Bank guarantee systems have been criticized in the last few years. We present some of the arguments that explain it.
One of the main criticisms that bank guarantees receive is the one related to its effect on savings. When a user is under bank guarantee, he or she is not motivated to keep savings because the guarantee covers for expenses not pain.
Another argument against bank guarantees is related to their source of management. When the guarantee system is managed by public or governmental institutions, it is argued that they tend to be unnecessary and ineffective.
Joint guarantee is the most common principle under which bank guarantees are based. However this type of guarantee does not pay for the administrative costs that it involves. This is why we recommend ranges of bank guarantees to be applicable according to each case.
There have been efforts to evaluate the effectiveness of bank guarantees through studies. The challenges have mostly been around the collection of feasible and relevant information. In spite of the difficulties, the common thread is the importance of the use of collateral to reduce risk.
Some conclusions could be drawn on the basis of the guarantee fund assessed. Access to credit for small businesses is seen as a problem. The least the financial market is developed, the greater the access of micro, small and medium enterprise credit is limited.
The challenge is to design projects that improve the relationship between the demand for micro-financing and provision of corresponding institutional credit. This objective requires the support of a widely dispersed customer base, especially in rural areas and strengthening of financial intermediaries (micro-finance institutions) which bring together the customer base and credit institutions. The bank guarantee programs have proven very useful in establishing this connection.
In countries where the government subsidizes credits to small businesses, bank guarantees have not been successful. The reason is that sources of funding coming from the government create dependency.
There is more than one type of bank guarantees. The criteria that some guarantee systems follow is the one that gives priorities to loans with interest rates dictated by the market. The financial ability to pay the loan and keep certain liquidity is also highly considered in order to reduce risk.
The viability of schemes should be considered a long-term. The direct subsidies to guarantee schemes are less harmful subsidies in the interest rate. Indeed, the latter tending to promote the mobilization of savings while the subsidized credit does not create any incentive to save.
One of the main criticisms that bank guarantees receive is the one related to its effect on savings. When a user is under bank guarantee, he or she is not motivated to keep savings because the guarantee covers for expenses not pain.
Another argument against bank guarantees is related to their source of management. When the guarantee system is managed by public or governmental institutions, it is argued that they tend to be unnecessary and ineffective.
Joint guarantee is the most common principle under which bank guarantees are based. However this type of guarantee does not pay for the administrative costs that it involves. This is why we recommend ranges of bank guarantees to be applicable according to each case.
There have been efforts to evaluate the effectiveness of bank guarantees through studies. The challenges have mostly been around the collection of feasible and relevant information. In spite of the difficulties, the common thread is the importance of the use of collateral to reduce risk.
Some conclusions could be drawn on the basis of the guarantee fund assessed. Access to credit for small businesses is seen as a problem. The least the financial market is developed, the greater the access of micro, small and medium enterprise credit is limited.
The challenge is to design projects that improve the relationship between the demand for micro-financing and provision of corresponding institutional credit. This objective requires the support of a widely dispersed customer base, especially in rural areas and strengthening of financial intermediaries (micro-finance institutions) which bring together the customer base and credit institutions. The bank guarantee programs have proven very useful in establishing this connection.
In countries where the government subsidizes credits to small businesses, bank guarantees have not been successful. The reason is that sources of funding coming from the government create dependency.
There is more than one type of bank guarantees. The criteria that some guarantee systems follow is the one that gives priorities to loans with interest rates dictated by the market. The financial ability to pay the loan and keep certain liquidity is also highly considered in order to reduce risk.
The viability of schemes should be considered a long-term. The direct subsidies to guarantee schemes are less harmful subsidies in the interest rate. Indeed, the latter tending to promote the mobilization of savings while the subsidized credit does not create any incentive to save.
About the Author:
Wade Henderson - recognized Professional - 15 yrs in the Business Finance Field - strong reputation for getting the deal done. IMMFinancial.com Letter of Bank Export Documents You are welcome to reprint this article - but get your own unique content version here.
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