Microfinance Guarantees: Is There Another Model?

Paper
Date Published: 
Dec 1998

Do guarantee schemes have a role in microfinance?

MFIs are looking for ways to capitalise themselves and improve their leverage by borrowing from formal financial institutions and raising funds from capital markets. As some have found it difficult to access commercial sources of finance, organisations with an interest in microenterprise development have designed various guarantee schemes to mitigate lender's risk, such as the:

  • Individual/retail model;
  • Portfolio model;
  • Intermediary/wholesale model.

The individual and portfolio models have largely failed in increasing financial flows to the sector. The paper suggests that intermediary/wholesale model may emerge as a viable alternative as well as the newly created Latin American Investment Fund (LA-CIF) which operates under a very different logic from previous intermediary funds.

Finally the document concludes that intermediary guarantees are an important part of the process of institutional development of microfinance. For this, MFIs will need to know the liabilities side of their business as well as the asset side. As MFIs increasingly conform to standard accounting and reporting principles, as well as demonstrating sound financial performance, not only will intermediary guarantees become less costly, they will become less necessary. A number of microenterprise networks, including Acción International and Women's World Banking, have provided this type of guarantee services to their affiliates.

Type: 
Paper