Guaranteed Loans to Microfinance Institutions: How Do They Add Value?

01 January 2007

This Focus Note looks at recent experience with guarantees of commercial loans to microfinance institutions (MFIs). Such loan guarantees are a form of insurance that covers a lender—typically a commercial bank—against default on its loan to an MFI. If the MFI defaults, the guarantor (that is, the issuer of the guarantee commitment) pays the bank the guaranteed portion of the loan. The MFI pays for this insurance in order to get a loan from a bank that will not lend without some additional security for payment. Loan guarantee structures are described in the annex.

In the microfinance industry, experimentation with loan guarantees began largely as an attempt to demonstrate to local banks that MFIs are creditworthy. In 2004, loan guarantees accounted for only about 8 percent of total foreign investment in MFIs. However, use of this funding instrument is growing rapidly.

This Focus Note discusses the results of a study, jointly supported by CGAP and USAID, that draws on data provided by guarantee agencies, publicly available financial reporting by MFIs, and telephone and e-mail exchanges with selected MFI managers and guarantee agency staff.