Guarantees for microfinance: Impact and lessons learned
One key challenge facing microfinance institutions (MFIs) is their inability to access sufficient financing – especially in local currency, which mitigates foreign exchange risk. Most MFIs are unable to meet their funding needs by mobilizing deposits alone, while local banks have
varying appetites for lending to MFIs. Strategically using guarantees can open up local markets and, over time, reduce the amounts required as local banks become more comfortable. Between 2006 and 2010, the proportion of total MFI hard currency financing decreased from 86 per cent to 69 per
cent – a positive trend that needs to continue. In 2005, Grameen Foundation launched one of the few loan guarantee programmes dedicated solely to local currency financing. To date, it has helped generate over US$188 m in financing through $54 m in guarantees, without any
defaults. This article discusses lessons learned; the role of guarantees in MFI capital raising; and the overall impact on both MFIs and commercial lenders.