Direct and Indirect Guarantees

Direct and Indirect Guarantees 

This classification relates to the relation between the borrower and the scheme.
Direct Guarantees 
The donor agency seeking to establish a guarantee fund acts as the guarantor and in case of default repays up to a percentage agreed. The client is presented for guaranteeing by a participating lender and the guarantor decides whether to guarantee the loan or not. In order to be approved, the loan has to be guaranteed directly by the guarantor. The advantages of this system are that it is easy to establish and to administer, since the role of the donor agency is clearly defined. The disadvantage is that it operates in an isolated way, with few institutional relations, which affects its impact on the target group. It also requires stringent control measures, making administrative costs relatively high.

Indirect Guarantees 
The difference with direct funds is that a third party administers the fund established by the donor agency. These guarantees also guarantee the loan up to a certain percentage. The final payment is debited to the fund by the third party and can take place without direct involvement of the donor agency, to which only progress reports are given. Credit Guarantee Schemes – Conceptual Frame 5 The Central Bank or the Government can sponsor these guarantee systems. The advantage of a system created by the government is that continuity is possible. On the other hand, lack of confidence and bureaucratic tardiness are also ingredients inherent in these systems.