The Benefits and Costs of Loan Guarantee Programs

This paper discusses loan guarantee programs, focusing specifically on their costs and benefits. The paper studies:

• Background of loan guarantee schemes;
• Their role in overcoming market imperfections, focusing on the role of information, collateral and transaction costs.

The paper discusses the costs and benefits of loan guarantee programs:

• Costs include:
  • Set-up costs: costs of setting up a new organization. The government or donors cover these costs;
  • Program subsidies: most loan guarantee programs involve heavy subsidies either to set them up and/or sustain their operations;
  • Transaction costs: these are the additional costs incurred by lenders and borrowers.
• Benefits include:
  • Additionality: this could be expressed either in terms of number of clients, number of loans, or volume of funds lent for targeted purposes; loan guarantees cause additional lending to targeted groups;
  • Counterfactual: speculation on whether the lending would have occurred without the guarantee;
  • Substitution: this includes intra-portfolio substitution and inter-lender substitution.
• Lessons learnt:
  • Assumptions about credit market imperfections (on which loan guarantee programs are often built) and the design of these programs, are seldom logically related;
  • All these programs involve subsidies;
  • Most of the evaluations report only part of the associated costs;
  • Benefits of these programs are seldom documented and additionality is never accurately measured.

The paper concludes that lack of information makes it impossible to make an informed judgment about the relationship between benefits and costs of these efforts.