Mutual Guarantee Companies in 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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                         June 1994

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               Mutual Guarantee Companies in Europe
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                    by Etienne Pflimlin*

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 Popula
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. (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 German 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. 

Thus, in Germany, with the backing of the Lender (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 Lender has one
MGC and where five companies of this type have just been
established in the Lender of the former East Germany. In some
regions, such as in France or Spain, the coexistence 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 share-holding 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 somewhat special because, since the banking
law of 1984 which introduced the first European banking
directive in France, the mutual guarantee companies are 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 authorised by the first directive and known
under the heading of ERABOBANK 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 (1) in France, however, their growth in highly
competitive 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 of 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 the
financing of the SME within the European Community.

The following principal 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 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 cover 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 charge
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
mutualize 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. But it is vitally
necessary to have long-term contractual ties between the MGC
and the 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.

If fact, the mutual guarantee company and the savings and
credit co-operative whilst fighting the attrition, were, in
fact, 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.

1. 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    	Number       Average No.       Total    	    Average
          	           Mutual    	of  	     members/     	     Guarantee 	   Running
          	          Guarantee 	Members     Mutual Gua-       Funds     	   Total
          	          Companies           	      rantee Cos.         (ECUs`000)	    per Mbr
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Germany 	27        	20,640    	764            	1,160,032 	56,203
Belgium  	17        	?                        	132,487
Spain     	26        	37,125    	1,430          	685,129   	18,455
France    	277       	603,000   	2,180          	13,032,164 	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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Note:     There was another Table (Table 2) to this article,
          giving the comparative study of Mutual Guarantee
          Companies in Member States of the ECC. If you like
          to have a copy, please send us an e-mail at
          icageneva@gn.apc.org