Person-to-person guaranteeing

Person-to-Person Guaranteeing (P2P Guaranteeing) is the process by which people are able to facilitate the lending process by providing the guarantee or collateral for a loan to be taken out. In the case of a borrower in such a position that there is insufficient funds for even the loan collateral, banks will not lend because of the inherent riskiness associated with such a loan. Therefore, it would be necessary for the borrower to obtain the funds from outside sources. By engaging in P2P Guaranteeing a third party steps in and provides the necessary risk capital by guaranteeing the loan, thereby reducing the bank's risk and enabling them to make a loan that they would not have otherwise made.
Advantages
*Maximizing Impact: Through the use of local credit channels, one U.S. dollar can leverage up to 50 dollars in loans, the P2P Guaranteeing model has a doubling effect of sorts. The amount of capital required of person A in order for person B to obtain a loan is less than the full loan amount, as person A is only supplying the collateral to free up the loan rather than the loan itself. Therefore, a $100 loan might require $20 in guarantee capital (20% of the loan amount).
*Lower Foreign Exchange Rate Risk: With P2P guaranteeing transactions are done solely in the local currency, between the local bank and the borrower. Money does not exchange hands when one agrees to become a guarantor since a guarantee is only an agreement to take on debt should the borrower default. The only time money crosses borders with P2P guaranteeing is in the event of a default. Therefore, the risk of loss associated with fluctuations in the Foreign exchange rate is greatly diminished.
*Lower Interest Rates: Guaranteeing a loan increases confidence that the loan will be repaid and it reduces the risk faced by the bank. As a result of reduced risk the cost to borrowing becomes less, which translates to a lower interest rate charged by the bank to the borrower.
*Promotion of Private-Sector Investment: Guarantees will encourage financial institutions to lend untapped capital since part of the risk is being covered.
*In 2008 USAID approved guarantees in education sector, enabling students to obtain loans for the purpose of pursuing higher education. Also, financing will be made available to private primary and junior secondary schools. <ref name="usaid" />
*In a July 2008 co-guarantee approval by USAID, a 10 year $48 million guarantee facility was set up to assist with the financial needs of "small and medium-sized enterprises" who are deemed "too small for corporate loans but have financing needs larger than what microfinance institutions can provide". <ref name="usaid" />

Main Menu

See Also

Main Menu