FUNDES – an attempt to establish loan guarantee schemes through private foundations in Latin America

Eckart Oehring

Mutual guarantee co-operatives or independent guarantee funds for small enterprises exist in almost all the industrialized countries, and have been gaining in importance as development instruments in the Third World, mostly financed from abroad. In Latin America, however, these often
degenerate into loan insurance schemes in which 75 per cent or more of the loan risk is carried by the guarantee scheme. The banks are generally uninterested as far as small enterprises are concerned. Such guarantee schemes allow the banks to take a careless attitude towards loan approval,
and this results in a high loss of guarantee commitments.In spite of these negative results in the Third World, FUNDES firmly believes that loan guarantee schemes can be developed into useful instruments for the promotion of small enterprise. It is very important to decide, however, exactly
which firms should be promoted by such credit guarantees, what are the precise aims of the fund, whether it has been set up on sound principles, and who administrates it.This paper describes the approach of FUNDES and its recent experience in six Latin American countries – Guatemala,
Costa Rica, Panama, Ecuador, Colombia and Bolivia – and it starts by describing some of the problems encountered with credit guarantee schemes.