In most instances small and medium enterprises (SMEs) are unable to provide information of their creditworthiness and tend to lack the appropriate accounting records and collateral, leading to uncertainty on expected rates of return and the integrity of the borrower. For SMEs, deficient collateral is one of the main reasons they are unable to obtain credit from banks. Governments, NGOs, and the private sector have developed initiatives such as credit guarantee schemes (CGSs) that provide guarantees to groups that do not have access to credit by covering a share of the default risk of the loan.
Rural credit guarantee schemes lessen the financial constraints faced by SMEs and absorb an important share of borrower risk, alleviating the high collateral requirements demanded by banks. By providing a guarantee, SMEs are able to obtain loans from banks at a lower interest rate. In case of default, the lender recovers the value of the guarantee. In essence, CGSs absorb an important share of borrower risk. CGSs can also compensate for factors such as insufficient collateral and weak creditor rights. By covering part of the default risk, a lender’s risk is lowered – guarantees secure repayment of all or part of the loan in case of default.
Related meetings and workshops
Seminar on Rural Credit Guarantee Schemes, Budapest, January 2006
Typology of Loan SME Guarantee Schemes, paper by AECM, March 2006Rural Credit Guarantee Schemes - A Financial Instrument for Agriculture and Rural Development, January 2006