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The secrets of highly effective Credit Guarantee Schemes

 

Today, July 17th, is the last day of the Fin4ag14 conference and this time, I put my choice on joining session 15 focusing on the lessons learnt and experiences around Guarantee Schemes, given that this area of risk management has been a topical issue throughout the conference.

To give you the best take home message, this will be my last (and perhaps shortest) blog on the conference and I will give you my views on the secrets of highly effective Credit Guarantee Schemes (CGS). 

Evaluation Criteria: Setting the bar

In order to identify success, we need first to be able to define success. Like I mentioned in my first blog post for the conference, “every revolution is a product of a generation that has a clear knowledge and understanding of what they want to achieve” (paraphrased).

I suppose the same applies for CGS. So, to “begin with the end in mind” I managed to take a few notes from the Mr Prasun Das on how to evaluate successful CGS. He shared that the key dimensions of evaluating CGS are:

  1. Financial sustainability: The ability of the scheme to generate autonomously the net resources required for operating. This indicates the degree of dependence on public funds, or the public subsidy component implied in its operations;
  2. Financial additionality: Relates directly to the rationale for developing or supporting guarantee schemes, that is, to mitigate failures in financial markets, which prevent viable firms from obtaining funds;
  3. Economic additionality: Describes the effect of increased access to finance on overall economic welfare, as measured by changes in profitability, employment, investment and innovation performance of the value chain in agriculture and small business.

The golden nuggets of successful CGS

During the session, Nomathemba Mhlanga of Food and Agriculture Organisation of the United Nations (FAO) also shared the findings of a CGS study conducted by FAO in 2010 and validated in 2011. Here are my four key points drawn from the study findings and the dialogue in Session 15.

They are formed from a “Tripartite of Trust”

The first and most powerful, but least complicated secret to explain is the element of trust between the Public, Private and Producer. What the Honorable Ugandan Minister of Finance and Economic Development- called a “PPP” Partnership (PPPP) and what I would call the tripartite of trust. The existence of the underlying statutes and legal enforcement is an indicator of the presence of the tripartite of trust;

Now to a few more scientific issues…

They have “Simple, Specific Contextualised Design”

The secret to successful CGS starts in the design. Copy paste designs are bound to fail. There is need for intelligent borrowing to design CGS with specificity. This means a contextualised and valid benchmark with optimal leverage ratio.

It is important to start simple. Some of the successful CGS started by covering only the principal value and then developed to cover up to  a certain level of interest, and growing thereof. We cannot violate the principles of growth.

They have a flexible operationalisation based on relationship

Then come the operationalisation of the CGS. The operationalisation of successful CGS is centred on actors who know each other at two levels in particular:

  • Guarantor to Financial Service Provider relationship
  • Financial Service Provider to FARMER/CLIENT relationship

Successful CGS are flexible and evolve with the local and domestic markets. The fees charged are related to the domestic market, i.e. realistic and taking into account expected defaults and claim submissions are not premature.

They have “Objective Monitoring and Supervision Schemes”

Successful CGS are objectively monitored and managed, i.e. political interests do not interfere with management and supervision. Technological advancement also make it possible to utilise ICT for better Information Management Systems.

In conclusion

I am finishing this blog as I am sitting in the main auditorium waiting for the closing session of the Fin4ag Conference, and I feel a sense of achievement not individually, but rather, corporately. I believe the revolution has begun as we all take off to put into action the knowledge we have gained on Revolutionising finance for agri-value chains!

Photo credit: Florence Sipalla/CIMMYT

Blogpost by Harrison Manyumwa, Social Reporter for the Fin4Ag Conference.

Copyright © 2016, CTA. Technical Centre for Rural and Agricultural Cooperation

CTA is a joint international institution of the African, Caribbean and Pacific (ACP) Group of States and the European Union (EU). CTA operates under the framework of the Cotonou Agreement and is funded by the EU.