Drawing from its extensive knowledge and experience in guarantee fund management and increasing access to finance in Ethiopia, First Consult through its BRIDGES Programme (a partnership with the Mastercard Foundation) is supporting the government of Ethiopia through the Ministry of Labor and Skills, to establish a national credit guarantee scheme.
Credit guarantee schemes (CGS) provide guarantees to borrowers who have difficulty accessing credit, by covering a share of the risk of loan default. In the case of default, the lender can recover the value of the guarantee. Credit guarantee schemes are thus designed to reduce the risk associated with lending to groups financial institutions consider high-risk, and hence facilitate access to credit by improving loan terms.
CGSs take different forms and are used for different goals. Development-oriented CGSs, which are common in the developing world, often target medium, small and micro enterprises (MSMEs) to help them get loan funding at low prices and easier conditions. In the eyes of some financial institutions, MSMEs might not be credit-worthy and hence CGSs are demanded. National CGS are often in line with national employment programs. In Africa, Ghana, Kenya, Tanzania, Rwanda and Egypt have it. They support government strategies aimed at developing the private sector with a focus on MSMEs.
In Ethiopia, CGSs by government and development partners have been extended to various ministries and agencies which were disbursed through MFIs and other financial institutions. One example is the Development Credit Authority (DCA) – a USAID-funded guarantee scheme that subsidized credit and other below-market financial products from 2004 – 2015, facilitating a total of USD 96.3 million in loans at a cost of USD 9.6 million through seven private banks. 316 businesses accessed the DCA-backed loans.
FC has a long experience in CGSs management and technical support to CGS stakeholders that spans decades and multiple programs, amassing key learnings in guarantee fund management to avail credit access to underserved sectors.
The Capital Link project is one of the first examples. From 2009-12, partial guarantees worth more than EUR 2 million were issued by Germany in financial cooperation to Ethiopia to refinance loans from two private banks to six microfinance institutions. Implementing in partnership with Enclude, the project channelled liquidity from the banking sector to the microfinance sector, and developed appropriate strategies and the capacity of the micro finance institutes to increase MSE loans.
BRIDGES Programme Team Leader Henok Tenna hands over technical proposal document for the establishment of a national CGS to H.E. Nigusu Tilahun, State Minister at the Ministry of Labour and Skills
The BRIDGES Programme currently being implemented by First Consult in partnership with the Mastercard Foundation has provided different levels of credit guarantees reaching thousands of enterprises to support their COVID resilience and relieve their need to present collateral.
Further working with the Mastercard Foundation in the MSE Resilience Facility, First Consult managed the disbursal of more than ETB 1.2 billion to more than 13,000 MSEs as an emergency facility to help MSEs in Addis Ababa withstand the economic shock caused by COVID-19. The Facility is scaled up in the MESMER Program, where First Consult is managing USD 30 million in a portfolio risk-sharing arrangement with finance institutions.
The national credit guarantee scheme proposed by First Consult this month envisions a public-private independent institution with a legal framework. It is open to multiple forms of ownership from private, government and multinational development organizations. It would mobilize public, private and philanthropic funds from various sources to serve as a policy instrument during times of economic hardship and to support credit-constrained end users during normal times. After studying the potential demand and feasibility and examining the regulatory environment, we have made a proposal for the modalities of establishing such a scheme to the FDRE Ministry of Labor and Skills.
We also held consultation workshops with two groups of stakeholders on the draft proposal and reflected their feedback in the proposal.
We propose and expect the presentation and endorsement of the proposal for a national credit guarantee scheme by the relevant government authorities. If endorsed, formation activities such as stakeholder identification and engagement, funding and governance set up, and product development and launch of the credit guarantee scheme would follow, which we are committed to support.