Working Paper Series: Special Edition of 2016 to 2018 Interns

Partial Loan Guarantee Scheme (PLGS) PLGS are usually thought of as a means to overcome the imperfections in credit markets by allowing the associated risks with loan recovery, to shift partly towards a third-party guarantor (Camino & Cardone, 1998). The purpose of this would be twofold: Firstly it would allow for lenders to establish and gather information on new borrowers who would be backed by the guarantee, this would enable the borrowers to establish a credit record and later progress to borrowing without collateral as lenders would have sufficient information on the borrowers (Vogel & Adams, 1997). This would serve as a mechanism that would allow small businesses with viable opportunities to expand by being able to access credit. Secondly, it would allow for greater penetration in the credit markets as banks would be able to extend credit to borrowers who would not have qualified without the PLG. This would allow banks to not only reduce the risks in lending but also allow for new learning to take place, as banks would be able to gain valuable insights and gather intelligence in SME lending. Hence, becoming more efficient at credit allocation. It should be noted that such schemes would need to be carefully designed to ensure that there is proper governance structure and the risk of moral hazard is minimized. An example of a PLGS in the CARICOM region is the Credit Enhancement Facility (CEF) launched by the Development Bank of Jamaica (DBJ). The CEF functions like a partial loan guarantee and enables MSMEs without the requisite collateral requirements to access financing from a network of approved financial institution. To date the CEF has allowed for loans in excess of $1 billion to be allocated to owners of MSMEs through the issuing of more or less 200 guarantees (Smith-Edwards, 2016). There is currently an initiative being facilitated by the World Bank in collaboration with the member governments to establish a partial credit scheme in the ECCU.

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