How FIG's Loan Guarantees Work
For MFIs and agriculture cooperatives in Africa and Latin America, obtaining credit is a necessary step towards self-sufficiency. Unfortunately, MFIs face serious difficulties when applying for loans from local banks.FIG breaks this impasse by identifying MFIs with market potential, training them to meet commercial bank standards of transparency, and providing Swiss bank guarantees on those MFIs' behalf. An important element of FIG's bank guarantees is that they do not cover more than 50% of the loans to the beneficiary MFIs and require that the MFIs pledge 10% of the guaranteed amount as collateral. Hence, all actors, FIG, the local bank, and the MFI, share the credit risk and are invested in the MFI's success.
As FIG's MFI clients have a track record of performing their loans, banks' conditions become softer until the MFIs are eventually considered reliable clients. Hence, FIG's loan guarantees reform bankers' risk perception of the informal sector, and help integrate the microfinance and commercial finance sectors.
Portfolio Guarantees
Unlike FIG's loan guarantees, FIG's portfolio guarantees are direct agreements between FIG and the beneficiary MFI. They secure an MFI's particular group of clients, by covering a percentage of potential losses.Specifically, portfolio guarantees cover a fixed percentage of any potential losses of the loan portfolio in excess of the MFI's average historical loss rate (which is certified by an external auditor). For the beneficiary MFI, FIG's portfolio guarantee works as credit insurance.
These guarantees are widely recognized as effective risk management tools by regulators and bank authorities, helping improve MFIs' standing with credit rating agencies. They prove particularly useful for MFIs wanting to grow into regulated financial institutions.
FIG c/o RAFAD Foundation - C.P. 117 - Rue de Varembé 1 - CH-1211 Geneva 20 - Switzerland / Phone: +41 22 733 5073 - Fax: +41 22 734 7083