Designing credit guarantees for systemic impact
- May 7
- 2 min read
The conditions for catalytic exit, and what follows for guarantee design when those conditions are absent
The rhetoric and reality on credit guarantees are miles apart. The discourse abounds with words like catalytic, sustainability, leverage, market creation and many others. But neither the theory nor the evidence are commonly put forward to support it.
Guarantees can do many important and impactful things. They can be socially and economically impactful and result in short-term allocation of resources to development outcomes that would not otherwise happen. They can be more efficient ways of delivering those resources than grants or technical assistance.
Guarantees can also build markets and be transformative. At present, though, at best we can say that we don't know if they do, and at worst there are very many cases where we know that they don't. We use the wrong metrics - the frequently used loss rates are diagnostically silent as to the market impact.
It is this catalytic exit theory of change that this paper interrogates. Catalytic exit has a single compound condition: There is a bankable segment of the credit market which is underserved because of false assumptions about default behaviour, recovery, or operating costs and that these assumptions are correctible through observed performance data.
The paper goes on to describe a more effective set of diagnostic processes necessary to achieve catalytic exit and some design and management practices which might be useful to do so.
It also looks at why "bad" guarantees (from a catalytic perspective) continue to be launched, highlighting "optically" efficiency, high reported "leverage ratios" and low initial fiscal costs compared to grants. While for lenders they can be a "free option" or a subsidy for lending they might have done anyway.
So, how do you design a credit guarantee for systemic impact?
👀 Sourcing: Requires a "systemic analysis" of why the market is failing before the instrument is chosen.
🏤 Management: Moves from "credit administration" to "value creation," where the guarantor actively helps the bank learn from the data.
📏 Measurement: Support better and more complex interim indicators of market impact. Demand ex-post tracking of unguaranteed lending - the only true test of a catalytic exit. Let's help guarantees reach their potential
Read the full paper for a nuanced and evidenced argument and let's improve the deployment of guarantees.
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