SUMMARY

While the use of credit guarantees is a wellknown conventional credit enhancement and risk sharing instrument, the global experience of credit guarantee schemes (CGSs) to support the financing of green initiatives of micro, small and medium enterprises (MSMEs) is very limited.

The development of green markets for MSMEs is challenged by a lack of policy and regulatory guidance, as well as economic efficiency (i.e. projects which produce social returns but insufficient private returns, given the perceived risks). However, progress is being made; combining financial inclusion approaches with sustainability objectives is gaining traction across AFI member jurisdictions.

In low and middle-income countries, green segments are still considered a new frontier for most financial institutions, and therefore, credit guarantees may be useful instruments where credit risk is perceived to be the key barrier to accessing finance.

Credit guarantee schemes can help to bridge the initial phase of uncertainty of MSME financing of green projects by: > Improving the bankability of transactions, where collateral is poor. > Encouraging lenders to provide financing to target groups by sharing credit risk. > Creating market learning opportunities for green business and technologies. > Improving the ability of lenders to price risk for

MSMEs and green projects. > Helping banks to initiate and grow their green lending business by revealing new clients.

Certain policy and regulatory pre-conditions are necessary to ensure that greening goals can be achieved through MSME financing. Defining what is “green” as well as an “MSME” is a priority being addressed by AFI member jurisdictions. Aligning CGS objectives with national definitions will prove to be a critical factor in addressing inclusive green policy objectives.

A proper design is crucial to achieving successful green policy goals for MSME financing, while maintaining the ongoing financial viability of operating a CGS. Depending on funding and market situations, there are numerous approaches for implementing a CGS; schemes can be publicly funded and administered, privately administered, or a combination of the two (hybrid). Determining the appropriate guarantee approach given the desired target groups (individual versus portfolio) and calibrating coverage ratios, costs, operational procedures and monitoring methods are critical factors to consider.

Several AFI members have implemented MSME CGSs with varying design approaches and experiences. Adapting these schemes to meet future green finance policy goals is being widely considered.

There are many challenges to financing green projects; from the risk appetite of lenders to the lack of awareness of borrowers which should be considered by policymakers when implementing a scheme. Ultimately, a credit guarantee is a specific instrument that has limitations for supporting access to finance. A CGS can be - and is often - designed to accompany other government support interventions such as concessionary refinancing facilities, capacity building programs, and targeted regulatory treatments, all of which are part of a comprehensive approach to tackling barriers to finance for MSMEs.