the     loan          inter-
                    - PME           tution          Federal State                     profes-
				     Inspection   and the                              ional
				     Office          Lander (for
 					             70%)
					             -Tax exemp-
						   tion
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Belgium    -Professionals -Caisse       -Counter           80% /95%  Single
                 -PME                 nationale   guarantee          of loan        banks
          			       prof.et.      -From 16 to                        (Banques
				       fonds de      43% tax                             Popula-
 				       garantie      			         ires)
				       (national,
         		                   professional
 				       and guaran-
				       tee funds
      				       office)

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Spain	      -PME	      -Ministry of    -Sogasa        100%        Inter-bank
	                                    Finance and   counter                          and inter-
                                            Economy       guarantee                      profes-
				       -Bank of         from 10%-                    sional
				        Spain             40%
				      - Audit	      26% tax as
				                              against the
				                              general rate
				                              of 35%.
						    -Tax exemptions

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Italay	     -Industries 	       -Internal 	     -Capital contri-  50% of   Inter-
	         -Craftsmen            		      butions by the   loan       bank
 				 		      regions.
					                 -Exemption
   				                               except for
            			                   financial
					                   products

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France      -Craftsmen         -CSBP           -Consolidation   Generally  Single
                 -Traders             -Bank com-     with BP or        100%        and
                 -Professionals     mission          ratio to be          of loan      multi-
                 -Civil Servants   -Auditor          complied with                    bank
                 -Private                                      individually                       Inter-
                   Individuals                               I.S. 33.3%                       profes-
                                                                                                             sional
    									             & uni-
									            profes-
										sional

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In Portugal, the State has abandoned beneficial loans - there are no mutual
guarantee companies. In England, the government abandoned beneficial
loans - there are no mutual guarantee companies. The government may
guarantee the loans for the borrower: 2.5% per annum on the amount
guaranteed.
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Source: SOCACO in Banques des Professionels, No.5 Jan., 1992.