Indirect Microcredit Programs : The Use and Potential of Guarantees in Microcredit

The aim of the paper is to introduce and clarify the financial and non-financial characteristics of microcredit programs based on a credit guarantee. We call these programs, which are widespread in Europe, Indirect Microcredit Programs (IMPs) because they use an indirect microcredit model. We discuss their differences with respect to the traditional direct microcredit model (i.e. the model pioneered by Grameen Bank) and credit guarantee schemes for SMEs. We identify and discuss the three key financial variables of IMPs: the guarantee fund amount, the coverage ratio, and the multiplier between the guarantee fund and the amount of loans that the banks participating in the program agree to disburse. We introduce a theoretical model to estimate the value of IMPs in terms of loan disbursements. With this model, we draw indications for the design and management of IMPs. First, we show that the guarantee fund amount, the coverage ratio, and the default rate determine the maximum amount of loans that an IMP can disburse. Second, we demonstrate that higher multipliers accelerate the loan disbursements, but do not increase the maximum amount that an IMP can disburse. Finally we clarify that, through the multiplier, an IMP can increase the real value of the loan disbursements and can accelerate the loan disbursements. We discuss the definition of an optimal multiplier for a given IMP, the limitations of this microcredit model, and opportunities for further research. Finally, we note that our results may also apply to credit guarantee schemes for SMEs and to developing countries