News Column

Africa's Call for Holistic Approach to Agro-Credit Guarantee Schemes

July 17, 2014

Masembe Tambwe

AFRICAN countries that adopt new tools to manage risk in agricultural Credit Guarantee Schemes (CGSs) have been cautioned to have the tools tailor- made to the countries' own environment lest they increase the problem.

Speaking during a session on Guarantee Schemes: Experiences and Lessons Learnt at the conference on revolutionising finance for agri-value chains here, aBI Finance Chief Operating Officer, Ms Josephine Mukumbya, said while the schemes helped in improving credit guarantee small enterprises' access to credit, without proper planning and design this would not be achieved.

"Agriculture, as it is known, is subject to many risks and some of the tools of mitigating these risks are warehousing receipt, insurance and contracts as well as credit guarantees. While CGSs are just one of the tools, I would advocate a holistic approach to getting the best results," she said.

Ms Mukumbya explained that various types of guarantee systems and schemes were used to increase lending or investing to targeted sectors or type of enterprises by sharing or absorbing the risks associated with lending.

Guarantees not only can increase the amount of loan funds available to an enterprise or a portfolio of investment beyond its own collateral limits, but also due diligence and monitoring by the guarantee manager could improve the quality of the loans made.

However, guarantee funds have a cost, which is paid through the fees charged and/or subsidised by the government or a donor, hence questions arise regarding the costs versus the benefits when a subsidy is needed.

"There is considerable renewed interest in using guarantees to increase investment in agriculture and small and medium enterprises that are deemed too risky for adequate financing without such risk-sharing incentives," she said.

Food and Agriculture Organisation (FAO) Agribusiness Economist in the Rural Infrastructure and Agro-Industries Division, Dr Nomathemba Mhlanga, shared with participants recent findings of a report on CGSs in Africa, saying that political interference and the inability of CGS managers to minimize this interference had brought an end to many CGS, particularly those operating in developing economies.

Dr Mhlanga said that the general lack of transparency in the presentation of financial results of most CGS is a further weakness that contributes to their fragility and potential misuse by forces other than those with commercial and development objectives.

"In spite of this, there are positive precedents for operating with different types of guarantee. Success is facilitated by a generally healthy banking sector with generally low levels of impaired assets, transparent accounting accompanied by supervision and evaluations, and professional management that is independent and free from political interference," she explained.

The design of guarantee systems has evolved to address the new and changing needs of intermediary financial service providers in areas such as portfolio concentration risks and the capital requirements for cushioning against lending risks.

Asia Pacific Rural and Agricultural Credit Association (APRACA) Project Manager, Dr Prasun Das, said due to the economic crisis, guarantee schemes had now once again become important ways to improve access to credit and offer credit leverage (also known as additionally) rather than being mere credit risk mitigators as in the past. Dr Das said that guarantee schemes are designed to act in situations of stability.

However, the pressure they are currently experiencing and the unfavourable economic situation have adversely impacted their soundness and ability to issue guarantees, and is also deteriorating the quality of their assets.

"In this scenario, it is important for guarantee players to start up a sharing process to enhance and spread best practices and discuss the most critical issues," he said.

The concept of additionality arose and became popular in the 1990s. Guarantee schemes facilitate access to credit for companies which would otherwise be unable to obtain it, transforming the role of the players from 'risk mitigators', which reduce the banking system's information asymmetries, to 'risk underwriters'.

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Source: AllAfrica

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