Bridging the Finance Gap: ACCION's Experience with Guarantee Funds for Microfinance Institutions
This paper analyzes ACCION's experience with guarantee funds - the performance of its Latin American Bridge Fund (LABF) established in 1984 and the rationale for creation of its Global Bridge Fund (GBF) in January 2005. The paper states that microfinance guarantee funds:
- Build familiarity of banks with MFIs;
- Leverage formal sector resources to microfinance;
- Avoid foreign exchange risk;
- Improve access to information and reduce transaction costs.
It describes the performance of LABF as:
- Over 80% of MFIs that availed guarantees have been able to access commercial credit:
- US $69.3 million issued to 23 MFIs;
- On an average, after five years of guarantees, MFIs graduated to attracting unsecured bank loans.
- The fund remained sustainable during the majority of years of operation;
- Investors received a weighted average interest of 2.44 percent without any losses.
The paper attributes success of LABF to:
- Diverse sources of capital mobilized from investors;
- Prudent stewardship of investor funds;
- Careful approval process;
- Risk sharing mechanisms;
- Minimization of exchange rate risk;
- Reduction of operating costs.
It describes the factors that led to the creation of GBF as:
- LABF fulfilled its mandate of linking the Latin American affiliates to banks;
- Many MFIs, including those outside Latin America, needed guarantees;
- Over time, an MFI's needs can change calling for guarantees for a broader range of financial instruments.
The paper also presents a record of the 23 MFIs that availed guarantees and a comparison of the two funds.