Arguments About Bank Guarantees
Bank guarantee systems have been criticized in the last few years. We present some of the arguments that explain it.
Users of bank guarantees feel generally safe because of the fact that guarantee funds will cover any unpaid invoices. This is often criticized because this fact will not motivate people to meet their commitments.
The characterizations of unnecessary and ineffective apply primarily to public and centralized bank guarantees that are managed in a bureaucratic way.
Most bank guarantee systems rely on the principle of joint guarantee. The drawback of this system is that is not cost effective in relation to the management costs. Bank guarantees should be given in relation with each case.
In recent years, many evaluations of guarantee schemes have been carried out. These assessments were mostly confronted with the difficulty of obtaining viable information to draw realistic conclusions. However, all these studies have highlighted the role of external guarantor in the distribution of risk.
In general we can say that access to credit for small and medium size businesses is difficult. In a situation when the market is under recession or a period of slow growth, it is harder for small businesses to find sources of credit.
The challenge is to design projects that improve the relationship between the demand for micro-financing and provision of corresponding institutional credit. This objective requires the support of a widely dispersed customer base, especially in rural areas and strengthening of financial intermediaries (micro-finance institutions) which bring together the customer base and credit institutions. The bank guarantee programs have proven very useful in establishing this connection.
In countries where the government subsidizes credits to small businesses, bank guarantees have not been successful. The reason is that sources of funding coming from the government create dependency.
There is more than one type of bank guarantees. The criteria that some guarantee systems follow is the one that gives priorities to loans with interest rates dictated by the market. The financial ability to pay the loan and keep certain liquidity is also highly considered in order to reduce risk.
There are arguments regarding the use of subsidies in bank guarantees. When subsidies are applies directly to bank guarantees are more productive in the long run than those applied to interest rates. Subsidizing credit reduces the motivation to save.
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