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
"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.
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.
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'.
Most Popular Stories
- Stop-Start Engines Save Gas, Reduce Emissions
- Shia LaBeouf Plea Deal, Alcoholism Treatment
- Ohio State Band Chief Fired After Probe
- Hispanic Leader Goes the Extra Mile
- U.K. Economy Surpasses Pre-Crisis Peak
- Visa, Amazon Results Drag Down the Street
- World Tensions Don't Curb Enthusiasm for Stocks
- Pandora Tumbles in Late Trading
- Morgan Stanley Ponies Up $275 Million to Settle SEC Charges
- Ricky Martin Joins 'The Voice ... Mexico'