Public and Private Investments in Microfinance: A Look at Guarantee Instruments

Guarantee mechanisms encourage banks to lend to certain economic sectors, such as microenterprises, building a link between microentrepreneurs and formal financial institutions.

This document states that although establishing a credit guarantee programme does not guarantee its success in reaching the microfinance market, credit guarantee programmes do offer some innovative methods to expand microentrepreneurs' access to capital. The following schemes have shown some success where key criteria are in place and there is an enabling environment for guarantee funds to function effectively:

• Graduated lending schemes;
• Guarantees of capital market instruments;
• Sustainable nonprofit funds for microenterprises;
• the use of partial guarantees to raise medium-term capital from local banks.

Overall it is stated that whilst guarantee funds are not a solution to the inherent risk related to any financial operation they:

• Provide an excellent instrument to spread the risk among different actors;
• Promote innovation and diversification toward new product and client segments.

To conclude, challenge for donors and banks alike is to craft a guarantee fund programme using lessons learned, monitor and track its performance, and make adjustments so that it reaches the targeted clientele.