This note has been prepared to provide practical advice and guidance to World Bank task teams, clients, and donor partners who are contemplating support to partial credit guarantee (PCG) schemes in order to promote access to finance for commercial agriculture. The note serves to highlight lessons learned from other PCGs, key features for the design of such schemes, and issues that should be considered during implementation. It does not include an exhaustive literature review, though it draws on evaluations already done. Ideally, this note would be reviewed together with the recently prepared note on matching grant schemes for agriculture; the two instruments complement one another, and they are being used jointly in a growing number of Bank-supported projects. Farmers, agribusiness small and medium enterprises (SMEs), and other SMEs in other sectors tend to be constrained in their access to credit by lack of collateral, credit history, and reliable financial accounts that will mitigate asymmetric information risks and enable financial institutions to better assess their creditworthiness. High interest rates on loans to farmers and SMEs reflect these conditions and inhibit credit demand, but even with high interest rates, supply of credit is greatly constrained for such borrowers, simply because financial institutions do not wish to take the risks.
Blog » Partial Credit Guarantee Schemes to Promote Agricultural Finance
Partial Credit Guarantee Schemes to Promote Agricultural Finance
This note has been prepared to provide practical advice and guidance to World Bank task teams, clients, and donor partners who are contemplating support to partial credit guarantee (PCG) schemes in order to promote access to finance for commercial agriculture. The note serves to highlight lessons learned from other PCGs, key features for the design of such schemes, and issues that should be considered during implementation. It does not include an exhaustive literature review, though it draws on evaluations already done. Ideally, this note would be reviewed together with the recently prepared note on matching grant schemes for agriculture; the two instruments complement one another, and they are being used jointly in a growing number of Bank-supported projects. Farmers, agribusiness small and medium enterprises (SMEs), and other SMEs in other sectors tend to be constrained in their access to credit by lack of collateral, credit history, and reliable financial accounts that will mitigate asymmetric information risks and enable financial institutions to better assess their creditworthiness. High interest rates on loans to farmers and SMEs reflect these conditions and inhibit credit demand, but even with high interest rates, supply of credit is greatly constrained for such borrowers, simply because financial institutions do not wish to take the risks.