guaranteeing a sustainable future - fast facility report.pdf · guaranteeing a sustainable future:...

Guaranteeing a Sustainable Future: An Overview of Guarantee Facilities and their Relevance to Sustainable Trade Finance

Authors:

Jason Potts Chantelle Reynolds Guus Rozendaal

Finance Alliance for Sustainable Trade

1255 University Suite 500

Montreal, QC H3B 3V8

http://www.fastinternational.org/

This work by the Finance Alliance for Sustainable Trade is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 2.5 Canada License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/2.5/ca/ or send a letter to the Creative Commons, 171 2nd St., Suite 300, San Francisco, California, 94105, USA to request a copy.

Table of Contents I Introduction ....................................................................................................... 1TheFinancingGapasaKeyBarriertotheProsperityofSSMEs ................................................... 1TheRoleoftheFinanceAllianceforSustainableTrade ............................................................ 2OutlineofReport ...................................................................................................... 3

II The Need for Guarantee Schemes as a Risk Mitigation Opportunity .................. 3AdvantagesofGuaranteeSchemesforAlternativeLenders ........................................................ 3DifferentTypesofGuaranteeSchemes ............................................................................... 5

III Overview of Existing Guarantees..................................................................... 8Introduction............................................................................................................ 8

IV Analysis of the Guarantees with respect to the needs of international sustainable SME lenders ..................................................................................... 11Summary/InterpretationofReviewedGuaranteeschemes .......................................................11OverviewEligibilityandotherConstraintsforInternationalLendersProvidingSustainableSMEFinance...20

V Summary and Recommendations ..................................................................... 22

VI Appendices..................................................................................................... 24Appendix A. Further examples of guarantees .........................................................24Appendix B. Guarantee survey table.....................................................................29Appendix C. Guarantee Directory for Lenders ........................................................29Appendix D. Guarantee Directory for Producers .....................................................29

28 Jan 2011 - r2 Cristina Larrea

F I N A N C E A L L I A N C E F O R S U S T A I N A B L E T R A D E Building livelihoods through sustainable trade finance.

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IIntroduction

TheFinancingGapasaKeyBarriertotheProsperityofSSMEs

In2002,theUnitedNationsConferenceonTradeandDevelopmentnotedthat“…thecommitmenttoreducing

extremepovertybyhalfbytheyear2015necessarilyimpliesattentiontotheprimarycommodityproblem…”1referring

tothefactthatanestimated2.5billionoftheworld’sruralpoordependuponcommoditiesfortheirlivelihoods. The

assessmentthatthealleviationofpovertyindevelopingcountriesdirectlydependsontheviabilityofthecommodity

sectoriswidelyacceptedamongeconomistsanddevelopmentalorganizations.However,thisgrowthopportunityhas

beenimpededbyadeepeningfinancinggapthatpreventsproducerstoexpandtheirbusiness.“Thecommoditysector,

stillthedriverofmostdevelopingeconomies,isstarvedofcredit,”concludestheUNCTADthreeyearslater.2

Atthesametime,theglobalmarketforsustainableproductionhasgrownrapidlyinrecentyears.Sustainable

production, as defined by globally recognized standards systems such as Fair Trade, Organic, Global gap, Forest

Stewardship Council, to name a but a few, has grown at between 15% and 100%per annum over the past decade

depending on the sector and country. Thismarket growth represents amajor opportunity for developing country

producers and SMEs, who are seeking to improve their revenue base, as well as the stability of their trading

relationships.3

Access to sustainablemarkets for conventional producers is constrained, however, by the limited access to

finance. Inorder tosecureadoptanddemonstratecompliancewithspecific sustainability standards,producersand

theirorganizationsmust first investsignificantresourcesup‐front. Often this investment isnotpossible forwantof

savingsand/oraccesstofinance.

Small‐scale producers are typically too poor with insufficient savings and collateral to be regarded as

“bankable”bylocalfinancialinstitutions,withmostcommercialbanksshowingverylimitedinterestinprovidingtheir

servicestothisbusinessgroup.TheincreasedneedforfinancingacrossthesustainableSMEsectorplacessustainable

SMEs in aparticularly challengingpositiongiven the traditionalunderprovisionof finance to the SME sector in the

developmentworldmoregenerally.4EvenwhereanSMEdoesmanagetobecomeformallycertifiedorrecognizedas

compliant, the regular maintenance costs of sustainable production can become unviable, in the absence of the

appropriatetradeandlong‐termfinancing.

Thegrowthofsustainablemarkets,intheabsenceofacorrespondinggrowthinaccesstofinanceamongSMEs,

has lead toagrowing financial gap. Basedon itsmost conservativeestimates,FASTestimates the financinggap for

sustainableagriculturetobeontheorderof$9billionUSDperannumglobally. Inresponsetothisgrowinggap,as

1UNCTAD”LDCReport2002”2 UNCTAD “ENHANCING COMMODITY FINANCING AND MANAGING SHOCKS IN AFRICA”(http://r0.unctad.org/infocomm/comm_docs/docs/official/enAUfinancee.pdf)3Numerouscasestudiesrevealthepositivepotentialofsustainabilitylabelingandcertificationinitiatives.SeeHenson,Spenceretcal.“DoFreshProduceExportersinSub‐SaharanAfricaBenefitfromGlobalGapCertification?”IFERGWorkingPaperNo.2FTUniversityofGuelph,2009.SeealsoGiovannucci,Daniele.“OrganicAgricultureandPovertyReductioninAsia:ChinaandIndiaFocus”IFADOfficeofEvaluation:Rome,2005;Meeta,Punjabi“GrapeExportswithGlobalGapCertification:CaseStudyofMahindraandMahindraInitiativeinIndia”FAO,2008.4Beck,T.andDemirgüç‐Kunt,A.,2006.SmallandMedium‐SizeEnterprises:AccesstoFinanceasaGrowthConstraint.JournalofBankingandFinance30,2931–2943.



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well as the growing integration of sustainable development objectiveswithin the financial sectormore generally, a

fledglingsectorof“sustainablelenders”hasbeguntotakeshapethroughtheestablishmentofanumberoffundsand

institutionsdedicatedtothefinancingofcertifiedsustainableproduction.5Thenumberofsustainablelenders,lending

directlytoproducergroups indevelopingcountries,nowexceeds20withestimated lendable funds(directedalmost

exclusively at sustainable trade finance) estimated atUSD150‐155million excludingChina and India. Although this

group of socially oriented lenders represents a sea‐change in the way the lending sector can service sustainable

production,currentratesoflendingbarelytouchthefinancinggapforsustainableproduction.

Perceptionsof riskhave, of course, been themainobstacle to lending in to SSME commodity organizations.

Andwhile theratesofrepaymentwithinthesustainable trade financesectorhavebeenexceptionallyhigh(typically

well above95%), thesector suffers fromthestigma thataccompanyagriculturalSMEsmoregenerally. Recognizing

this,membersofthesustainabletradefinancecommunityhavelongpromotedtheuseofguaranteefacilitiesdedicated

to sustainable production that will allow investors and lenders overcome the traditional stigma associated with

commodity‐based SMEs allowing the development of the experience and infrastructure to service this sectormore

effectively.

Guarantees offer a vehicle for spreading the risk across new and innovative investments across a wider

investmentpool.Dependingonthenatureandpurposeoftheguaranteesystem,guaranteesmaybeusedtopromote

public objectives such as poverty reduction and economic stability or to stimulate the growth of new market

development where uncertainty operates as an obstacle to commercial growth. The logic for using guarantees to

expandthereachofsustainabletradefinancestemsfrombothpotentialmotivations—bothinpromotingsustainable

developmentandmarketdevelopment.However,thusfar,therehasbeenverylittleinthewayofexplicitrecognition

ofthepotentialrelationshipbetweenguaranteemechanismsandsustainabletradefinance.

This report, by providing an overview of the logic behind, and the status of the most relevant guarantee

facilities serving commodity finance, aims to provide a basis for understanding the potential linkages between

sustainabletradefinanceandguaranteemechanisms,aswellasforexploringtheopportunitiesforleveragingexisting

guaranteesasvehiclesforexpandingaccesstofinanceforsustainableproduction.

TheRoleoftheFinanceAllianceforSustainableTrade

TheFinanceAllianceforSustainableTrade(FAST)asaninternational,memberdriven,non‐profitorganization,

represents those financial institutionsandproducerorganizationsdedicated tobring sustainablyproducedgoods to

market. Members include Full Members, socially oriented and alternative lending institutions in the North and

AssociateMembers, commercial lenders, SSME producer organizations, development focused institutions and other

stakeholders in the agricultural commodities supply chain committed to promote sustainable production and trade

withintheirrespectivecapacities.FASTbringstogetherthisgroupofstakeholdersinthesustainabletradeindustryto

workcollectivelyonaglobal levelat increasing thenumberofproducers indevelopingnations thatcansuccessfully

5TheFinanceAllianceforSustainableTradewasfoundedinlightofthegrowinginterestamongfinancialinstitutionsinexplicitlyintegratingsustainableproductionwithintheirlendingportfolios.Thesociallendingcommunity(lendinginstitutionswithexplicitsocialorganizationalgoals,missionsandobjectives.)hasbeenamajorforceinbuildingthemomentumbehindthesecommitments.



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access affordable trade finance. FAST’smain objective is to bridge the “financing gap” by taking on a project based

approachprovidingsolutionsforthemultidimensionalproblemofthegrowinginaccessibilityoffinance.

Overthecourseofconsultationswithitsfoundingmembersin2007,FASTidentifiedaccesstoguaranteesasa

keyareaofinterestandopportunityforallstakeholdersinthesustainabletradefinancesector.Aspartofit’sfounding

mandate,FASThas commissioned this reportwithaview toboth informing itsmembershipof the current statesof

guaranteeopportunities,whilealsoprovidingaspringboardforthedevelopmentofFAST’sownstrategicsupportfor

ensuringaccesstoimprovedriskmitigationopportunitiesforitsmembership.6

OutlineofReport

The purpose of this report is to provide a common starting point for FAST stakeholders and members in

understandingthepotentialopportunitiesandobstaclestotheutilizationofthirdpartyriskmitigationinstrumentsin

the delivery of sustainable trade finance. Section II of this report takes the first step in answering this question by

describing the logicandoperationof guarantee schemes ingeneral aswell as technicaldifferencesbetweenspecific

typesofguaranteesobservedaroundtheworld.Inthissection,particularattentionisgiventotheincentivestructures

ofthevariousschemessincetheseoftenprovidelightonthereasonsforthedifferentoutcomestheyachieve.Section

IIIoffersaconcisedirectoryofexistingschemesaroundtheworldpayingspecialattentiontooperationalconstraints

thatmightaffecteligibilityforsociallyorientedlenders.SectionIVprovidesananalysisofthepotentialchallengesand

opportunities facingsustainable lenders insecuringaccess toguarantee fromaselectgroupof the“mostpromising”

guarantee mechanisms identified globally. Finally, by comparing the needs and characteristics of socially‐oriented

lendersandthesupplyofguaranteeschemes.SectionVgivesrecommendationsandoutlinespossiblestepsthatcanbe

doneinordertoimprovethestatusquo.Throughoutthedocument,wherenototherwisespecified,thecurrencyisUS

dollars.

IITheNeedforGuaranteeSchemesasaRiskMitigationOpportunity

AdvantagesofGuaranteeSchemesforAlternativeLenders

At themostbasic levelguarantees “aim tooffset situations inwhichborrowerswithanequalprobabilityof

default have an unequal probability of obtaining credit since some have insufficient collateral.” 7 In other words,

guaranteeschemestrytoovercomesomesortofmissinginsuranceagainstdefault(e.g.collateral)bybringinginathird

partyguaranteefortheloanthataperspectiveborrowermightreceive.

Fromtheperspectiveofthelender,guaranteescanbestbeunderstoodasariskmitigatingorrisk‐diversifying

instrument. The latter becomes clear when it comes to a regional or sector specific focus of a lender. Economic

difficulties occurring in one country within a commodity sector due to, for instance, climatic catastrophes, will

6Thisreporthasbeenpreparedundertheauspicesofthe“GuaranteeFacilityProject”whichoperatesasoneofthefourfoundingprojectsofFAST.7AnkeGreen“CreditGuaranteeSchemesforSmallEnterprises:AnEffectiveInstrumenttoPromotePrivateSector‐LedGrowth?”(http://www.unido.org/fileadmin/import/18223_PSDseries10.pdf)



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dramaticallyincreasethedefaultofdebtorsintheportfolioifthelender’sinvestmentfocusislaidonexactlythesame

regionandsector.Guaranteeschemesallowtransferringrisksfromalendertotheguarantorsincethelatternormally

hasbetteropportunitiestodiversifyrisk(eitheracrossdifferentsectorsorregions).

Guaranteestakeintoaccountthatthecaseofperfectinformationalsymmetry,e.g.Whereallpartieshaveequal

knowledgeofallrelevantinformation,infinancialmarketsispracticallyveryscarce.Inacontextwhereasymmetryis

thenormratherthantheexception,guaranteescanmakeeconomicsensebybringinginagreaterpoolofinformation

intotheriskmanagementequation.Twowaysthatguaranteescantakeadvantageoftheseinformationassymetriesto

promoteoveralleconomicefficiencyinclude:

• Whereaguarantorhasbetter informationabout theprobabilityof interestandprincipalrepayment

thanthe lender. Inthiscase, the informationaladvantagesof theguarantoroverthe lendercanhelp

borrowerstoobtainaloandespitethefactthatlendercannotsufficientlyestimatethefuturereturnof

aproject.8

• Whereguarantorsareabletoindirectlysupportcertainregionsorsectorsthat,accordingtotheirown

analysis,wouldoperatemoreefficientlywithincreasedaccesstofinance.Forinstance,specialtypesof

guaranteessuchastheportfolioguaranteeenabletheguarantortosupportanidentifiedlenderwitha

special social or environmental profile giving credit to unidentified borrowers. By allowing a

guarantor topromoteaccess to financeacrossa sector,withoutactivelynegotiatingandmonitoring

several separated loancontracts, loanguaranteescan facilitate sectorgrowthat reducedcost to the

economy.

Oneoftheunderlyinggoalsbehindguaranteesistocreatealeveloftrustbetweenfinancialintermediariesandborrowers.Throughtheguaranteeprocess,newrelationshipscanbeestablishedwhich,aftertime,havethepotentialofsurvivingwithouttheinvolvementoftheguaranteemechanism.Astheabilityoftheclienttorepayisdemonstratedto the banking community, more banks will be more likely to offer funds, closing the financing gap and allowingguaranteestobescaledback.

By closing information gaps, balancing risk and reducing information asymmetries, guarantee schemes canplayacriticalroleinimprovingmarketefficiency,itselfoneofthecoreprinciplesofsustainabledevelopment.Totheextent thatsuch facilitiesare targetedtowardsbusinesseswithdirectcommitments topovertyalleviationandsocialandenvironmentalproductionpractices,guaranteeshavethepotentialtostimulateprogressalongallthreepillarsofsustainabledevelopmentsimultaneously,offeringoneofthemostdirectmeansforfacilitatingtheimplementationofaholisticapproachtosustainabledevelopment.

Guaranteefundsareappealingbothintheoryandinpracticeastheyarethemostfrequentlyusedtoolswithingovernment programswhen it comes to SME financing.9 Guarantees tend to bemore effective and less costly thandirectlendingasgovernmentscanlimittheirinvolvementinownershipandmanagementwhiletargetingthesectorsorregionstheywouldliketoaffect.Banksindevelopinganddevelopednationsarealsomorelikelytofavorgovernmentguaranteeprogramsoverothermeasureslikeinterestsubsidiesordirectcredit.

Notwithstanding the potential of guarantee schemes, they tend to be underutilized by the private sector infacilitatingfinance.Tothispoint,a2008WorldBankstudyconcluded:

8ThorstenBeck,LeoraF.Klapper,JuanCarlosMendoza“TheTypologyofPartialCreditGuaranteeFundsaroundtheWorld”9Beck,T.,DemirgüçKunt,A.,andSoledadMartínezPería,M.,2008.BankFinancingforSMEsaroundtheWorldBankPolicyResearchWorkingPaper4785



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“We do find that small firms use significantly more informal finance [supported by guarantees] than largefirms.However,financingfromsuchsourcesislimited.Thus,theuseofinformalfinancingdoeslittletorelaxfinancialconstraints facedbysmall firms indevelopingcountries.”10 In thecountriesreviewed in thatstudy,“thealternativesourcesoffinanceeitherdonotsignificantlyfillthegap,orinthecaseoftradecredit,arelessprevalent.”AnotherWorldBankstudyin2005surveyed4000enterprisesin54countries,80%ofwhichweresmalland

medium sized enterprises.11 Their study found financial obstacles to growth to be statistically and numericallysignificant.Specificsignificantobstacles toSMEs includedcollateralrequirements,bankpaperwork/bureaucracy, theneedof special connectionswithbanks, banks lackingmoney to lendandaccess to financing for leasingequipment.Highinterestrates,arguablyasymptomofthevariousotherobstacles,wereasignificantobstacletoeverysizeoffirm,whilethesmallestfirmswerealsoconstrainedbyalackofaccesstospecificexportfinance.

Despite the multitude of literature outlining the difficulties of SMEs to secure financing, guaranteedevelopmenthasbeen limited, especially in theprivate sector.Whenguaranteeshavebeen implemented, theyhavetendedtobearesultofgovernment initiativeandpublic fundstosupportaparticular industryorregion.Theuseofpublicfundsforsuchprogramscreatesincentivestokeepfundswithinnationalborders.Thus,governmentprogramstendtopartnerwithlocalfinancial institutions,makingitdifficultforinternational lenderstotakeadvantageofsuchmechanisms.

Theremainderofthisreportisdedicatedtoidentifyingguaranteefacilities,whichmaybeapplicabletolendersactive in providing sustainable trade finance as well as to an exploration of alternative models that might moreeffectivelypromotefinanceforsustainabledevelopmentthroughimprovedaccessforlenderswithaparticularinterestinpromotingsustainabledevelopment.

DifferentTypesofGuaranteeSchemes12

Guaranteeschemesarepromisestopayacertainamountofmoneyand/orapercentageofaloantolendersinthe

caseofaborrower’sdefault,thusprovidingaformofriskinsuranceforlendinginstitutions.Ingeneral,guaranteestendtocomeinthreemainforms—Loan,PortfolioandPortableGuarantees:

10Beck,T.,Demirgüç‐Kunt,A.,andMaksimovic,V.,2008.FinancingPatternsaroundtheWorld:AreSmallFirmsDifferent?JournalofFinancialEconomics89,467‐8711Beck,T.,Demirgüç‐Kunt,A.,andMaksimovic,V.,2005.FinancialandLegalConstraintstoFirmGrowth:DoesFirmSizeMatter?JournalofFinance60,137‐177.12AdaptedfromUSAID,http://www.usaid.gov/our_work/economic_growth_and_trade/development_credit/types_of_guarantees.html



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1. Loan(ortransactional)guarantee:

A loan guarantee simultaneously identifiesthe borrower and lender for a one‐timetransaction. This type of guarantee has thehighesttransactioncosts,butalsoensuresthegreatest consistency between the guarantor’sobjectives and the financing arrangement.Given the high transaction costs, this type ofguarantee if particularly suited for long‐termloansand/orlarge‐scaleprojectfinancing.Thelendersubmitsthefundstotheborrower,the repayment of which is guaranteed by athirdparty.

2. Portfolioguarantee:

Aportfolioguaranteeidentifiesaspecificlenderforaseriesofloanstounspecifiedborrowersbasedonasetof agreed parameters for applying the guarantee. The portfolio guarantee offers ameans for reducing thetransaction costs associated with the management of guarantees, while still providing a direct vehicle forensuring that actual lending meets the priorities of the guarantor (through the eligibility parameters).Portfolio guarantees are particularly suited to the SME sector and have the benefit of allowing lenders toimplement a riskdiversification strategyacross the guaranteemechanism. Theportfolio guarantee ismoresuited to smaller‐scale lending butmay also bemore susceptible to generatingmarket distortions if/whensimilarlysituatedlendersdononothaveequalaccesstotheguaranteemechanism.

3. Portableguarantee:

Unidentified Borrower



Guarantee

Identified Borrower

Identified Lender

Guarantee

Identified Lender



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Aportableguaranteeidentifiesaspecificborrowerwhocancomparecompetingloantermsandoffersfromvarious lenders. Borrowers become more attractive and, by virtue of the guarantee, have enhancedopportunitiestocreatearelationshipwithlendinginstitutions.Themainadvantageoftheportableguaranteeisitsabilitytolinktheguaranteeprocesswithspecificresultsforaspecificactor.Thesearetherarestformofguaranteehoweverandare,aswithloanguarantees,challengedbyhightransactioncosts.13.

Variousformsofriskcoveragemaybespecifiedbytheguarantorsuchaspoliticalinstability,currencytransfer

restriction, natural disaster or breach of contract among others. The amount of coverage varies from instrument toinstrument but tends to range between 50% and 100%. Coverage rates are determined by balancing the need togenerateincentivesand/orcapacityforlendingwiththepotentialforcreatingmoralhazardproblems.Instrikingthisbalance a guarantor will regularly limit the duration and applicability of a guarantee to different sectors, regions,businesssizesorsocial,political,oreconomicgoalssuchasthepromotionofwomen.SustainableSMEFinanceandGuaranteeSchemes

“Sustainable SME Finance” refers to the group of financial service products designed to specifically service

sustainableSME’s14serviceprovidersoperatinginthesphereofsustainableSMEfinancemaycomefromavarietyofbackgrounds and geographic locations. The social lending sector, consisting of financial institutionswith a specificsocial mission, and often fueled by the social investment community, have been a particularly active force in thedevelopment of sustainable SME financial products and services. As more traditional commercial players adoptsustainabledevelopmentobjectivesaspartof theiroperatingmissions, therearealsoagrowingnumberofproductsandservicesexplicitlytailoredtosustainableSMEs.Althoughthesectorispoisedforrapidgrowth,thefactthatitisarelativelynewarea,working fromaplatformofnew financingmodelsandnetworks, exposesproviders toahostofuncertainties.Guarantees,bysharingaportionoftheriskburden,offeraparticularlyattractiveoptiontoinstitutionsthat are constrained by these uncertainties but which otherwise are interested in expanding their activity in thesustainableSMEsector.

Financial institutions servicing the sustainable SME sector can take any shape, size or form. However, thesociallendingsector,whichhastakenakeeninterestinpromotingthissector,consistsofanumberofinstitutionswithsimilarprofilesand face similar challengeswhen trying toaccessguarantees for theiractivities. Althoughany long‐termvision for the expansion of sustainable SME financemust look beyond the characteristics of the social lending

13Inourreviewwewereunabletoidentifyanyguaranteefacilitiesthatexplicitlyspecializedinprovidingportableguarantees.14Forthepurposeofthisstudy,“sustainableSME’s”aredefinedasSMEscompliantwithoneoranotherrecognizedglobalvoluntarysustainabilitystandard.Examplesinclude,FairTrade,RainforestAlliance,ForestStewardshipCouncil,Organiccertificationetc.

Identified Borrower

Unidentified Lender

Guarantee



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sector, it is nevertheless also critical that the needs of these institutions be considered in the elaboration of riskmitigationopportunitieslinkedtoimprovingaccesstocreditforsustainableSMEs.

SomeofthecorecommoncharacteristicsdefiningsustainableSMEsectoratpresentinclude:• Leadinginstitutionsservingthesectortendtobesmallinsize:

o The total lending base of the sustainable trade finance sector for SMEs identified as ofDecember2009wasapproximately$150millionUSD fromthesustainableoriented lendinginstitutions15.TheportfoliorangeoffinancialserviceprovidersactiveinthesustainabletradefinancesectorforSMEsis$2millionto$56million,withanaverageloansizeof$180,000.16Basedonthiscontext,portfolioguaranteesservingthesectorprobablyneedtorangebetween$1millionto$10milliontobeusefulforthesector.

• DriversinthesustainabletradefinancesectorforSMEstypicallyoperateinternationallyo Thevastmajorityof those identifiedasoperating in thesustainable trade financesector for

SMEsoperateinmorethanonecountry.17• Constraintsassociatedwithidentifyingviable“sustainable”SMEclients

o Institutions with a focus on providing finance to sustainable SMEs are often limited byconditionson thegrounddetermining theabilityof localSMEs toactuallyadoptrecognizedsustainablepractices.Ahostofconstraints,beyondaccesstofinanceitself,canlimittherangeofcountriesandregionswheresuchlendingispracticallyviableorevenpossible.HistoricallythishasledtogreaterlendingactivityinLatinAmericathanAfricaandAsia.

Inouranalysisofwaysforwardforstrengtheningtheroleofriskmitigationfacilitiestosupporttheexpansion

ofthesectorwetakethesebasiccharacteristicsassignpoststhatneedtobeaddressedinordertoimproveaccesstosuchfacilities.

IIIOverviewofExistingGuarantees

Introduction

Attheoutset, it isimportanttonotethatexperiencesintheuseofguaranteeshasbeenmixed. Somefundshave

playedaproactiveroleinexpandingaccesstocreditwithextremelylowdefaultrateswhileothershavesuccumbedtodeepmoralhazardproblemsandhighdefault rates. Thedegreeofgovernment involvement, thechoiceof coverageratio and the distinction between guaranteeing portfolios rather than the content of individual loans have beenidentified as key variables in determining the different success rates among funds. A World Bank study notes apositivecorrelationbetweengovernmentinvolvementincreditriskassessmentanddefaultrates.18A2003reportbyUNIDO concludes that the ideal coverage rate formaximizing the financial stimuluswhileminimizing default rates

15SociallyorientedlendersisatermthatrelatestobothEuropeanandNorthAmericanlendersandlocalcommercialbanksandcreditinstitutionsacrossthedevelopingworld,thesegroupshaveexplicitcommitmentstoworkwithSMEproducergroupstofillthefinancinggap.16BasedonFASTestimates17BasedonFASTestimates18Ibid.



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potentiallyassociatedwithguaranteefacilitiesrangesfrombetween60%to78%ofriskcoverage.19Ourreviewdoesnotconsiderthepotentialsustainabilityofthevariousfundsfromthisperspective,butratherseekstodeterminewhenandwhereselectfundsmightbeabletoservethesustainableSMEfinancecommunity.Nevertheless,itisimportanttokeepinmindthattheeffectivenessofanygivenguaranteefacilityinactuallypromotinginvestmentinsustainableSMEfinancemaydependonvariablesotherthanthoserelatedtotheaccessandadministrativeissuesoutlinedbelow.20

Ourreviewexamined119guaranteefundsin39countries.21Theprimaryobjectiveoftheanalysiswastoidentifywhat guarantee facilities currently in existence might be able to offer services the financial institutions currentlyleading investment in the sustainable trade finance sector for SMEs in the developing world. The 119 guaranteefacilitiesanalyzedwereselectedontheprimafacieeligibilityofloanstoSMEsintheagriculturalsector.Thishighlevelfilterwasappliedameansofnarrowingdownthebroaderrangeofguaranteefacilitiesinexistencetothosewiththemost probable capacity of serving the sustainable SME finance sector given its current concentration in agriculturalSMEs. Of the 119 facilities identified as potential serving Agricultural SMEs, 7 were operated as global facilitiesofferingguaranteesacrossmultipleregions.Another7wereoperatedasregionalguarantees(5operatinginAfricaand2operatinginLatinAmerica).Theremaining105facilitieswererestrictedtoprovidingguaranteesrelatedtocountryspecificloans.

Among the105countryspecific funds,33were located inAfrica (across18countries);63were located inLatinAmerica(across17countries)and6inAsia(across1country).Thevastmajorityoftheloansoperatingonacountryspecificbasisareoperatedasloanportfolioguarantees.Theglobalandregionalfundstypicallyservedavarietyofriskmitigationservicesrangingfromloanguarantees;tobondguaranteesandportfolioguarantees. Thevastmajorityofcountry specific funds focus on the provision of portfolio guarantees. Although there are notable exceptions, themajorityoftheguaranteefacilitiesoffercoveragebetween50%and75%.Thesizeofloansguaranteedbythevariousfundsobservedrangesfrom$5,000to$180million.

Fromabirdseyeperspective, thevarietyofdifferent fundsand the rangeofdifferent countries forwhich someform of agricultural/SME guarantee is available, would seem to suggest a land of opportunity for sustainable SMEfinancethroughoutthedevelopingworld.However,virtuallyallofthein‐countryfundsreviewedareestablishedwitha restricted number of pre‐identified local financial institutions as eligible for the guarantee program. Where themajority of institutions currently offering explicit service to the sustainable SME finance sector are operating on aglobal scale and do not have local operations spread throughout the world, the potential for the sustainable SMEfinancesectortoaccessthemanycountryspecificguaranteesisthereforeextremelylimited.

Basedonthispracticalreality,weselectedasubsetoftheglobalandregionalfundsforamoredetailedanalysisofthe potential eligibility for international institutions with the characteristics of those leading the sustainable SMEfinancesector.The12fundsinTable1representthesubsetoffundswithpotentialeligibilityforinternationallybasedsustainableSMElenders.

19“Experiencehasshownthatguaranteecoverageof60‐80%oftheloanisadvisable.Itprovidesincentivestothelendertoproperlyassesstheriskofloansanddoesnotdeterthemfromparticipatinginthescheme.Coverageforportfolioguaranteesshouldalwaysbelowerthanforindividualguaranteessincetheschemeisnotdirectlyinvolvedinscreeningtheborrowers.Also,theguaranteeamountmayvaryforspecificcategoriesoffirmswhichgovernmentswanttopromote.”SeeGreen,Anke,WorkingPaperNo.10,“CreditGuaranteeSchemesforSmallEnterprises:AnEffectiveInstrumenttoPromotePrivateSector‐LedGrowth?”UnitedNationsIndustrialDevelopmentOrganization(UNIDO),August2003.20Asageneralrule,itisunderstoodthatriskassessmentandcoveragedecisionsarebestmadebythepartywiththemostinformationabouttheborrower.Ourreviewofselectfundsprovidesinstanceswherethisruleofthumbhasbeencorroboratedorconversely,successfullycircumventedwithcreativeguaranteedesign(ex.Rabobank).Ingeneral,theWorldBankobservesthatcoverageratiosofmanyguaranteefacilities“donotseemtobesetinlinewithinformationaladvantagesorincentivestructures,”andbelievemorerisk‐managementpracticesshouldbeinplace.21OurstudydrawsfromandbuildsontheWorldBankStudy,“TheTypologyofPartialCreditGuaranteeFundsAroundtheWorld.”



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NameofFundRegionalFocus Industry

ForInternatio‐nalSMElenders? TypeofGuarantee

Min/max(approxUSD)

Coverage% Duration

GLOBAL

RaboSustainableAgricultureGuaranteeFund Global Various No22 Partialcreditguarantee 0.5‐1million Upto90

3–4years

USAID‐DevelopmentCreditAuthority Global Various Yes

Portfolio/Loan/Bond/Portable

1millionto43million23 Upto50 Various

SIP(SmallInvestmentProgram)‐throughMIGA Global

Finance,agribusiness,manufacturingandservice Yes

Currencytransferrestriction,expropriation,andwar,terrorismandcivildisturbance Max10million Various

Mica’sregularguaranteeprogram Global

Newcross‐borderinvestments Yes

Seeaboveandbreachofcontract Max180million 90–95 Various

ARIZ/AFD Global MSME Yes ‘Singledeal’andportfolio

'Singledeal':$3.3million;portfolio:$7,000to$210,000 Upto50

SD:2‐12years;P:1‐5years

Proparco Global Various Yes

Guarantees:bond,bankloan,localcurrencyloan,liquidityofmutualfunds,investmentfundsandlocalsavingsmobilizationfunds $2.8‐$140million 50

AFRICA FondsAfricaindeGarantieetdeCooperationEconomique(FAGACE) WestArica Various Yes

Ave.$2.6million

Upto80

AllianceforaGreenRevolutioninAfrica(AGRA) Africa

Smallholderfarming,water Yes Portfolioguarantee

GARI‐FondsdeGarantiedesInvestissementsenAfriquedel'Ouest WestAfrica

Manufacturing,publicworks,agro‐industry,transport,fishing,tourism,mining,agriculture,productivesectorservices Yes

Mediumandlong‐termcreditguarantee;guaranteeofoperationalresourcefunding;counter‐guarantee Min$110,000 50

FondsdeSolidarityAfricain(FSA)

FrancophoneAfrica Various Yes Max$43,000 50–65

AgriculturalCreditGuaranteeSchemeFund Nigeria Various Yes Transactionguarantee

Max20,000(w/outtangiblesecurities),1million(ind'lborrowers),and10million(cooperativesandcorporations) Upto75

LATINAMERICA ProjectoCAMBIO Honduras,

Guatemala,El

Salvador,

CostaRica,

Nicaragua

Sustainableagro‐

industries

Yes Max$3million 40–80 Max10

years

22Dedicatedtolocallenders,butoneofthefewfundswithaspecificfocusonguaranteeingloansforsustainableproduction‐hencetheirinclusioninthislist.23Actualrangeofexistingguarantees,notanexplicitMax/Min.



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Table 1 Condensed table of guarantee facilities which may be accessible to lenders serving the sustainable trade finance sector.

IV Analysis of the Guarantees with respect to the needs of international

sustainableSMElenders

Summary/InterpretationofReviewedGuaranteeschemes

GlobalFunds

RaboSustainableAgricultureGuaranteeFund24

Type:PartialcreditguaranteeasariskmitigatinginstrumentGeography:SouthAmerica,AfricaandAsiaCoverage$:$500,000–$1,000,000(amountsabovethemaximumcanbesyndicated)Coverage%:upto90Duration:3‐4yeartermsDefaultRate:0%RequirementsandCharacteristics:Mustbe involved insustainableagriculture.Thegoal is for theguaranteetobescaled back over a three to four‐year periodwith the financial institution owningmore of the risk as trust is builtbetweenthetwoparties.Thisenablesintermediariestoofferbettertermstotheirborrowerswhomaynothavebeenabletoaccessthecreditotherwise.Intheory,90%coverageisveryhighandcouldleadtomoralhazardproblemsamongthelenders.However,giventhatRabobankoffersthreetofouryeartermsanddealswithfairlyhighlevelsofloans,thereseemstobeenoughofanincentivetolendprudentlytoensurecontinuedbusiness.Furthermore,thescalingbackor‘phasingout’strategyencourageslenderstocreateasustainablerelationshipwiththeirborrowers

Rabobank does not engage international lenders, however theirmodel is an interesting case study as theircoverageratiosarehighanddefaultratesarelow;hencethe‘scalingback’strategyseemstobeeffective.Theyarealsooneoftheveryfewfundsthatfocusonsustainableagriculture.

USAIDDevelopmentCreditAuthority25

Type:Portfolio,IndividualandPortableGuaranteesGeography:GlobalCoverage$:Typically$5to$10million,howevercanrangefrom$1toover$40millionCoverage%:upto50Duration:various(most1‐5years)DefaultRate:lessthan1%Requirements and Characteristics: Guarantees are designed to correct market failures and should only beimplementedwhen it isdeterminedamarket imperfectionexists, the loanwouldnothavebeengrantedwithout the 24http://www.rabobank.com/content/corporates/tcf/raboagrifund/25http://www.usaid.gov/our_work/economic_growth_and_trade/development_credit/index.html



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guaranteeandthattheguaranteewillnotprovideincentivesformoralhazardbehavior.USAIDhopestocapitalizeonthe “demonstration effect,” demonstrating the sustainability and profitability of development credit to financialinstitutions,whichmay consequently expand their services to underrepresented lenders, resulting in self‐sustainedfinancing.TheDevelopmentCreditAuthority(DCA)branchofUSAID,establishedin1999,hasenabledapproximately$1.6billionofprivatecapitaltobelentinover60countries.Thevastmajorityoftheirprojectshavebeenpartnershipswithlocalbankswith theexceptionof certainpartnershipswithmultilateral lenderssuchas theAfricanDevelopmentBankorsocially‐orientedlenderssuchasRootCapital.USAID’s guarantees are often complemented by technical assistance, partnering financial institutionswith potentialborrowersandfamiliarizingthemwiththeenablingenvironment.Thispromotestheexpediencyoftheprojectandtheinformationalsymmetryofthelenderandborrower.GiventhatUSAID’sguaranteestendtobeportfolioguarantees,although$10millionmayseemveryhigh,wearenotsurehowmuch is grantedperproducer at any given time. Covering only50%of the risk ensures that the financialinstitutions they partner with retain a reasonable portion of the risk and the very low default rates demonstrateprudent lendingdecisions.USAIDalso requires independent riskanalysis tobeperformedby theirpartner financialinstitutions.This engagementofprivate interest in riskmanagement and lowdefault rates is consistentwithWorldBank correlations. Furthermore, USAID requires financial institutions to write‐off the loan before they claim it toensuretheyexercisereasonablecollectioneffortsbeforehand.Example:2005loanguaranteeforRootCapitalIn2005,USAIDapproveda$2millionloanguaranteeforEcoLogicFinance(nowRootCapital)inordertoexpandtheirlendingservicestocoffeecooperativesinfiveEastAfricanCountries.Thisloanguaranteesupportedover6,000farmersand encouraged linkages to international coffee buyers including Starbucks Coffee Company and Green MountainCoffee Roasters. Since 1999, Root Capital has provided affordable loans to small‐scale producers, boasting a 98%repaymentrateanddemonstratingtheviabilityoftheirbusiness.

TheflexibilityofUSAID’sschemecombinedwithitsprecedentinworkingwithEcologicsuggeststhatitcouldworkverywell for international sustainableSME lenders: aportfolio loan thatwouldallow them toexpandtheir services to a rangeof borrowers.Application, however seems cumbersomeand guarantees tend to betargeted to local banks. Nowhere does USAID explicitly support sustainable agriculture or focus onenvironmental conservation. Recognition of potential in this sector is implied only through support of RootCapital.

MIGA(MultilateralInvestmentGuaranteeAgency)26

MIGAprovidestwotypesofguarantees:a) RegularguaranteefundType:IndividualGeography:GlobalCoverage$:upto$180millionforasingleproject

26MIGA:“Aboutus.”http://www.miga.org/about/index_sv.cfm?stid=1588–RetrievedJune1,2009



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Coverage%:upto95oftheprincipal(orhigherasdeterminedonacase‐by‐casebasis),plusuptoanadditional150percentoftheprincipaltocoverinterestthataccruesoverthetermoftheloanDuration:3–15years(sometimesupto20)Requirements andCharacteristics:MIGA’s regular guarantee fundmanages risks by insuring eligible projectsagainstlossesrelatingtocurrencytransferrestrictions,expropriation,warandcivildisturbanceandunliketheSIPfund, it alsocoversbreachof contract.MIGAguaranteesalsobenefit investorsand lendersbydeterringharmfulactions, resolving disputes, accessing funding, lowering borrowing costs, increasing tenors, providing extensivecountryknowledgeandprovidingenvironmentalandsocialexpertise.Premiumsvaryperprojectandarepaidatthebeginningofeachcontractperiod.Theagencycannot terminatethecontractunlessdefaulthasoccurredbutcanreduceorcancelcoverage.MIGAcanalsocoversignificantlyhigheradditionalamounts throughreinsurancearrangements.b) SIP(SmallInvestmentProgram)Type:IndividualGeography:GlobalCoverage$:upto$10millionCoverage%:determineduponreviewofapplicationDuration:variousRequirementsandCharacteristics:MIGAisspecificallydesignedtoassistsmallandmedium‐sizeinvestorswiththeirforeigndirectinvestmentactivities.ForaninvestmenttobeeligibleforMIGAcoverage,theprojectenterprisemustfulfilltwoofthefollowingthreecriteria:nomorethan300employees,totalassetsnotmorethan$15millionand/ortotalannualsalesnotmorethan$15million.Althoughthetotalsizeoftheinvestmentmaybelargerthan$10million,theapplicationforinvestmentguaranteemustbelessthanUS$10million.

MIGA’sSmallInvestmentProgram(SIP)isdesignedtogrowtheagency’ssupportforsmallandmedium‐sizeinvestorsbyoffering:

1. A standardized package of risk coverage that includescurrency transfer restriction, expropriation, andwar andcivildisturbance

2. Aquickandefficientunderwritingprocess3. Asingleapplicationformthatcanbecompletedonline4. Noapplicationfeeforeligiblesmallandmedium‐sizeinvestors

MIGA insuresnewinvestmentsassociatedwith theexpansion,modernization,or financialrestructuringofexistingprojectsinitsdevelopingmembercountries.Newinvestmentsarethosethathaveneitherbeenmadenorirrevocablycommittedon thedateof submission toMIGAofaSIPDefinitiveApplication forGuaranteesignedby the investor.MIGAhasadedicatedSIPteamthatguidesinvestorsthroughtheapplicationandunderwritingprocess.

The low‐levelofdefault associatedwith this fund is correlated to theirhigh levelof involvement inproject and riskassessment. They grant a fairly low amount of guarantees after a rigorous screening process. Again, these are loanguaranteesthatwouldonlybenefitalenderwithaspecificlong‐termprojecttobefinanced.

AlthoughMIGAmay support international lenders, these guaranteesmay be at too large a scale for the typicalsustainable SME finance lender. The durations are long and investments high. Although this represents an



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important challenge for many operators serving the sustainable SME finance sector, this may represent anopportunityaslargercommerciallendersenterthemarketplace.

PROPARCO27

Type:

i. Bondguarantee–aguaranteetosaverswhoextendaloantoabankissuingborrowingstorefinanceitselfortoacompanyseekingresourcestoinvestinaspecificproject

ii. Bankloanguarantee–guaranteesthesuccessfulcompletionofloansthatbankinginstitutionswithavailableliquiditiesmayextendtootherinstitutionstofinanceprivatesectorcompanies

iii. Localcurrency loanguarantee–guarantees thesuccessfulcompletionof loans issued in localcurrencybybankstoindustrialandcommercialcompaniestofinancetheirmanufacturinginvestmentprogram

iv. Liquidityguaranteeofmutualfunds,investmentfundsandlocalsavingsmobilizationfunds–aliquidityguarantee to the various instruments of mobilization of long‐term resources intended to financemanufacturinginvestment,whichhasadirectimpactonfinancialmarketintermediation

Geography:Global;rangefromemergingmarketstoLDCs,particularlyinAfricaCoverage$:2.8–140millionCoverage%:50Requirements and Characteristics: Industries covered include plantations and primary agribusinesses, livestockfarmingandseaproductpackaging,modernizationandexpansionofheavy industries, transportation,educationandhealth.Thegoalistofinanceoperations,whichareeconomicallyviable,sociallyequitable,environmentallysustainableand financiallyprofitable.PROPARCO focuseson jobcreation inAfricaandclimatechangeandbiodiversity inmajoremergingcountries.Created in1977,PROPARCO(theInvestmentandPromotionsCompanyforEconomicCooperation)isaDevelopmentFinancial Institution partly held by Agence Française de Développement (AFD) and private shareholders from theNorthandSouth.Theirmissionistobeacatalystforprivateinvestmentindevelopingcountries,whichtargetsgrowth,sustainabledevelopmentandreachingtheMillenniumDevelopmentGoals(MDGs).PROPARCOhasateamof80people,eightregionalofficesandissupportedby50AFDGroupagenciesworldwide.In2007PROPARCOgranted€600Mforoverfiftyprojectsinmorethanthirtycountries.Thesectorstrategyistailoredtothe levelofacountry’sdevelopmentandfocusesontheproductivesector, financialsystems,infrastructureandequityinvestment.Inviewoftheapparentreluctanceofbanksindevelopingcountriestofinancethissector,PROPARCOprovidesanalternativetobankfinancingbyacquiringstakesinlocalinvestmentfundsdedicatedtofinancingcorporatesinexpansion.Since2006PROPARCOhasbeenusingasystematicprojectimpactmeasurementtool.Itisusedselectivelypriortoanyfinancingandthenthroughouttheprojectlife.TheGPR(GeschäftspolitishesProjectrating©)isaninstrumentadaptedfrom a tool developed by PROPARCO’s German counterpart, DEG. It is also used by other European DevelopmentFinance Institutions (EDFIs) and harmonizes impact measurements made by European partners. The tool, using amultidimensional approach, assesses: the economic viability of a project, its development impacts, PROPARCO’s

27http://www.proparco.fr/jahia/Jahia/



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additionalitycomparedwithcommercialbanksandtheprofitabilityofthefinancing.PROPARCOalsolooksatasetofsectoralindicatorsincommonwithAgenceFrançaisedeDéveloppement.28Guaranteesissuedin2008totaled€21Magainst€7.6Min2007.OutstandingguaranteesissuedbyPROPARCOconcern30operationsforatotalamountof€55.8M(against€44.9Mat31December2007).Thisbreaksdowninto52.3%forbankingestablishmentsand47.7%fornon‐financialclients.Thegeographicalbreakdownshowsthat6.6%ofguaranteeswereissuedinWestAfrica,41.4%intheCentralandEastAfricaandIndianOceanarea,8.71%inAsia,35.64%intheMediterraneanandMiddleEast,3.6%inFrenchOverseasLocalAuthoritiesand4.13%weremulti‐country.29

PROPARCO’sexplicitconcernwithenvironmentalstandardsinemergingmarketssignalspotentialinterestforsustainabletradeindevelopingcountries.ThefocusofjobcreationinAfricaandhighenvironmentalstandardscouldbebridgedbyinternationalsustainableSMElendersactiveinAfricancountries.Nonetheless,thetypeofguarantees offered tends to entail high dollar amounts andmay be at too large a scale for themajority ofinstitutionsoperatinginthesectoratpresent.

ARIZ/AFD30

Type:SingleDealandPortfolio Geography:GlobalwithfocusinAfricaCoverage$:SingleDeal:$3.3million;Portfolio:$7,000to$210,000Coverage%:upto50(75forMFIs)Duration:SingleDeal:2(1yearforMFIs)–12years;Portfolio:1–5yearsRequirements andCharacteristics:Targets SMEs andMFIs. Banksmust submit guarantee requests toAFD’s localagency.Theguaranteescovertheprincipalplusoutstandinginterestattherateoftheloanatthedatetheguaranteeiscalledin,withaoneyearlimitoninterest.Theyincludeaguaranteerequestformandthecompleteprojectdocumentcompiledbythebankforitsdecision‐makingprocess.Thelocalagencyprocessestheguaranteerequests.a)SingleDealGuarantee:Thepurpose is toguaranteeany typeofequipment loanrequestedby (i)SMEstart‐ups,businessdevelopmentandtransmissionand(ii)MFIs.ARIZchargesanannualfeeontheoutstandingprincipalamountguaranteed.Theupper limitof theguarantee is2millionEuros (expressedabove inapprox.$USD). Processinganddecision‐makingbyAFD’slocalagenciesiscompletedwithinfivebusinessdaysonreceiptofthecompleteapplicationbytheagency.b) Portfolio Guarantee: The purpose is to guarantee a whole pre‐defined target loan portfolio for SME start‐ups,businessdevelopmentand transmission.The timeperiodallowed forbuilding‐upof the targetportfolio is2years–renewable once. The amount of this guarantee is definedon the basis of the bank’s guarantee requirements for theannual portfolio envisaged. The amountmatches the outstanding amount to be guaranteed for individualized loansallocated in localcurrency.Theguaranteerange is from5000to150000Euros i.e.50%of individual loans forunitamountsrangingbetween10000and300000Euros(expressedaboveinUSD).Thepricingschemeisselectedbythepartnerbankandiseither:i.Anannualfeebasedontheguaranteedoutstandingamount.Itisassessedeverysixmonthsduringthefirsttwoyears,withpaymentattheexpiryofthisperiodofadiscountedfeefortheguaranteedresidualoutstandingamount,or,ii.areducedfixedfeebasedontheamountoftheportfolioguaranteeenvelope.

28www.proparco.fr29ProparcoAnnualReport200830http://www.afd.fr/jahia/webdav/site/afd/users/administrateur/public/plaquettes/AFD_ARIZ_GB.pdf



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This is a newguaranteemechanism for bankswith recognized expertise in credit analysiswanting to develop theirmesofinance activities and SME loan portfolio. The guarantee is formalized by an AFD guarantee agreement. Thedecision‐makingandmanagementforeachguaranteeallocatedfromthecontractualARIZenvelopeisdelegatedthankstothetrustrelationshipbetweenAFDandthepartnerbank.

ARIZ isaguaranteemechanismdesigned togive small andmediumenterprisesandmicrofinance institutionsbetteraccesstofinancing.Itaimstosupportbusinessstart‐upsanddevelopmentprojectsbyscalingupbanks’participationintheir financing.ARIZ ispresent inover20countries,mainly inAfricawith some40partnerbanksworldwide. Since2000,theyhaveprovided56MillionEurosfor187guaranteesinSub‐SaharanAfrica.Asteadilyrisingnumberandvolumeofguaranteesallocated(up80%annuallyoverthepast3years)Anincreasingnumberofcompanies(almostahundredin1008)havebeenabletodevelopeachyearandthousandsofjobshavebeensupportedorcreated.

Althoughthisseemstobeasuccessfulandwell‐implementedprogram,it isunlikelytobeausefulcandidatefor internationalsustainableSMElenders.Thesingledealguarantee isquite largeandspecific toequipmentloans whereas the portfolio guarantee is based on supporting the development of a pre‐determined targetportfolio.Whiletheportfolioapproachprovidesincentiveforproducerstoeffectivelyexpandtheiractivities,presumably to ensure re‐payment and future business viability, it requires a degree of co‐investment andplanning that could well serve to be too involved and costly for international lenders to undertake.. Theunderdeveloped status of many target sustainable SME clients also represents a serious obstacle to theapplicationoftheARIZmechanism.

AfricanFundsFondsAfricaindeGarantieetdeCooperationEconomique(FAGACE)–variouscountries31

Type: Guarantee facility, interest rebate facility, extension of credit facility duration, financing of fixed‐termtransactions,investmentintoequitycapital,fundsmanagementGeography:Benin,BurkinaFaso,RepublicofCentrafrica,Coted’Ivoire,Mali,Niger,Rwanda,Senegal,SierraLeoneandTogoCoverage$:CFAF50billion(USD$120million)Coverage%:upto80Duration:upto5yearsRequirementsandCharacteristics:Supportedindustriesincludeindustriesaimingtodeveloplocalnaturalresourcesor import substitution products; rural development: agriculture, livestock breeding; infrastructure; and SMEsproducinggoodsand services.Guarantees favour long‐termandmedium‐term loans for fund raisingoperationsandshort‐termloansforagriculturalloansandinter‐bankingloans.Interest‐rebatefacilityislimitedtoamaximumofone‐third of the interest rate applicable to the planned transaction. No project can benefit from an extension of creditfacilitiesdurationforaperiodexceedingfiveyearsandinvolvinganamountexceeding25%oftheamountoftheloan.Thebeneficiariescanbepublic,semi‐public institutions, individualorcollectivelyowned.TheyarecalledPromoters,andtheguaranteesareobtainedthroughthem.AsageneralruletheSMEsshouldprovidesomeformofcollateral, ifpossible,andFAGACEwillcomplementtheguarantee.Toapply,promoterssubmitapplicationsthatarereviewedbythemanagementcommitteeandtheinternalguaranteecommittee.




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Thefund’smissionistocontributetotheeconomicandsocialdevelopmentofthememberstatesthroughfundingandfacilitatingdevelopmentprojects.Itismanagedbyaboardofdirectors(comprisedoftheministersoffinanceofallthemember countries) and amanagement committee. The fund has registered share capital in the amount of CFAF 30billion(CDN$72million)in2005.Thebeneficiaryofanyguaranteefacility issubjecttothepaymentofaflatcommissionof1%oftheamountcoveredandaguaranteecommissioncalculatedonayearlybasisbasedonthebalanceoftheloan.Thisratevariesbetween1and2%dependingontherisk.In2005,44projectsin9membercountrieswereguaranteedbyCFAF48.673billion(CDN$116.8million)tosupportCFAF94.391billion(CDN$226.5million)ofloans,producingaveragecoverageofCFAF1.1billion(CDN$2,654,890)atapprox.52%.TherealizedamountofguaranteeswasCFAF3.5billion(CDN$8.4million),thecollectionratewas8.27%andprovisionsforbaddebtamountedtoCFAF1.6billion(CDN$3.8million).

AlthoughinternationalSMElenderscouldpotentiallyaccessthisfund,thesizeofthetransactionsenvisionedprobablyrender itoutofreach formostof theplayers in thesectoratpresent. Aswithmanyof theaboveschemes, this guarantee is more project‐based and focused to larger‐scale investments and therefore lesssuitedtotheSMEsector.

AgriculturalCreditGuaranteeSchemeFund

Type:IndividualGeography:NigeriaCoverage%:75RequirementsandCharacteristics:Thisschemeprovidesguaranteesforloansadvancedtotheagriculturalsectorbybanks32. Included in the “agricultural sector” are coffee, tea, cocoa, rubber, oilpalmand similar crops; cultivationorproductionofcerealcrops;animalhusbandry;andprocessingwhereit isintegratedwithatleast50percentoffarmoutput.Lendinginstitutionsandproducersapplyfortheguaranteetogether.ACGSFwasestablishedin1977with60%offundingfromtheFederalGovernmentand40%fromtheCentralBankofNigeria(CBN).CBNmanagesthedaytodayoperationsofthefundwhichnowhasacapitalbaseofN 3.0billion.Between 1978 and 2004, 64% of funds and 60% of their value were repaid and approximately 23% of claimsrepresenting15%oftheirtotalvaluewererecoveredfromdefaultersbeforetheycouldbesettled.Problemscitedwiththe functioningof thisscheme includeunwillingness toparticipate, inadequatemonitoring, inadequatestaff training,policyconflictsandproblemsofilliteracy,whichaffectsrecordkeepinganddecision‐makingofborrowers.

It is clear that technical assistance in terms of training for lenders and borrowers in this schemewould bebeneficialtothesuccessofthisprogram.A75%guaranteeinthiscasemaybetoohighandproducetoomanymoral hazard problems, as it seems the informational advantage lieswith the financial intermediary ratherthan the guarantor. Furthermore, the claim process needs to be revisited. Whether this is a judicial ororganizational problem is unclear, as iswhether or not lenders havemade any sufficient attempt to collecttheirloans.Althoughthisprogrammaybeaccessedbyinternationallenders,theymaybecautioustoexploitit.

32Olaitan,M.A.(2006),“FinanceforSmallandMediumEnterprises:Nigeria’sAgriculturalCreditGuaranteeSchemeFund.”JournalofInternationalFarmManagement3(2).



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AllianceforaGreenRevolutioninAfrica(AGRA)33

Type:PortfolioGeography:RuralAfricaRequirementsandCharacteristics:Thegoaloftheorganizationistohelpsmall‐scalefarmersandtheirfamiliesliftthemselves out of poverty and hunger. AGRA programs develop practical solutions to significantly boost farmproductivityandincomesforthepoorwhilesafeguardingtheenvironment.AGRAadvocatesforpoliciesthatsupportitsworkacrossallkeyaspectsoftheAfricanagricultural“valuechain”—fromseeds,soilhealth,andwatertomarketsandagriculturaleducation.AGRAischairedbyKofiA.Annan,theformerSecretary‐GeneraloftheUnitedNations.AGRA,withinitialsupportfromtheRockefeller Foundation and theBill&MelindaGates Foundation,maintains offices inNairobi, Kenya andAccra,Ghana.Thisfundisverynewandhaslimitedinformationregardingcriteriaandsuccess.Informationaboutguaranteesisembodiedintwoexamplestodate:TanzaniaandKenya.InTanzania,AGRAandtheFinancialSectorDeepeningTrustprovided$1.1millionforaloanguaranteefunddedicatedfor loans to farmers, agro‐dealers and other agricultural businesses, to secure $5 million from the NationalMicrofinanceBank(NMB).NMBagreed to lend toagro‐dealersatratesof18%,comparedto the typical rateof46%charged by microfinance institutions. So far, loan applications of nearly 2.9 billion Tanzania Shillings have beenreceivedfromagro‐dealers,andabout2billionhasbeenapproved(about$1.5million).FSDTincreaseditsshareoftheloanguaranteefrom$100,000to$1million,andthebankhasexpandeditsdedicatedlendingto$10million.InKenya,AGRAandtheInternationalFundforAgriculturalDevelopmentprovided$2.5millioneachtocontributetoaloanguaranteefor$50millionoflow‐interestloansfromEquityBank.Theseloansweremadeavailableto2.5millionfarmersand15,000agri‐businesses.TheKenyangovernmentprovidesmillionsofdollarsinsubsidiestargetedatthecountry’smostvulnerablefarmers,whoreceivevouchersthattheyredeematagro‐dealershopsinexchangeforfarminputs.Agro‐dealersreturnthevoucherstoEquityBank,whichthencreditstheiraccounts,enablingtheagro‐dealerstopurchasesupplies.TheTanzanianandKenyanprogrammeshave so fardistributedover$4million in loansandhelped to certifymorethan3,500agrodealers inKenya,Malawi andTanzania,whohave sold tensofmillionsofdollarsworthof inputs tosmallholderfarmers.InwesternKenya,theprogrammehascontributedtoa20percentincreaseinmaizeyield.

AGRA lacks clear guarantee offerings andmethodologies, likely due to its recent inception. Despite AGRA’slimited experience, the focus given to environmental sustainability and small‐scale farming appear verysuitable to international sustainable SME finance. Furthermore, their two case studies appear to have beenquitesuccessfulthusfar.AGRApresentsaninterestingpotentialrisk‐sharingpartnershipalthoughthereisnotanexplicitguaranteeinthetraditionalsense.

GARI–FondsdeGarantiedesInvestissementsenAfriquedel’Ouest34

Type: Guarantee of medium and long‐term loans and international banks and financial institutions; guarantee ofresourcemobilizationoperations‐operationdevelopingestablishments(banks,financialestablishments,companies);counter‐guarantee–nationalandinternationalbanksandfinancialestablishmentGeography:Bénin,BurkinaFaso,CapVert,Côted’Ivoire,Gambie,Ghana,Guinée,GuinéeBissau,Liberia,Mali,Niger,Nigeria,Sénégal,SierraLeone,TogoCoverage$:minimumapprox.$110,000 33http://www.agra‐alliance.org/section/about/reports34http://fondsgari.org/an/index.php



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Coverage%:max50Duration:max10yearsRequirements and Characteristics: Guaranteed operations are start‐up, modernization, privatization, transfer ofownership, productivity improvement, production capacity building and restructuring. Supported industries includemanufacturing,publicworks,agro‐industry,transport,fishing,tourism,mining,agriculture,productivesectorservices.Tobeeligible, the loansguaranteedmust reachaminimumamount equal to the countervalueofFCFA50millions.Finally,thecostofguaranteesistodatemadeupofafixedcontributioncollectedupfrontandaguaranteecommissioncalculated on the successive outstanding guarantees on semi‐annual basis. As of December 31st 2007, the Fund’sconditionsforinterventioninrespectofbankborrowingscorrespondedtotheapplicationofacontributionrateequalto2%or3%oftheguaranteegranteddependingonwhetherthebeneficiaryinstitutionisashareholderofGARIornot(orrefinancedbyashareholder),andasingleguaranteecommissionrateof1.5%.ThemainobjectiveoftheGARIFundistocontributetothedevelopmentoftheprivatesectorbysupportinginvestmentfinancing.Thissupportisintheformoflongandmediumtermcreditguaranteestobanksandfinancialinstitutionsandguarantees for resourcemobilization transactions carried out by private companies operatingwithin the EconomicCommunityofWestAfricanStates(ECOWAS).Theguaranteescoveraportionofthemediumandlongtermfinancinggranted to companies in the productive private sector. Twenty‐two requests for guarantees were submitted forconsiderationbytheBoardofDirectorsin2007,nineteenofwhichcamefromcreditinstitutions,onefromaGuaranteeFund, and two from International Financial Institutions. Of the 22 requests considered, sixteen were approved,amountingtoatotalofFCFA13.192billion.TheoneInternationalFinancialInstitutiongrantedaguaranteeaccountedfor23%oftotaloutlays.Approvedguaranteesweremainlyfromtheindustrysector61%andservicessector39%.

ThisguaranteewouldappeartobeappropriateforinternationalSMElenderswithinterestengagingproducersinWesternAfrica.

FondsdeSolidariteAfricain(FSA)35

Type:unspecifiedGeography:Benin, Burundi, Centrafrique,Mali, Niger, Senegal, Togo, Tchad, Rwanda,Maurice, Gabon, Cote d'Ivoire,BurkinaCoverage$:approx.$43,000Coverage%:50–65(privatesector)RequirementsandCharacteristics:Supportedindustriesincludeagricultureandagro‐industryaswellasthepublicsectorsofelectricity,water,andsocialhousing.Theguaranteecannotexceedatotalof10timestheshareofresources.Likewise, no project can exceedmore than 10% of this ceiling or in absolute terms, FCFA 2,000,000,000 except byapprovaloftheBoard.Aguaranteefeerangingfrom1%to2.5%oftheoutstandingguaranteedloanisreceivedbytheFSAandpayablequarterly. RequeststointervenemustbesubmittedtotheFSAthrough:i)theinvestmentlocations’stategovernment, representedby theMinisterofFinanceoramemberof theFSAboard, ii)adonor, iii)nationalorinternational Financial Institutions authorized by the domestic monetary authorities of the project. Requests forassistanceshouldinclude:theapplicationspecifyingthenatureoftheassistancesought,thefeasibilityoftheproject,adomesticindustrysurvey,thefinancialstatementsofthelastthreeyears,projectedaccountsrelatedtotheproject,thefinancingplan for theproject, the legaldossier, theevaluationreportof the funderand theagreement (orproposedagreement)loanfortheproject.




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FSA was created in 1976 following discussions during the Summit Conference of Heads of State andGovernmentofFrenchandAfricancountriesinBanguiin1975.Despitetheirlonghistory,casestudiesrelatedto successof theorganizationare limited.The informationavailable indicates thatmostguarantees supportspecificmedium‐tolarge‐scaleinvestmentprojectsoutsidetheagriculturalsphere.ItisalsounclearwhethersmallerinternationallendersoperatinginthesustainableSMEfinancesectorwouldfallintothe“internationalfinancial institution” category. Given the types of activities guaranteed and the cumbersome applicationprocess,thisfundpresentsconsiderableobstaclestointernationallendersservingthesustainableSMEsector.

LatinAmericanFunds

ProjectoCAMBIO(CentroamericanoMarketsforBiodiversity)36

Type:Individual(throughidentifiedfinancialinstitutions)Geography:Honduras,Guatemala,ElSalvador,CostaRica,NicaraguaCoverage$:upto$100,000Coverage%:40–80oftheprincipal(contingentonliquidwarranties)Duration:various;mustberenewedannuallyRequirements and Characteristics: Supported industries include organic agriculture, sustainable forestry,agroforestry,silvopastoralsystems,sustainabletourism,aquaculturecertifiedandsustainablefisheries.Allguaranteesarechargeda1.5%commission.Interestratesaresetbasedonmarketratesandalongwithguarantees,aredefinedinaccordancewiththepoliciesofeachagent.ProjectoCAMBIOisajointinitiativebytheUnitedNationsDevelopmentProgram(UNDP),theCentralAmericanBankforEconomicIntegration(BCIE)andtheFundforGlobalEnvironmentFacility(GEF).ThegoalistoensuretheCentralAmericanMSMEscontributetosustainabledevelopmentandenvironmentalprotectionandtoensuretheviabilityofbiodiversity‐friendly investments by addressing barriers in banking, business, policies and legislation. While animportant facet of the project involves certification of agricultural, forestry and tourismproducts, Projecto CAMBIOalso provides financial support in the form of a credit fund and guarantee fund as well as technical support. BCIEcurrently has access to $3 million US in credit to be distributed through their network of Intermediary FinancialInstitutions (IFIs), whichmay take to form of banks,microfinance institutions, cash credit, cooperatives and NGOs,among others. At the maturity of the loan, the IFI initiates recovery and in the case of default, it is up to BCIE todeterminetheloan“uncollectable,”inwhichcasetheywillreimbursethefundswithin15days.WhileNGOsandMultilateralAgenciespartakeinthefunding,ownershipandmanagementofthisprogram,theIFIsareresponsibleforcreditriskassessment,monitoringandrecovery.Trainingandguidanceisprovidedtothelendersandborrowersinanattempttoestablishaninformedandsustainablerelationshipbetweenbothparties.

This fund is a good example of possible future funds aswell one of the only funds that targets sustainableagriculturewithpotentialapplicability/participationofinternationalSMElenders.

Overview Eligibility and other Constraints for International Lenders Providing Sustainable SME

Finance

36http://www.proyectocambio.org/programa_mipymes.html



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Of the twelve funds selected for further analysis, only four of them make explicit reference to the promotion ofsustainable enterprise and/or the environment in their lending strategies (Rabobank; Proparco, AGRA and ProjectoCambio). Giventheexplicitalignmentintermsofboththesectors(SMEandAgriculture)aswellasthealignmentinterms of priorities, each of these funds, in principle, represent an important opportunity for the sustainable tradefinance sectormoregenerally. However, among these fourphilosophicallyaligned initiatives, significant constraintsexistwithrespect tosecuringaccess for lendersserving thesustainable trade financesector. This is thecaseof theRabobank Agrifund Guarantee scheme’s limitation to local lenders, which restricts access to the majority of actorscurrently servicing sustainable trade finance markets due to their international character. Although AGRA is wellalignedwiththeobjectivesofsustainabletradefinance,thefactthatitisstillunderdevelopmentmakesitdifficulttoascertainthelevelofitspotentialforservicingthesector—clearlyAGRArepresentsanimportantopportunitytosecureaccessforthesustainabletradefinancesector.Proparcowouldappearoneofthemostcompatibleexistingguaranteeschemeacrosscurrentinstitutions. Proparcooffersportfolioguaranteespotentiallyallowingforreducedtransactioncostsascomparedwithotherfacilitiesfocusingontransaction‐basedapproaches.ProjectoCambioappearsasagoodopportunity as well as they are quite open to expand its guarantee fund to new international lenders targetingsustainableagriculture.

Table 2 Analysis of the applicability of select guarantee facilities to the needs of sustainable trade finance sector. Green represents conditions that are ideally suited to the sector, while red represents conditions that may represent significant barriers to the sector.

Amongtheremainingguaranteefacilitiesthatmightsupportsustainabletradefinancelending,USAID’sDevelopmentCreditAuthorityoffersaparticularlypromisingopportunity for sustainable trade financing. ThebenefitsassociatedwiththeUSAIDsystemareprimarilylinkedtoitsflexibility.UndertheDCA,USAIDhasrepeatedlynegotiatedportfolioguarantees tailored toa specific sectorand/orregion. Thedownsideof thisapproach for individual lendersare thehightransactioncostsassociatedwithinitialset‐up,suggestingapotentialroleforgroupcoordinationundertheUSAIDDCA.

NameofFundSustainabilityObjective GeographicScope

Type ofGuarantee

InternationalLenders Size

RaboSustainableAgricultureGuaranteeFund

USAID‐DevelopmentCreditAuthority

SIP (Small Investment Program) ‐ throughMIGA

MIGA'sregularguaranteeprogram

ARIZ/AFD

Proparco FondsAfricaindeGarantieetdeCooperationEconomique(FAGACE)

Alliance for a Green Revolution in Africa(AGRA)

GARI‐FondsdeGarantiedesInvestissementsenAfriquedel'Ouest

FondsdeSolidarityAfricain(FSA)

AgriculturalCreditGuaranteeSchemeFund

ProjectoCAMBIO



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FSA,GARI,ACGS,andFAGACEallfocusontransaction‐basedguarantees,whichposesignificantchallengestoindividuallendersservingthesustainabletradefinancesector.ThesmallsizelimitsofthecoverageforFSA,GARIandACGS(allbetween $40,000 and $110,000 points towards high per $ transaction costs for securing the guarantee). Of thetransaction‐based facilities,FAGACE,mightbe thebestequippedtoovercomethischallengedueto largersizeof theloansitguarantees(average$2.5million).Althoughthisislargerthanmosttransactionsservingthesustainabletradefinancesectoratpresent,itcouldfillanimportantneedinstimulatinglonger‐termcreditwithinthesector(inAfrica).DataonthecurrentoperationsofFAGACEwasnot,however,readilyavailable,raisingsomequestionastoitscurrentstatusandlevelsofactivity.ARIZ and the MIGA‐SIP facilities are more promising due to their focus on portfolio guarantees. The potentiallyreduced transaction costs associated with portfolio guarantees makes them more attractive to sustainable tradefinancelenders.ThesebenefitsareprobablylessinthecaseoftheARIZfacilityduetoitsstrictrequirementsregardingthesubmissionofclientbusinessplansandgoalsettingprocessesaspartoftheguaranteeprocess.Whilethislevelofmanagementshouldhelpensurethesuccessoftheguaranteeprocess,itlikelyoperatesasasignificantbarriertoactualusebythesustainabletradefinancesector.WiththemaximumsizeoftheportfolioguaranteeunderARIZat$150,000Euros,thesetransactioncostsareamplifiedbythesmallsizeoftheloansthatmakeupanARIZportfolio.TheMIGA‐SIPprogramdoesn’trequirepre‐identifiedborrowers,whichsimplifiestheprocessconsiderably.Thelargermaximumguaranteesize($10million)wouldalsoappeartobemoreinlinewiththeneedsofthoselenderscurrentlyservingthesustainabletradefinancesector.

VSummaryandRecommendations

Our review of 119 Guarantee facilities serving SMEs in the agricultural sector reveals that only 12 funds offer anyremoteopportunityforinternationallendersservingthesustainabletradefinancesector. Mosttraditionalguaranteefacilitiesareestablishedwithpre‐identifiedlocallendinginstitutions,whicheffectivelyexcludethepossibilityofaccessfor international lenders without a long‐standing local presence. Moreover, among the 12 funds identified withpotentialcapacitytoservethesustainabletradefinancesector,oneofthem,theRabobankAgrifund,atthemomentdonot represent actual funds to which international sustainable trade finance lenders could access. Among themostpromisingfacilitiesforinternationalsustainabletradefinancelendersare:Proparco, ProjectoCambio,MIGA‐SIPandUSAID’s Development Credit Authority. However,with the exception of USAID and Projecto Cambio, there is littleactualevidenceofthesefundsactuallyservicingthesustainabletradefinancesector.USAID,ontheotherhand,has,toour knowledge, onlyworkedwith the sustainable trade finance sector once thus far. As such there is a need andrationaleforinvestigatingthesespecificfundsinmoredetailtoseehowtheymightservicesustainabletradefinancemorereadilyinthefuture.Recommendation 1: FAST should enter into protracted discussions with Projecto CAMBio, Rabobank Agrifund,

Proparco, MIGASIP and USAID to explore the possibility of offering services to the sustainable trade finance

sectorand/ortailoringtheirservicestomeetthissector.

Based on the analysis it is clear, however, that the specific needs of the sustainable trade finance sector—namely,guaranteesforloanstoagriculturalSMEsbyinternationallenders—areatthemoment,asageneralrule,notcateredtoby existing guarantee facilities. As such, if beyond discussionswith the individual guarantees that show particularpromise identified above, these guarantees are not able to address the needs of the socially oriented lending



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institutions, FAST should consider the establishment of a fund specifically designed to address the needs of thesustainableSMEfinancesector.Recommendation 2: In the event that none of the existing funds is able to address the needs of the socially

orientedlendersorisonlyabletodosoinamannerwhichisinsufficienttomeetthoseneedsadequately,FAST

should explore the establishment of sustainable trade finance oriented guarantee facility that is open to

internationallenders.



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VIAppendices

Appendix A. Further examples of guarantees

NameofFundRegionalFocus Industry

AccessibleforSociallyOrientedLenders? TypeofGuarantee

min/max(approxUSD)

Coverage% Duration

LATINAMERICA

FondoNacionaldeGarantias Colombia various No automaticandindividual

1.5million‐260millionautomaticandupto400millionw/approval 50‐80

Progape/Progara/Progain ElSalvador

smallagro‐industrial,smallagriculturalandmediumagro‐industrialenterprisesrespectively No automaticandindividual 80,000–200,000 50–70

GarantiaFira Mexico

agriculture,forestry,fishingandagribusiness No max106,000 40–90

FundacionFOGAPI Peru

foundationguaranteefund;directguaranteetobanks max350,000 upto50

max3years

AFRICA

SharedInterestUS SouthAfrica Various Yes Directtobank max$1,270,000 75

SOUTHEASTASIA

AsuransiEksporIndonesia(ASEI) Indonesia

non‐oilandgasexports No transactionguarantee

80(fortradefinanceandinsurance)

max6months

PTAskrindo Indonesia MSMEs No $5,000‐$50,000

20–70CreditGuarantee;60‐90TradeCreditInsurance

6months‐13years

PTPKPI Indonesia SMEs No max$100,000 upto75

LatinAmericanFunds

FondoNacionaldeGarantias(FNG)

Type:IndividualandAutomatic;specifictobanksGeography:ColumbiaCoverage$:3MM(USD$1,550)toCOP520MM(USD$267,000)Automatic;Coverage%andDurationvarywithbanksDefault:6.5%RequirementsandCharacteristics:FNGworkswithseveralcommercialbanks:Bancolombia,BankofBogota,Bankofthe West, BBVA, Bancafé, Bank AV Towns, Colombian Bank Union, Agrarian Bank, Megabanco and BCSC amongst



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others.SMEsaredirectedtospecificfinancialinstitutions(FIs)dependingontheirsector.FNGanalysesthesubmittedfiles and decide if the amount of credit requested by the SMEs is within the defined guidelines for an AutomaticGuarantee.If it isthecasetheFIsdonothavetosubmitthefiletoFNGtoobtaintheguarantee.Whentherequestedloans are above the Automatic Guarantees the FIs will have to present the documents to FNG for approval, therequestedcreditscangouptoCOP800MM(USD$500,000)andarereferredtoasIndividualGuarantees.Establishedin1982,FNGisoneoftheoldestguaranteefundsinLatinAmerica.TheshareholdersaretheRepublicofColumbia(89%),Bancoldex(10.9%)and0.1%isunspecified.Thefund’smissionistofacilitatetheaccessofColumbianSMEs to financing by providing partial credit guarantees. Colombian SMEs represent about 90% of the nationalenterprises,generatebetween60to70%oftheemploymentandgenerate40%ofthenationalproduction.Forexample:COMEVA:forstartups,themaximumamountofcreditofferedbythebanksisCOP200.000.000(CDN$100K),andthemaximumamountcoveredbyFNGis80%.CreacióndeMicroempresasdeBancoAgrario: thecompanieshavetohave25employeesor lessandthecoverageofFNGis50%.BogotáEmprendedora:offersfinancingforwomenentrepreneursforamaximumamountof$3,000,000andcoverageforupto70%byFNG.Between1982and1995,3,899guaranteeswerepaidout, amounting to9.0percentof the43,200 issuedaltogether.However,1,109oftheguaranteespaidout28.4percentwererecovered,bringingdefaulttoabout6.5percent.TheAutomaticGuaranteeprogramthatColombiaoffersisveryinterestingandasimilarprogramwithlimitedsuccessexists inElSalvador,whoseanalysis follows.OnereasonColombiamayperformbetterwithanautomaticguaranteesystemistheirhighlevelofspecializationofguarantees.Althoughthistheoreticallyincreasestransactioncosts,specificcriterialeadingtoanautomaticguaranteemaybesuccessfulprovidedthecriteriaareappropriateandefficient.Giventhis scheme is bank‐specific, it would be inappropriate for social lenders and should be marketed to Colombianproducers.

PROGAPE/PROGARA/PROGAIN

Type:Automatic;bankspecificGeography:ElSalvadorCoverage$:$80,000‐$200,000Coverage%:50–70RequirementsandCharacteristics:PROGAPEisadministeredbyBancoAgrícolathroughamanagementagreementwithBMI,whilePROGARAandPROGAINareadministratedbyBancoCuscatlánundersimilararrangements.Theclientsubmits an application at one of the aforementioned banks and the lending officer evaluates the files based on thebank’s lendingcriteriaandona technical, economicand financialpointofview.Asmall company is constitutedofamaximumof 50 employees and sales up to $USD695,000. Amedium enterprise is one that has amaximumof 200employeesandsalesupto$7millionsannually.InElSalvador,theestimatedSMEfinancingneedsis$USD4.4billionperyearofwhich$USD1.6billionareunmet.In1973,theGuaranteeFundforSmallEntrepreneurs(FOGAPE)wascreatedbytheMultilateralInvestmentBank(BMI)tofacilitateaccesstocreditforsmallenterprises.Afterseveralyearsoffunctioningwithvaryingsuccess,FOGAPEwasliquidated in 2000 and various guarantee programs were created and administrated by BMI. Among them werePROGAPE,designed forsmallurbanandagro‐industrialenterprises;PROGARA,oriented towardsmallenterprises intheagriculturalsector;andPROGAINthatsupportedmediumagro‐industrialenterprises.



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Theseprogramsdonothaveahighpriorityinanyofthebankschargedwiththeiradministrationandnoneofthethreeprograms have achieved financial sustainability. The three programs (PROGAPE, PROGARA and PROGAIN) charge acommissionfeevaryingfrom2%‐4%accordingtothedebtor’screditriskrating.AsanadditionalincentivetoincreaseaccesstocreditforMSMEs,SalvadoranLawpermitstheuseofcertificatesissuedby guarantee programs as admissible collateral. Thiswould be attractive to banks because the additional collateralreduces loan provision requirements. Despite the fact that the banks have carefully studied the services offered bythese funds, the fundshavenothadanoticeableaffecton theprocessof facilitatingaccess to credit to thousandsofentrepreneurs.Manybanksexpressly indicated that theydidnotconsider these fundsagoodalternative forMSMEslackingcollateralandthestatisticsonguaranteesutilizedareevidenceofthis.AreportwrittenfortheUSAIDin20072pointsoutsomeoftheflawsoftheBMIguaranteedprograms:Somebanksindicatedtheyhadalotofdifficultyatthetimeofexecutingtheguarantees,statisticsdemonstratethatthepayout rate of these programs in El Salvador is the lowest in all of Latin America. Consequently, the banks are notenticedtousetheguaranteeprograms.Anotherissueisthatoncethebankreceivesapaymentitcannotaccountforitbyreducingitstotalportfoliopastdue(provision for bad debt) because it would unable the business owner to legally refuse ongoing collection efforts.Because of this thebanks showhigher rates of baddebt,which affects their ratingwith the superintendencyof thefinancialsystem.(SSF).Furthermore,thecommissionschargedarefixedaccordingtotheriskoftheenterpriseanddoesnottakeintoaccountthepercentofcoverageprovidedbytheguarantee,thereforethesamerateischargedfora50%guaranteeasa70%guarantee.GarantiaFIRA

Type:individual;bank‐specificGeography:MexicoRequirements and Characteristics: Supported industries include agriculture, livestock, fishing, forestry andagribusiness.FIRA(TrustFundsforRuralDevelopment)wasestablishedin1954byMexico’sfederalgovernment.Itisasecond‐tierdevelopmentbankthatofferscreditandguarantees,training,technicalassistanceandtechnology‐transfersupportFourothertrustshavebeenestablishedinconjunctionwithFIRA:

FONDO (1954)(Fondo de Garantía y Fomento para la Agricultura, Ganadería y Avicultura): Focused onmobilizingresourcestotheprimarysectorthroughshort‐termfinancing,targetedforworkingcapital

FEFA (1965) (FondoEspecial para FinanciamientosAgropecuarios): Financing, subsidies andother servicesfor production, recollection and distribution of goods and services through long‐term financing for theacquisitionofmachinery,equipment,installations,etc.

FEGA (1972) (FondoEspecial deAsistenciaTécnica yGarantía para CréditosAgropecuarios): Identification,evaluation,guarantees,technicalassistance,supervision,trainingandtechnologytransferservicestargetedtoimprovesector’sdevelopmentandcreditpayback.

FOPESCA (1989) (Fondo de Garantía y Fomento para las Actividades Pesqueras): Focused on channelingFIRA’sresourcestowardsthefishingsector

FIRAhasanextensivenetworkof143officesthroughoutMexico,morethan40%ofwhicharebasedincommunitieswithfewerthan50,000residents.FIRA’sfieldofficesandheadquartersincludeastaffofmorethan1,137agriculturalandfinancespecialistswithadeepknowledgeofMexico’sfarmingconditionsandproducercapabilities.



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Thesespecialistsconductabroadrangeofactivities fromeconomicand industrial studies, feasibilityanalysesof theprojects,supervision,implementationandtrainingtofarmers,riskmanagementandtechnologydevelopment,amongmanyothers.FIRAisgovernedbyaboardofdirectorscomprisedofrepresentativesfromtheFederalGovernment,regulatorybodies,commercial banks, agricultural industries, and awide arrayof agricultural organizations representing small andbigfarmers.Throughoutitshistory,FIRAhadexperiencedmuchgreatermanagementcontinuitythanmostpublicsectorentitiesinMexico.Itisseenasahighlyprofessionalandtechnicalorganizationwithareputationforhighintegrity,and,accordingly,enjoysgreaterinsulationfromoutsidepoliticalmanipulation.FIRAoffersadiverserangeofproductsandservicestosupportthedevelopmentof theruralsector. Itprovidesshort‐termand long‐termcredit inpesosandUSdollarsthroughfinancialintermediariesatcompetitiveinterestrates.Toshareriskandfacilitateaccesstobankcreditbyruralproducers,creditguaranteesareofferedtotraditionalbankinginstitutionsandotherfinancialintermediaries.FondacionFOGAPI

Type: guarantee letters (individual guarantee), guarantee portfolio service (portfolio guarantee) and guaranteeintermediateservice(intermediateguarantee)Geography:PeruCoverage$:350,000inlocalcurrency($USD120,000)Coverage%:upto50percentcoverageoftheprincipalDuration:3yearsRequirementsandCharacteristics:Guarantee letters ‐a letterofguarantee issuedbya first tierbank toenableanSMEtoobtaincreditfromitssuppliers,advancepaymentsandtoprovidecomplianceguaranteesinpublicandprivatetenders.Thismodelhasbeenreserved forensuringsourcesofwork forSMEwhohavetoperformserviceorsupplycontractsand isbasedupon twoprinciples: “additionality"and "noadverse selection".Theprincipleofadditionalityconsistsoffacilitatingaccesstoformalcreditforalargernumberofsmallandmicrobusinesses.Theprincipleof“noadverseselection"consistsofconsideringalldirectloansdisbursedtoSME,which,instrictchronologicalorder,meettherequirements,established in thesaidagreementbetweenFOGAPIandthe IFI tobecoveredandcovercannotberefused.ThePortfolioguaranteeisprovidedbysecondtierbanksandisaimedatgivingtheSMEsectoraccesstoformalloansfrom financial institutions.To thateffect,FOGAPIhasentered intoagreementswith financial intermediaries (FIS) toguaranteeautomaticallyupto50%ofthecapitalbalanceofSMEloans,whichmeettherequirementssetforthintheagreements.Thethirdmodel,theintermediateguarantee,wasdesignedin2002.ItspurposeistoguaranteeunregulatedEDPYMEsandNGOsthatdonotacceptpublic funds, toobtainthe fundstheyneed for theirwork fromthe financialsystem. Inaddition, FOGAPI has a refinancing agreement with USAID, signed on the 30th of September 2002, to coverintermediateguaranteesandtoguaranteetheportfoliosoftheseinstitutions:EDPYMEsregulatedbytheBankingandInsuranceRegulatorandunregulatedNGOs.FOGAPIschemesarenon‐profitandtaxable.Togetherwiththeintermediatefinancialinstitutions,thefoundationusesinformationprocessingsoftwareforthedevelopment,monitoringandcontrolofguaranteeoperations.Thissoftwareiscontinuallyupdatedtoprovideabetterservicetothetargetgroup.Thefinancial institution’s involvementinfunding,management,creditriskassessment,monitoringandrecoveryensures

prudentlendingandriskmanagementbehaviourwhichislikelyareasonforthisscheme’ssuccess.FOGAPIalsoprovides

training and guidance to the lender and borrower, reducing information asymmetries and creating sustainable

relationshipsbetweenthem.Thepricingstructure isbasedonsizeof loan,amountguaranteed,andadaptedtoriskand



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maturitywhichismarketefficientandensurestheguaranteecannotbeconstruedasasubsidytothelenderwhichwould

resultinindiscriminatelending.Therearefeespaidbyfinancialinstitutionandborrower,sothatbothpartieshaveastake

in the engagement. Borrowers must also provide some form of collateral as well as financial statistics/status, legal

documentsofthebusinessanddocumentsoftheoperationthatwillbeguaranteed.Incaseofdefault,payoutisonlyissued

afterthebankandtheguarantorhaveinitiatedrecovery.AfricanFunds

SharedInterestUS37

Type:directtobankGeography:SouthAfricaCoverage$:upto$1,270,000Coverage%:75RequirementsandCharacteristics:SharedInterestdepositssecuritiesinapooledfundinaU.S.bank.Thiscapitalisthenusedtosecurestand‐bylettersofcreditthattheU.S.bankissuesinfavorofSouthAfricanbanksfortheirloans.In2007,12ofSharedInterest’s17outstandingguaranteeshadbeenissuedtoruralcooperatives,community‐ownedandothersmall‐andmedium‐sizedagriculturalbusinesses.MuchofSouthAfrica’scommercialagriculturecontinuestobethedomainofwhitefarmers,andoftencontrolledbyahandfulof largecompanies.AnumberofSharedInterest’sruralbeneficiarieshavebeenthefirsttocompetesuccessfullywithestablishedwhitebusinesses.While most beneficiaries primarily engage in domestic markets, some are beginning to export overseas. SharedInterest’s agricultural beneficiaries include associations owned by traditional communities in former homelands,familiesmakingproductiveuseof landwhere they were forciblymovedduringapartheid,andcooperatives thatarenowfarmingfieldsthegovernmenthasreturnedtothemthroughitslandrestitutionprogram.Thecountryisstillstrugglingtoreachthegovernment’sgoalofplacing30percentofthecountry’sarablelandinblackhandsby2014(thecurrentratiois4.7percent).Moreover,thereisincreasingrecognitionthatlandownershipisonlyafirststep.Communitiesalsorequiretheworkingcapital,technicalassistanceandmarketlinkagesthatSharedInterestandThembani supply through theguaranteeprocess.Withoutsuchsupports,newbusinesses run theriskof failure,continuingpovertyandthepotentiallossoftheirland.SoutheastAsianFunds

PTAskrindo

Type:Bankcreditguarantee,tradecreditGeography:IndonesiaCoverage$:varieswithsizeCoverage%:20–70(BCG),60–90(TCI)Requirements and Characteristics: Bank Credit Guarantee ‐ This is offered to micro and small enterprises foramountsfromIDR50million,nottoexceedIDR500million;andtomediumenterprisesforcashloansaboveIDR500million,nottoexceedIDR80billion.Coveragerangesfrom20to70percentandincludesinterestandexpensessolongas they do not exceed the categorymaximum.Trade Credit Insurance ‐ there are three types: domestic, export and

37http://www.sharedinterest.org/about/



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importtradecreditinsurance.Coveragerangesfrom60to90percent.Collateralrequirementsaredeterminedbythefinancialinstitutionandpremiumratesarebetween0.45%and2%perannum.PTAskrindohasprovidedacasestudyformodelingguaranteeschemesinIndonesiaandsurroundingcountriesduetoits early establishment in 1971, as well as its four periods of business. From 1971 to 1990, credit insurance wascompulsory. During this time, although heavily subsidized by the Indonesian government, Askrindo suffered greatlossesasthepremiumratewasdeemedlowerthantherisk.In1990,thegovernmentissuedanewmarketmechanism,abolishingmostoftheirsubsidiesandleavingbanksandAskrindofreetosetpremiumratesanddetermineeligibilityforguarantees.Duetoexternalmarketconditions,Askrindoagainsufferedlossesandwaslegallyconsideredbankruptin 1993 when they suspended activities for a review period. 1996 to present has been termed the ‘Expansion ofDiversificationProductsPeriod,’wherebyAskrindohascreatedproductsdistinctfromcashloanstailoredtotheneedsofdifferenttypesofbusinessesandindustrialsectors.CasesarereviewedindividuallyandAskrindonowmanagesalltheriskinhouse.Thisapproachsurvivedthe1997financialcrisisandcontinuestobesuccessfultoday.There are two methods of guarantee, Conditional Automatic Cover (CAC) and Case by Case (CBC) approach. CACinvolvesthefulltrustofthefinancial institutionastherealizationofcreditprecedesthecreditguaranteeapplicationandapproval.Incontrast,theCBCapproachdictatestheapplicationandapprovalofthecreditguaranteemustprecedetherealizationofcredit.Incomeisgeneratedthroughpremiumsofguaranteeandinsurance,recoveries,re‐insuranceandyieldsoninvestment.Since2007,theRepublicofIndonesiaowned82.4%andtheIndonesianCentralBankowned17.6%.AsofDecember31,2007 Askrindo’s capital amounted IDR 1,727 billion consisting of 878.01 of its own capital and 849.84 from thegovernment.Askrindohas16regionaloffices,1representativeofficeand13marketingoffices.Askrindohasrecentlyengagedregionalgovernmentinvariousrisk‐sharingschemes.Oneofsuchschemesfocusesonprimaryagriculture,whichwouldbeofinteresttotheFASTmembers.

Appendix B. Guarantee survey table

TheGuaranteesurveytableillustratesanextensivelistofover100guaranteefundscurrentlyavailabletoproducers,banks or both, throughout the globe. This list contains detailed information on every fund available, including theindustrywhereitoperates,whoitlendsto,thetypeofguarantees,theamounts,andthecoverage.Tofacilitatetheviewofthisexceltable,weaskyoutopleasedownloadithere: https://www.fastinternational.org/files/Guarantee%20Survey%20Table.xls

Appendix C. Guarantee Directory for Lenders The potential Guarantee schemes for financial institutions have been summarized in the Guarantee Directory for Lenders. https://www.fastinternational.org/files/Guarantee%20Directory%20for%20Lenders.doc

Appendix D. Guarantee Directory for Producers The potential Guarantee schemes for producers have been summarized in the Guarantee Directory for Producers. https://www.fastinternational.org/files/Guarantee%20Directory%20for%20Producers.doc

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