Microfinance Guarantees : A Basic Primer and Review of Experiences in Latin America and the Caribbean

The purpose of this report is to provide an overview of current practice in microfinance guarantees, highlighting some of the lessons learned to date and issues to be addressed in the future. The paper?s annexes provide a partial inventory of guarantee funds operating in Latin America and the Caribbean. The study focuses primarily on institutional guarantees, due to the increasing use of the models for microfinance, the emerging consensus in the field that this is the most appropriate guarantee mechanism to support microenterprise lending, and the possibility that this mechanism may be more sustainable than other types of guarantees. More traditional models, such as individual guarantees for small business loans or loan portfolio guarantees to banks serving the small business sector, will be discussed only briefly. A strong debate has developed around the issue of sustainability for all types of guarantee schemes, including intermediary guarantees. Should guarantee funds be sustainable, both in the economic and financial sense? In what cases and for how long are subsidies justifiable? While some argue that guarantees of any type are unjustifiable since they are more expensive than other measures designed to solve the same problems (i.e. information asymmetry or regulatory barriers), others concede that when used as a short-term measure, guarantees are the best proven way to open up capital markets to nonbank microfinance institutions. Both camps agree that not enough hard data is available about the costs and benefits of guarantee funds to make a sound judgment either way. Two brief case studies in this paper address issues related to the cost structure, sustainability, and management of intermediary guarantee funds