Here we present you some of the arguments that people have used to explain their thoughts about bank guarantees.
Users of bank guarantees feel generally safe because of the fact that guarantee funds will cover any unpaid invoices. This is often criticized because this fact will not motivate people to meet their commitments.
The characterizations of unnecessary and ineffective apply primarily to public and centralized bank guarantees that are managed in a bureaucratic way.
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.
In general we can say that access to credit for small and medium size businesses is difficult. In a situation when the market is under recession or a period of slow growth, it is harder for small businesses to find sources of credit.
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.
Bank guarantees have been less effective in countries whose governments provide subsidies to small credits. When bank guarantees are subsidized, people tend to save more and increase their dependency to the government.
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.
Users of bank guarantees feel generally safe because of the fact that guarantee funds will cover any unpaid invoices. This is often criticized because this fact will not motivate people to meet their commitments.
The characterizations of unnecessary and ineffective apply primarily to public and centralized bank guarantees that are managed in a bureaucratic way.
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.
In general we can say that access to credit for small and medium size businesses is difficult. In a situation when the market is under recession or a period of slow growth, it is harder for small businesses to find sources of credit.
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.
Bank guarantees have been less effective in countries whose governments provide subsidies to small credits. When bank guarantees are subsidized, people tend to save more and increase their dependency to the government.
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 Commercial Credit LC
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