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April 22, 2010

Loan Guarantee Programs and Their Benefits . April 22, 2010. Contract No. 674-M-00-08-00043-00 .

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April 22, 2010

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  1. Loan Guarantee Programs and Their Benefits April 22, 2010 Contract No. 674-M-00-08-00043-00 This publication was produced for review by the United States Agency for International Development. It was prepared by Leigh Knight, a consultant for ShoreBank International, a subcontractor to Chemonics International Inc. The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States government.

  2. Loan Guarantee Programs-Background: • Loan Guarantee programs have been long established to provide access to credit for borrowers with good business fundamentals but without the requisite levels of collateral coverage to qualify for a loan. • Often the programs are established to create employment in particular industry sectors, or to create economic growth in a geographic region, or to enable business development for a particular disadvantaged group. • Most countries have established some form of loan guarantee program via either public or private guarantee venues.

  3. Loan Guarantee Programs-Background (cont.): • Successful loan guarantee programs require: • Lenders with a mission to provide financing to commercially viable enterprises/projects and to support economic development, and with an ability to do proper due diligence. • Borrowers with a viable business plan, management skills and desire, some capital to contribute. and • A guarantor also with an ability to evaluate projects and the undisputed ability and willingness to execute the guarantee should the lender be forced to call on it. • When looking at loan guarantee programs for historically disadvantaged groups, a willingness to provide or enable mentoring and stretching of normal commercial terms, within prudent levels.

  4. Loan Guarantee Programs- Characteristics • Although individual guarantee programs will differ, they will be similar in several areas including the following: • Require a viable business /commercial transaction. • Require risk sharing thus limiting the maximum level of guarantee to (90%, 80%, 75%, 50%, etc.) of the total loan amount. • Will work with partner banks and other financial institutions. • Can guarantee single loan transactions, loan portfolios and / or equity investment transactions. • Tenors of the guarantees will range from short-term (less than a year) – up to 10 years. • Include Guarantee fees • Will include eligibility criteria

  5. USAID DCA Guarantee Program

  6. What is DCA? USAID’s Development Credit Authority (DCA) provides risk sharing guarantees to private lenders to encourage the provision of credit to financially viable SMEs and projects which contribute to development goals. Key DCA concept is “Additionality” Aimed at addressing deficiencies in credit markets

  7. Three Basic Types of DCA Guarantees: • Loan Portfolio Guarantee • Loan (or Bond) Guarantee • Portable Guarantee

  8. Other Basic Attributes: • The DCA guarantee never exceeds 50%. • Tenor of the guarantee generally not > 10 years. • DCA’s guarantee fees are determined by a combination of risk factors: country risk; risk in the loan portfolio of the ultimate beneficiary of the g’tee; and risk in the ultimate beneficiary FI itself.

  9. Other Basic Attributes (cont.): Processing time: 6 – 12 months First step: develop a “Concept Paper” Beneficiaries must be privately owned lenders. Origination and utilization fees USAID does not review sub-loans. 9

  10. Other Basic Attributes (cont.): Not quite a “first call” guarantee Recoveries shared pro-rata Reporting semi-annual; done on-line 10

  11. Thembani International Guarantee Fund

  12. What is TIGF? Section 21 company established in 1996 Main investor is New York based NGO, Shared Interest. Mission: help improve access to finance for South Africa’s previously un-banked and under-banked majority population, thereby improving those communities economically and socially.

  13. Attributes of TIGF’s Guarantees: Guarantees loans to micro-finance institutions (MFIs) and rural, agricultural cooperatives (those loans are on lent to micro-enterprises and coop members.) Up to 75% of loans guaranteed Loan guarantees of up to 3 years TIGF assists borrowers to develop their projects and facilitates negotiations with the lenders.

  14. Attributes of TIGF’s Guarantees (cont.): • Guarantee fees of 3% p.a. on the amount guaranteed (planning increase to 5%). • TIGF plays a prominent role in monitoring the borrowers (regular site visits). • When necessary and appropriate, TIGF provides BDS and mentoring to borrowers. • As a result: good track record, i.e. no guarantees have been called in the last 8 years.

  15. Going Forward: • TIGF currently is drafting a revised strategy. • Has working relationships with several banks but is looking to add FI partners. • TIGF also looking for additional funding sources • Goal is to increase loan guarantee volume, but prudently.

  16. Loan Guarantee Benefits to Businesses: • Allow higher loan amounts • Strengthens the loan application • Less equity injection required- Can act as quasi-capital • Reduce / Shift transactional credit risk from borrow to guarantor • Additional form of cushion to protect the bank from risk • Additional set of analytical eyes on the transaction, both the bank and guarantor should review the underlying transactions. • Can reduce pricing to the borrower due to the reduced risk profile of the transaction • Longer repayment terms that may ultimately qualify a borrower for conventional commercial lending

  17. Loan Guarantee Benefits to Lenders: • Provides lenders with another tool to expand the loan portfolio while reducing risk exposure • Improves the economy and quality of life in the targeted areas, which in turn improves prospects for lender’s business. • Reduces concerns regarding collateral often found in smaller communities and historically disadvantaged borrowers • In some cases, e.g. TIGF, guarantor provides monitoring and mentoring services.

  18. Loan Guarantee Benefits to Lenders (cont.): Allow lenders to make loans above their normal lending limits Can increase profitability by selling the guaranteed portion of the loan on the secondary market. “Demonstration effect” - allows lenders to stretch their risk profiles while “testing the waters” in a particular kind of lending. Once a good repayment track record is established, the lender can make further such loans w/o guarantees, in a potentially profitable segment. 18

  19. THANK YOU

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