Credit Guarantee Schemes: Conceptual Frame

This is the first document in a series of papers analyzing design features, the problem of asymmetric information and case studies within the field of credit guarantee schemes. Its objective is to provide a theoretical background about the different kinds of credit guarantee schemes, arguments for and against credit guarantees and some considerations on these programs.

The paper outlines a number of different credit guarantee schemes such as:

• Direct and indirect guarantees;
• Individual and portfolio models;
• Funded and unfunded schemes;
• Open and targeted schemes;
• Ex-ante and ex-post schemes;
• the intermediary model.

Under arguments in favor of credit guarantee schemes the paper states that CGSs:

• Provide the guarantees necessary for borrowers to secure the loan;
• Can reduce the lender's reluctance and perception of risk so as not to negatively affect access to credit;
• Are especially useful for first time borrowers, who are often turned down by lenders due to the lack of a financial record;
• May help produce additionality.

Under arguments against credit guarantee schemes, the paper states that:

• CGS programmes are more common in industrialized countries and lenders in developing countries have different characteristics than lenders in developed countries;
• Detractors argue that CGSs do not produce additionality;
• CGS programs are costly and not sustainable over time, as they tend to consume their capital quickly;
• Due to experience and knowledge of their clients, lenders are better at evaluating risk than CGS;
• Moral hazard and adverse selection are often associated with CGS;
• There is no reason to believe that lenders want a third party guarantee.

The paper concludes that several issues need to be taken into account these include:

• Impact on the guarantor, the lender and the borrower;
• Financial sector development, inflaion and local networks.