|
|
|
|
|
| About Guarantees |
| What is a loan guarantee? |
A loan guarantee is an agreement between a guarantor, a lender, and a borrower in which it is agreed that a guarantor will repay the loan if the borrower defaults.
|
In the United Prosperity context, a loan guarantee is your offer to repay an agreed percentage of a loan to the bank in case (a) entrepreneur defaults on the loan she received from the microfinance institution (MFI) and (b) the MFI then defaults on the loan it received from the bank. As a social guarantor, you could lose the funds you use to guarantee a micro-loan only if both the above defaults happen. You can reduce the risk of default by using your contribution to guarantee several entrepreneurs (in different geographical areas and business sectors) rather than focusing your contribution on just one entrepreneur.
|
Your guarantee reduces the risk for the bank and therefore enables the bank to make a loan which they would not have otherwise made. United Prosperity consolidates the guarantees provided by social guarantors and offers a single, larger guarantee to the bank.
|
| How does a United Prosperity guarantee work? |
The process of guaranteeing loans for MFI partners involves the following steps:- Our MFI partners upload the profiles of poor entrepreneurs seeking loans.
- You, the social guarantor, select the entrepreneur(s) you want to support and contribute funds to guarantee their loans.
- United Prosperity consolidates the payments received towards all entrepreneurs presented by the same MFI partner. With the aggregated funds, United Prosperity issues a cash-secured guarantee to a bank on behalf of the MFI partner. Based on the guarantee, the MFI partner is issued a loan from a local bank, and lends to the entrepreneurs that you and others have selected.
- Once the entrepreneurs repay the loan to the MFI and the MFI repays the loan to the bank, your guarantee gets freed up. At that point, you can either withdraw your money, or use to guarantee the loans of other entrepreneurs.
|
In some cases, our partners will be involved in facilitating the loans to entrepreneurs but not making the loan themselves. In such a case, United Prosperity would issue a cash-backed guarantee on behalf of the entrepreneur and the bank would lend directly to the entrepreneur.
|
| As a supporter of microfinance why should I guarantee a loan to a poor entrepreneur rather than lend directly to that entrepreneur? |
With a guarantee your money has a bigger impact. Here’s how:
Example A: Providing a loan to a poor entrepreneur: A poor entrepreneur needs a $1,000 loan. Ten lenders could each contribute $100 to make a loan of $1000 to the poor entrepreneur.
Thus a total $1000 in contributions results in $1000 of loans made to the poor entrepreneur. On an individual basis, a $100 contribution results in a $100 loan to a poor entrepreneur.
Example B: Providing a loan guarantee to a poor entrepreneur through United Prosperity: Guarantee amounts are typically only a portion of the loan amount. For example, for a bank to lend $1000 to a poor entrepreneur, it might require a guarantee of only $200. Thus 2 social guarantors could each contribute only $100 and cover the $200 guarantee needed and thereby make a $1,000 loan available to the poor entrepreneur.
Thus $200 in guarantees results in $1000 loans available to the poor entrepreneur. On an individual basis, $100 loan guarantee results in $500 of lending to a poor entrepreneur.
=> As a result, with a given amount of money you make a bigger impact with a loan guarantee than with a loan.
Based on the credit history of our partners or the entrepreneurs, the guarantee percentage needed may vary from 15% to 60% of the loan amount. Thus $100 in guarantees is capable of facilitating $166 in loan (60% guarantee) or even up to $666 in loan (15% guarantee).
|
| Are there any additional advantages of providing a loan guarantee using the United Prosperity model as compared to other Person to Person models? |
Yes, there are several other advantages of a loan guarantee using the United Prosperity model:
- Local linkages: Our guarantee facilitates the creation of local linkages between domestic banks, MFIs and poor entrepreneurs. In the course of repaying the loan, both the entrepreneur and the MFIs develop credit histories that will enable them to access more funds at a later date with a lower guarantee percentage, or even without a guarantee. MFIs also get to form relationships with banks and offer other products like savings, insurance, money transfer etc. through the bank.
- Mitigates foreign exchange risk: The foreign exchange risk is mitigated since the loan from the Bank to the MFI, and from the MFI to the entrepreneur are in local currency.
- Reduced interest: Our guarantee reduces the interest the bank will charge the MFI since the bank’s risk is lower. Some of the interest rate benefits get passed on to the entrepreneur.
- Scalability: There is enough money available in the developing countries. Our guarantee frees up those funds. It utilizes available capital effectively and in the long term it is a more scalable model.
- Manages risk better: We get the additional benefit of monitoring of the loan to the MFI by the bank which is not available with other person to person models.
|
| How long will it take for the entrepreneur to get a loan after I guarantee? |
A ‘guarantee needed by’ date is posted in every entrepreneur’s profile. The entrepreneur is expected to receive their loan within 4-6 weeks of that date.
|
|
|
|
