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Rural Credit Guarantee Schemes

Rural Credit Guarantee Schemes
Accessing finance is a challenging task for firms; however these financing constraints tend to be even more difficult for micro, small and medium enterprises (MSMEs), whose main problem regarding access to finance tends to be deficient collateral. In response, governments, central banks, non-governmental organizations (NGOs) and the private sector have developed initiatives such as credit guarantee schemes (CGSs). For MSMEs that are unable to obtain credit due to deficient collateral, CGSs can alleviate the high collateral requirements by covering a share of the default risk of the loan, absorbing an important share of borrower risk and alleviating the stringent collateral requirements demanded by banking regulations. In case of default of a borrower, the lender would be able to cover part of the outstanding debt by calling on the guarantee. There seems to be a consensus of most practitioners and designers on some core design principles, including: (1) only partial coverage of the loan amount (e.g. 50%); (2) establishment of the CGSs as registered and licensed non-bank financial institutions operating under central bank supervision; (3) avoiding first loss cover by the CGS, going for shared losses and sharing of amounts recovered; and (4) charging a guarantee fee high enough to allow the CGS break even, after making loan loss provisions and creation of reserves.  

All countries in the MedAgri region have established credit guarantee schemes to facilitate MSME access to finance. 
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