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Project Summary

Study of Scope for a Global Guarantee Scheme for Microfinance

Region		Global
Project Sector(s)		Microfinance
Assistance Type		Technical Assistance
Start Date		2005
Completion Date		2005
Implementing Agencies		Development Associates A/S http://www.dev-ass.dk/
Funding Agencies		Danish International Development Agency (Danida)

Project Description

Background

In most of Danida´s partner countries a main constraint for the expansion of microfinance is that the banks have a perception that lending to micro and small enterprises is too risky. In many of these countries commercial banks have surplus liquidity, but do not lend the money because of the high-perceived risk. In such circumstances, guarantees may be more appropriate than credit lines in order to increase access to loans for micro, small and medium enterprises (MSMEs), including farmers.

Furthermore, in some countries government regulations require the private banks to make significant reserve provisions to cover potential losses when the banks lend to agriculture and MSMEs. A credit guarantee scheme might in such cases reduce the legal reserve requirements and thus induce bank lending for this market segment.

Within a number of sector support programmes and projects, Danida provides guarantee funds in agreement with local banks. This reduces the risk that the banks carry and should thereby, if other conditions are fulfilled, increase their lending for the MSMEs which are targeted by the programme or project. However, two drawbacks have been noted, viz. (i) the funds can rarely be efficiently geared, and (ii) it is always problematic to find optimal final destinations for the funds after expiry of the programme/project.

Description

This study will examine whether it would be feasible to establish a Central Guarantee Scheme/Fund, funded by Danida and possibly other private sector partners, which in Danida partner countries would provide guarantees to micro finance institutions and commercial banks lending to  MSMEs. The hypothesis is that such a central Danish fund would be a more effective way of providing guarantees for credits than having a number of small guarantee funds linked to programmes and projects in several countries. The guarantee fund could if feasible attract private sector support. The idea is that such a Fund could be geared in two ways. Firstly, the Fund should only cover part of the participating financial institution’s risk. Secondly, the fund could guarantee outstanding loans in excess of the total size of the Fund, as it would not be expected that the fund would have to pay out on all its guarantee commitments at the same time. The Fund may also be able to charge fees for the guarantees. The Fund could, possibly, also have other products to offer financial institutions, such as technical assistance for product development.

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