Person-to-person guaranteeing: Difference between revisions
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==Advantages== | ==Advantages== | ||
===Impact=== | ===Maximizing Impact=== | ||
Through the use of local credit channels, one U.S. dollar can leverage up to 50 dollars in loans,<ref name="benefits">[http://www.usaid.gov/our_work/economic_growth_and_trade/development_credit/overview.html USAID], USAID's partial credit guarantees.</ref> the P2P Guaranteeing model has a doubling effect of sorts. The amount of [[Capital_(economics)|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). | |||
===Promotion of Private-Sector Investment=== | |||
Guarantees will encourage financial institutions to lend untapped capital since part of the risk is being covered.<ref name="benefits /"> | |||
===Encouragement of Lending=== | |||
The risk is shared with the private-sector, effectively reducing the overall level of risk and encouraging lending.<ref name="benefits /"> | |||
===Increase of Banks' Lending Capacity=== | |||
Guarantees help banks to make loans they would not have made otherwise, thereby allowing them to explore previously untapped markets and new territory and increasing their overall lending capacity.<ref name="benefits /"> | |||
==="The Demonstration Effect"=== | |||
By demonstrating the benefits of loan guarantees -- specifically sustainability and profitability -- local financial institutions will likely follow suit and expand their market reach.<ref name="benefits /"> | |||
===Lower Foreign Exchange Rate Risk=== | ===Lower Foreign Exchange Rate Risk=== | ||
Revision as of 17:58, 13 August 2009
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,[1] 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).
Promotion of Private-Sector Investment
Guarantees will encourage financial institutions to lend untapped capital since part of the risk is being covered.Cite error: Closing </ref> missing for <ref> tag
- In 2008 USAID approved guarantees in Kyrgyzstan's education sector, enabling students to obtain loans for the purpose of pursuing higher education. Also, financing will be made available to Ghana's private primary and junior secondary schools. [2]
- 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". [2]
Pioneer
United Prosperity, a California-based non profit is considered to be "the world's first person-to-person loan guaranteeing website".[3]