15 November 2016

New PSDI report challenges use of credit guarantees

This 20-page report challenges the use of government-sponsored loan guarantees as a way of overcoming the lack of lending in the Pacific.

Credit Guarantees: Challenging Their Role in Improving Access to Finance in the Pacific Region argues there is no strong theoretical justification for the use of credit guarantees as, under the schemes, the nature of the risks involved does not change, only the entity that bears them. The report cautions that credit guarantees may encourage risky lending and increase lending costs. It also finds no evidence of credit guarantee schemes meaningfully extending access to credit, while some have suffered large losses.

The report says credit guarantees are not a substitute for improved credit assessment and credit risk management. Instead, it calls for continued support for reforms of collateral frameworks, noting that limited use of secured transactions frameworks by lenders to date does not detract from their long-term potential to increase access to credit. The report also recommends increased use of trade credit as an additional source of finance.