In many countries, especially in the developing world, minimal access to formal finance hinders the growth of various sectors, more typically SMEs. This is primarily due to under-collateralization, limited or no credit history or, the lack of expertise needed to produce sophisticated financial statements. This creates a situation of asymmetric information, between the firm and the potential lender, as the latter attributes a high risk of default to the borrower and, in the absence of collateral, results in a partial or negative response to the borrower’s credit demand. Credit guarantee schemes (CGSs) are commonly used as a response to this market failure. CGSs act as schemes which protect a part of the requested loan with a guarantee that ensures the repayment of a percentage of the loan; the CGS reduces the risk of the lender and favors the provision of financing to viable businesses that are credit constrained.
