The Concept of the Credit Guarantee Scheme

A credit guarantee is a commitment by a Credit Guarantee Scheme (CGS) (the ‘guarantor’) regarding the repayment of a loan received by an enterprise (the ‘borrower’) from a commercial bank (the ‘lender’).

 Credit guarantees can facilitate access to finance only if they are accepted as a valid substitute for other forms of collateral by commercial banks.

In order to be recognized as a valid risk mitigating, a credit guarantee must display certain features, including adherence to Basel II conditions meted on banks.

In particular, a credit guarantee must be direct (i.e. represent a direct claim of the lender on the guarantor), explicit (i.e. address a specific exposure), unconditional (i.e. its payment is not submitted to conditions that are not under the control of the lender), irrevocable (i.e. cannot be cancelled by the guarantor unless the lender has failed to fulfill its obligations), explicitly documented and legally enforceable.

Although established precisely to alleviate commercial banks’ risks, credit guarantees typically do not cover the full value of loans, in order to avoid ‘moral hazard’ and opportunistic behavior.

A system based on credit guarantees requires reconciling different and equally legitimate interests, it is not about “imposing” anything on banks or granting a ‘free ride’.