Microfinance Credit Guarantee Facility (MCGF)

This paper outlines provisions of the Microfinance Credit Guarantee Facility (MGF) provided by the State Bank of Pakistan (SBP).

The MCGF aims to incentivize the channeling of funds to the microfinance sector. Under the MCGF:

• Banks and development financial institutions (DFIs) will extend credit facilities to microfinance banks (MFBs) and MFls, thereby easing credit constraints;
• Formal financial institutions will build links with microborrowers, and this familiarity will help them graduate to the next level;
• SBP’s Banking Services Corporation will provide partial guarantees to cover the principal amount in case of default to cover the first loss;
• Guarantees will be limited to a certain percentage of the principal amount, and will aim to minimize perceived risk premium; 
• Regulatory issues that limit unsecured lending by banks and DFIs will be resolved, and loans to MFBs/MFIs will have to comply with banking regulations.

The lending institution will provide financing after carrying out proper due diligence of the MFB/MFI, keeping in view the risk profile of the borrower as well as its own credit and lending policies.