Guarantee schemes

Guarantee mechanisms continue to be discussed as a potential mechanism for encouraging banks to lend to certain economic sectors such as small businesses. Guarantee funds can be set up privately or by a government and are used to pay the lending bank an agreed percentage of losses incurred on guaranteed loans. This "insurance' reduces the bank's risk, thereby allowing the bank to lend to borrowers who, on their own, would not have enough collateral or reputation to qualify for a bank loan.

The first credit guarantee funds were created in Europe as long ago as 1848. These were really mutual guarantee associations which set up their own funds. State supported funds played an important role in the reconstruction of post war Europe and in the 1970s and 1980s a new wave of guarantee fund experiments were tried in developing countries. Many of these were not successful but now interest has revived and it is important that we learn from past experience to avoid repeating mistakes. There is no blueprint or best model but success for a guarantee fund will depend on the accuracy and precision with which it is designed and built into the existing institutional and financial framework.

Library Resources

resource title type year resource
Credit Guarantee Systems for Agriculture and Rural Enterprise Development Paper 2013 English (en)

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Credit guarantee systems for agriculture and rural enterprise development takes a fresh and unbiased look at the application and results of guarantee funds for agricultural and rural enterprise development. In order to address the need for increased investment in agriculture and agribusiness, there is renewed interest in using guarantee systems investment to attract finance and investment towards target groups and agro-industries, including small and medium enterprises, that are too risky for adequate financing without such risk-sharing incentives. The document serves to inform development agencies and policy-makers on current practices and experiences, so that they can apply this information to their decision-making regarding whether or not and/or how best to promote guarantee mechanisms that are effective and sustainable.

credit guarantee paper  -  English (en)

Author Rauno Zander, Calvin Miller, Nomathemba Mhlanga
Publisher Food and Agriculture Organization of the United Nations (FAO)
Rome, Italy
Number of Pages 124 pp.
Primary Language English (en)
Region / Country Global
Keywords Credit Guarantee, Risk Management, Investment
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SMEs’ Credit Guarantee Schemes in Developing and Emerging Economies: Reflections, Setting-up Principles, Quality Standards Report 2013 English (en)

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This manual argues that guarantee facilities can be a useful instrument to promote SMME’s finance, directly and indirectly through microfinance institutions’ refinance if certain standards are observed. The manual aims to provide clear guidance on how to set up and run a credit guarantee scheme, taking account both positive and negative experience from the past. It also sets out guidelines for a reasonable public sector involvement that strictly limits risks for public budgets and avoids distortions of competition.

giz study on smes credit guarantee schemes  -  English (en)

Improving Access to Finance for SMEs in Central Asia through Credit Guarantee Schemes Reference Material 2013 English (en)

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This handbook provides an overview of international experience and good practices in credit guarantee schemes (CGSs), which are risk-sharing tools that aim to enhance access to finance for firms lacking collateral. Current practices in Central Asia are reviewed and guidelines on their establishment and improvement are provided based on the individual situation in each country from the region.

improving access to finance for smes in central asia through credit guarantee schemes  -  English (en)

Four Case studies on Credit Guarantee Funds for Agriculture Case Study 2013 English (en)

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This publication is an in-depth analysis of different models of guarantee system. An assessment of these cases, together with a review of the global industry of agricultural guarantee systems, was published as "Credit  guarantee systems for agriculture and rural enterprise development". The four case studies in this document provide the reader with a more detailed description of how these individual programmes have worked over time. Three of the programmes are among the largest and longest standing agricultural guarantee funds in the world, and have had both successful and difficult experiences as they evolve over time. The fourth case, from Estonia, shows how a small, efficient guarantee fund can operate profitably year after year.

case studies  -  English (en)

Author Zander, R.; Miller, C.; Mhlanga, N.
Publisher Food and Agriculture Organization of the United Nations (FAO)
Rome, Italy
Number of Pages 54 pp.
Primary Language English (en)
Region / Country Global
Keywords Credit Guarantee, Funds
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A Guarantee Systems Classification: The Latin American Experience Paper 2013 English (en)

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Guarantee systems are financial tools designed to mitigate the dysfunctions, within credit operations, generated from the entrepreneurs’ demand for collaterals. The present work diagnoses the unwanted effects, triggered by international rules, on the access to funds by micro, small, and medium enterprises; it posits as well the guarantee systems as solutions to these specific circumstances. Thus, it examines their legal configurations, their operational features, their relation to the financial system, and the performance levels they have achieved in Latin America. This paper has deemed virtually all the existing systems so that the results are highly significant, providing an outstanding contribution of knowledge to this field of study.

This work purposes and introduces an original compilation of guarantee financial schemes, unveiling a new reality from the perspective of an empirical classification for Latin America. The set has been sorted by the different forms in which they have operated and supported the guarantee coverage on its assets or whether they have merely acted as operators and managers of an autonomous and liquid resource known as guarantee trust or fund –which is predominant within public participation schemes that not often bear the collateral coverage on their own financial equity. This classification defines and establishes diverse operational and administrative situations.

idb papaer  -  English (en)

Credit Guarantee Fund for Georgia Paper 2012

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The paper addresses to the most accute problems (results of the world wide crisis and August conflict) of the Georgian economy mobilizing savings and enhancing access to credit for the micro and small companies in Georgia and facilitating FDI growth by improving a foreign small business confidence to invest in Georgia. The paper analysis the international practice in design and management of the credit guarantee schemes (CGS) to develop some proposals and recommendations how to expand access to credit to the thousands of micro and small companies in Georgia and enabling them to grow at more accelerated rates.

Facilitating Access to Finance: Discussion Paper on Credit Guarantee Schemes Paper 2010 English (en)

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The OECD paper investigates the reasons behind the emergence of guarantee schemes and review their impact. It also explains the types of schemes available and distils international good practices in credit guarantee schemes design and management.

facilitating access to finance  -  English (en)

Refinancing guarantees: calculated risks on behalf of small rural farmers Article 2009

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In 1992, SOS FAIM, a Belgian development NGO took the initiative of creating a loan guarantee fund for Latin America.

Initially, this program aimed to facilitate locally sourced financing for SOS Faim’s southern partners, by providing first class guarantees, which would be acceptable to commercial banks. The times were characterised by the widespread withdrawal of the state: the dismantling of many development banks and the implementation of structural adjustment programmes that had been imposed by international institutions. The partners for whom the international guarantee fund was designed were both rural farmers’ associations in need of working capital (for collecting and / or marketing produce) and micro finance institutions that required additional funds in order to serve a larger number of farmer and micro entrepreneur clients.

Author Sos Faim
Publisher Sos Faim
Number of Pages 8 pp.
Primary Language English (en)
Region / Country Global
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Guarantee Funds in El Salvador Paper 2007

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The Salvadoran economy is turning its attention to micro, small, and medium enterprises (MSMEs), recognizing their importance to the country’s entreprenuerial fabric as providers and distributors of goods and services for large firms and for the general economy, for their contribution to gross national production, and for being the largest creators of productive employment in the country.

Despite their contributions to El Salvador’s economy, MSMEs encounter many difficulties in accessing credit through the formal financial sector, in part due to their informality, poor financial planning, and lack of collateral to guarantee loans. This lack of access to credit hinders MSMEs’ expansion and development.

The Salvadoran financial sector has demonstrated a legitimate interest in serving the MSME market but still faces the aforementioned challenges. One instrument that can act as a catalyst in these circumstances is a Guarantee Fund, which by sharing credit risk with financial intermediaries (FIs), allows them to enter the large MSME market securely and profitability and develop appropriate banking technology to efficiently serve this important segment of the country’s productive economy.

While El Salvador has ample experience in guarantees, it has not always been positive. Existing guarantee facilities do not have the capacity to expand credit to all of the businesses that require it. However, they have stimulated interest on the part of banks and savings and credit cooperatives in guarantee mechanisms.

This study concludes that this is an opportune time to create a Guarantee Fund that has the potential to comply with USAID’s mission of expanding access to credit to the thousands of micro, small, and medium enterprises in El Salvador and enabling them to grow at more accelerated rates. Interest exists on the part of all actors involved, including government, multilateral development agencies, the financial sector, and the business community. This interest should facilitate development of a new, properly designed entity that can achieve important impacts in the economic development of El Salvador in a short period of time.

Typology of Guarantee Societies and Glossary of Technical Terms Document 2006

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Mutual Guarantee Societies are initiatives put in place by socio-economic circles such as Chambers of Commerce or Business Federations to promote access to financial services. They generally operate midway between three main partners : SMEs, Financial Organisations and Public Authorities. Guarantee Funds are founded by States or Regions as guarantee instruments to help SMEs. They may intervene either directly towards entrepreneurs or as reinsurance of commitments taken by Mutual Guarantee Societies. In this case, there is a leverage effect between public and private sectors.

The European Mutual Guarantee Association (AECM) was formed in 1992 to represent the interests of mutual guarantee societies in Europe. There is a wide variety of models of guarantee schemes which have been designed in different countries as a result of different historical contexts, regulatory and legal environments and local financial sector structures. This edition of their flash bulletin aims to clarify these differences by providing a typology of SME loan guarantee schemes, based around the following characteristics:

  • the scope of activity
  • the channel of the guarantee
  • the nature of the scheme

The scope of activity considers whether schemes are acting as wholesalers, retailers or portfolio guarantors, the channel of the guarantee refers to direct or indirect guarantors and the nature of the scheme is related to ownership, legal form, creation, objective, and the extent of involvement of shareholders in the functioning.

The second part of the bulletin is made up of a useful glossary of terms, with definitions provided under the following headings:

  • Banks and loans
  • Guarantee scheme
  • Management and various

More information can be found on the AECM website.

Author Association Européenne du Cautionnement Mutuel (AECM)
Publisher AECM
Number of Pages 15 pp.
Primary Language English (en)
Region / Country Global
Keywords Guarantee Scheme, Small And Medium Enterprises (Smes)
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Bridging the Financing Gap: ACCION’s Experience with Guarantee Funds for Microfinance Institutions Paper 2005

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Guarantee funds are financial instruments designed to promote commercial lending to populations or sectors, such as microfinance, where access to credit has traditionally been a challenge. This paper suggests the record for guarantee funds for microfinance has been mixed. Investment strategy, sources of capitalisation, risk management procedures and general macroeconomic conditions have all contributed to the success or failure of these funds.

This paper analyses ACCION's experience with its guarantee fund, the Latin American Bridge Fund. It addresses the factors that helped or hindered its success and discusses the factors that led ACCION to revise the original Bridge Fund concept and create the new Global Bridge Fund in 2005.

In January 2005, ACCION International launched the Global Bridge Fund. The Global Bridge Fund plays a role similar to its Latin American Bridge Fund but on a wider and more flexible basis. The Global Bridge Fund guarantees not only short-term lines of credit but also the issuance, by microfinance institutions, of short-term fixed-income instruments. It is also available to institutions who are not affiliates or partners of ACCION.

Among the questions this report aims to address are: how well the Bridge Funds helped microfinance institutions access commercial capital, the sustainability of the Fund itself and the returns the Fund has provided investors.

The paper begins by setting out the objectives of guarantee funds, including a glossary of some key terms. It then sets out more specifically how ACCION's guarantee funds operate and covers areas such as financial viability, how investors in the guarantee funds have fared and key design factors. It concludes with a discussion about the creation of the Global Bridge Fund.

Author Lopez, C y de Angulo, J
Publisher ACCION
Number of Pages 18 pp.
Primary Language English (en)
Region / Country Global
Keywords Guarantee Fund, Agricultural Microfinance
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Do Credit Guarantees Lead to Improved Access to Financial Services? Recent Evidence from Chile, Egypt, India and Poland Paper 2005

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This paper takes a look at the effect that credit guarantee schemes (CGS) have on access to financial services in four countries, based on case studies carried out in Poland, India, Egypt and Chile. The thesis being tested was “CGS are effective in promoting sustainable changes in lender behaviour, leading to financial sector deepening” (ie, increasing access to financial services for those who previously had restricted or no access, and increased provision of relevant products and services to the resulting new clients), depending on the presence of certain macro and micro factors, which the authors list. The study determined that CGS did have a positive impact on access to financial services, at least in services directly related to CGS, while it was much harder to see the effect of CGS on the wider condition of financial services provision in the four case studies. As this is a highly technical paper, it is not recommended for other than policy-makers.

The paper is divided into two rough sections, a summary and conclusions section which forms the body, and ten appendices which go into detail about the case studies, the questionnaire used to build the studies and an efficient summary of a 1997 document of use to the study’s researchers, Credit Guarantee Schemes for Small Business Lending. Among the principal conclusions is the confirmation that certain factors need to be present in order for CGS to promote the deepening of the financial sector, both on the large (macro) scale and on a specific (micro) level. Macro factors include a competitive banking environment, a dynamic rather than closed business sector, a supportive and efficient supervisory agency, and a credit bureau for maintaining and disseminating information. Micro factors include a spirit of competition among lenders, a desire on their part to develop long-term, permanent deepening of the financial sector, an emphasis on long-term sustainability of lenders, a participatory approach to setting shared objectives between lenders and borrowers, and the clear communication of the benefits to lenders of such a deepening of the financial sector. This paper also offers the converse, a list of the macro and micro failures that combine to work against CGS helping to deepen the financial sector. In general, CGS were particularly successful in encouraging the development of the financial sector in Chile, with varying degrees of success in the other three case studies.

This study is a useful tool for policy-makers and provides a worthy argument in favour of the use of CGS, though it does not claim to look at the general viability of CGS. The executive summary contains a particularly useful table which sets out a list of the factors leading to success and factors which lead to failure in CGS.

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