Designing Better SME Policies: Why Incentives Matter More Than Spending

A World Bank study finds that most SME support programs in Kazakhstan, like interest subsidies and fully guaranteed loans, fail to boost growth and can even reduce jobs. In contrast, a well-designed, market-based credit guarantee that shares risk between lenders and borrowers significantly increases employment and sales.

Governments across the world invest heavily in helping small and medium-sized enterprises grow, create jobs, and drive economic diversification. But do these programs actually deliver results? A new World Bank study by researchers from its Financial Services Sector Global Department and Development Research Group takes a close look at Kazakhstan’s experience and offers a clear answer: some programs work well, others do not, and the difference lies in how they are designed.

Kazakhstan has made SMEs a central part of its economic strategy, aiming to reduce dependence on natural resources and boost employment. To support businesses, the government, through the DAMU Entrepreneurship Development Fund, rolled out three major financial tools: interest rate subsidies, fully subsidized credit guarantees, and a newer market-oriented scheme called the DAMU Optima Guarantee.

When Cheap Loans Don’t Deliver Growth

Interest rate subsidies are one of the most common policy tools used worldwide. The idea is simple: reduce the cost of borrowing so businesses can invest more. In Kazakhstan, this program has been widely used, covering tens of thousands of firms.

However, the study finds that these subsidies fail to produce real benefits. Businesses receiving subsidized loans do not significantly increase their sales. Even more surprisingly, they actually reduce employment by about 10 percent on average.

The reason is that subsidies do not change how banks make lending decisions. Banks still lend to firms they consider safe, meaning the program often benefits businesses that would have received loans anyway. Instead of expanding access to finance, subsidies mainly act as a financial bonus, with little impact on growth or job creation.

Guarantees Without Risk, But Also Without Results

The second tool examined is fully subsidized credit guarantees. These programs reduce the risk for banks by covering a large share of potential losses, and firms do not pay any fees to receive the guarantee.

In theory, this should encourage banks to lend more, especially to smaller or riskier businesses. But in practice, the study finds no meaningful improvement in employment or sales for firms using these guarantees.

One key issue is incentives. When banks and borrowers face little or no risk, they may become less careful. Banks might lower their standards when approving loans, and firms may feel less pressure to use funds efficiently. As a result, credit expands, but without improving business performance.

A Smarter Design That Actually Works

In contrast, the DAMU Optima Guarantee program shows strong and positive results. Unlike the other programs, it requires firms to pay fees and ensures that banks still carry part of the risk. This creates a shared responsibility between the government, lenders, and businesses.

This design makes a big difference. Firms benefiting from this program increase employment by about 24 percent and boost sales by around 21 percent. The effects also grow over time, suggesting that businesses are able to expand steadily.

The key lesson is that keeping some level of risk for both lenders and borrowers encourages better decision-making. Banks screen borrowers more carefully, and firms are more likely to invest productively. This balance between support and discipline leads to better outcomes.

Who Benefits Most and Why It Matters

The study also shows that not all firms benefit equally. Formal, registered businesses gain much more from the successful program than self-employed individuals. These firms are often better structured and more capable of using additional financing effectively.

There are also differences based on gender. Women-led firms tend to see stronger gains in employment, while male-led firms experience higher increases in revenue. This suggests that businesses may use financing in different ways depending on their structure and leadership.

Local economic conditions also play an important role. In regions with higher unemployment, the successful guarantee program leads to stronger job creation, as businesses can hire from a larger pool of available workers. On the other hand, interest rate subsidies perform worse in these weaker regions, sometimes reducing employment further.

The Bigger Lesson for Policymakers

The findings carry an important message for governments everywhere. Simply spending more money on SME support is not enough. Poorly designed programs can be expensive and ineffective, or even harmful.

What matters most is how these programs are structured. Policies that remove all risk may weaken incentives and reduce effectiveness. In contrast, programs that share risk and maintain market discipline can successfully support business growth and job creation.

Kazakhstan’s experience shows that well-designed financial tools can make a real difference. For policymakers looking to support small businesses, the challenge is not just to provide funding, but to design smarter, more effective systems that truly help firms grow.