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Setting up Effective Development Finance Instruments in Africa: Guarantee Systems and Mutual Guarantee Associations

This article explores the concept of Guarantee Systems (GSs) and Mutual Guarantee Associations (MGAs) as effective development finance instruments in Africa. It discusses the objectives, design, management, and challenges of implementing GSs and MGAs. The article also emphasizes the importance of transparency, membership fees, replenishment issues, and the impact of GSs on banks. Furthermore, it provides insights into setting up or rehabilitating Guarantee Funds (GFs) at continental, sub-regional, and national levels. The ultimate objective is to help governments, banks, and economic actors in Africa foster economic development.

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Setting up Effective Development Finance Instruments in Africa: Guarantee Systems and Mutual Guarantee Associations

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  1. GUARANTEE SYSTEMS IN AFRICA SETTING UP EFFECTIVE DEVELOPMENT FINANCE INSTRUMENTS J. Garson JGARSON

  2. JGARSON

  3. Definition Guarantor (3) (2) B A N K (1) JGARSON

  4. A lost cause ? • “All GFs did fail in Africa” • Levitsky: GFs are bound to fail • Anyway: • Moral hazard • Free rider • Logic JGARSON

  5. Yet.... • GFs worked well in Europe and in many DCs • No other answer to the issue of collateral • Cultural divide ? • Donors’ self interest ? JGARSON

  6. Revisiting the issue • Clarify the objective of GSs • Designing GSs is a science, not a (political) art • Managing GSs is a science, not... • Setting up/Rehabilitating GSs: a not too easy JGARSON

  7. Objectives of GSs JGARSON

  8. GUARANTEE SYSTEMS 2b 2a GOVERNMENTS WANT TO HELP GOVERNMENTS WANT TO HELP ECONOMIC ACTORS WANT TO HELP THEMSELVES 1 GUARANTEE FUNDS MUTUAL GUARANTEE ASSOCIATIONS JGARSON

  9. Guarantee Funds G F (3) (2) B A N K (1) JGARSON

  10. Mutual Guarantee Associations (2) (3) RF B A N K (1) JGARSON

  11. MGAs • More than 120 years • Self-managed “club” • RF = members (+ Govt + Donors) • Cottage enterprises, SMEs, dentists, housing • Levitsky ??? JGARSON

  12. Guarantee funds Rely on Budget One-year barrier Transparency Problem? MGA Membership fees Self-blocking mechanism Transparency The replenishment issue JGARSON

  13. Objective of GSs • What is a good design? JGARSON

  14. Key Parameters • Percentage of coverage • First-demand guarantee • Speedy bilateral procedures • Check additionnality • Maintain separate assessments JGARSON

  15. Know Who You Are • GSs only clients: banks • GSs only asset: credibility vis-à-vis banks • GSs only obsession: keep that credibility as high as possible JGARSON

  16. Know How You Impact Banks • Donors mistake: “they want it” • A loss is a loss, even with a GS • GSs additionnality: just tilt the balance for “grey area” cases • Help convince Banking Commissions JGARSON

  17. Objective of the GSs ? • What is a good GS design ? • What is a good GS management ? JGARSON

  18. Know Your Strength • Negotiate with Banking Commission • Keep them competing for your guarantee • Do use counterguarantees as sanctions JGARSON

  19. Objective of GSs • What is a good GS design ? • What is a good GS management ? • Setting up GSs JGARSON

  20. Setting up/Rehabilitating GFs • Continental GF: FSA • Sub-Regional GFs • GARI • Fagace • National GFs • FODEX JGARSON

  21. GUARANTEE SYSTEMS 2b 2a GOVERNMENTS WANT TO HELP 2c BANKS WANT TO DEVELOP MLT LENDING ECONOMIC ACTORS WANT TO HELP THEMSELVES MUTUAL GUARANTEE ASSOCIATIONS JGARSON

  22. Setting up MGAs • Governments (Turkey, Spain…) • Donors (Philppines) • Members themselves (France, Germany) • Banks (West Africa, Cameroon) JGARSON

  23. THANK YOU ! jose.garson@bred.fr JGARSON

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