Guarantee Facility

Guarantee Facility

The Guarantee Facility project expands the reach and impact of sustainable trade finance by improving information and access to credit guarantee schemes for social lenders. The project also considers the viability of the development of a sector specific fund.

BACKGROUND

The lack of adequate business financing for SMEs across the developing world is a widely recognized problem. The scarcity of finance among SMEs is a result a combination of factors: insufficient or flawed information on financial risk, underdeveloped financial products for the sustainable SME sector, and underdeveloped accounting and risk management practices among many developing country SMEs. As a result of a high level of perceived and real risk, SMEs are often required to provide collateral for loans far beyond their actual capacity.

SMEs serving the sustainable goods market have fared slightly better than their unsustainable counterparts, chiefly due to the emergence of a new segment of socially-oriented lenders. These offer increased flexibility in financing as part of an intentional effort to promote sustainable development. The ability of social lenders to provide credit to those most in need, however, is hampered by traditional risk barriers.

The barriers to the flow of credit are underdeveloped frameworks and information system, which could be overcomed through the development of more active and streamlined lending channels and instruments. To date, the "risk barrier" has effectively prevented the growth of the necessary infrastructure needed to serve SMEs efficiently.

In recognition of this, a number of guarantee services and mechanisms have been established to support and encourage commercial banks to lend to otherwise overlooked small businesses. Access to such guarantee schemes, when managed according to market principles, can provide an opportunity for producers at the lower end of the economic scale to demonstrate their financial viability, while simultaneously facilitating the development of instruments and infrastructure more responsive to the needs of other SMEs.

However, despite the growth of guarantee services, the issue of inadequate financing remains. Restrictions on the use of existing guarantees schemes, combined with a lack of coordination, allows for only limited access to such facilities, while a shortage of guarantee capital and funds sets their upper limits far below actual needs.

There is a shortage of credit available to SMEs in both sustainable and conventional sectors and insufficient guarantee funds to address the problem. The FAST Guarantee Facility will improve the ability of social lenders to access guarantee schemes by removing existing barriers, developing instruments for facilitating access, and to the degree appropriate, the development of a sector specific guarantee fund.

GOALS

The FAST Guarantee Facility provides greater access for sustainable SMEs, who are excluded from current lending systems, to finance their continued operation and growth. By identifying existing guarantee services available to socially-oriented lenders, improving the ability of these lenders to utilize such services, and reducing the obstacles that currently inhibit their use, lenders can improve the quantity and quality of the loans they distribute, maximizing their impact and reaching those most in need.

STRATEGIC APPROACH

With the initial project planning completed and phase one launched, FAST is currently seeking funds to carry the project through the remaining stages.

Phase One: Review of Existing Guarantee Services
An in-depth review of existing guarantee services will be conducted to identify the schemes appropriate for socially-oriented lending institutions. Additionally, an information platform will be developed to increase lender awareness of the various schemes and the conditions on their use.

Phase Two: Amendment of Existing Guarantee Services
FAST will work directly with the providers of identified guarantee facilities to identify and reduce the barriers that may impact the operation of guarantee facilities by social-lending institutions. As well, FAST will facilitate the adaptation of existing guarantee schemes to improve access for its constituents.

Phase Three: Establishment of a Specific Guarantee Fund
FAST may work to establish a guarantee facility dedicated to social-lending institutions if the previous phases have not adequately expanded the total capital available within the sector.

Developments of this project have been made possible thanks to the support of:

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