Extremely conservative lending policies have long dominated banking in the Middle East and North Africa. Credit risk has been managed by minimizing exposure and imposing extremely high collateral requirements, thereby restricting credit availability to large, highly capitalized businesses. Lending also has tended to be short-term, ignoring the fixed capital requirements of borrowers. In addition to discriminating against SMEs, these practices isolate lenders from the enormous potential offered by this segment.
MEII’s loan guarantee model stimulates SME lending by providing local partner banks with guarantees typically at around 70% (depending on the country and project) of the principal amount of loans to bankable SMEs. More importantly, MEII’s loan guarantee model provides its partner banks with technical assistance to assess the viability of its SME borrowers and structure loans to effectively meet working capital and longer-term needs of borrowers, maximizing potential for full repayment. Demonstrating success where other loan guarantee and SME credit programs have failed, MEII’s loan guarantees encourage and assist banks to profitably and responsibly manage credit risk to an expanded marketplace.
MEII has designed and manages four loan guarantee facilities totaling $330 million in Palestine and Tunisia. Each is highly localized and customized according to specific risks and needs of the local banks and SMEs.
MEII guarantee facilities are not designed to be permanent economically sustainable facilities. By design they are temporary (often 10-12 year) interventions designed to address local market bottlenecks and stimulate lending to SMEs. While most traditional guarantee facilities seek financial sustainability, MEII’s definition of sustainability is when lenders and SMEs transact in the normal course of business without the need for a third party intermediary. A permanent guarantee facility encourages an unhealthy dependence on collateral, and eventually only increases the cost of lending to SMEs. MEII’s philosophy is to a use a guarantee facility as a tool with focused technical assistance program to transform the way lenders lend to SMEs.
Therefore, while the MEII loan guarantees are fully backed by AAA guarantees from OPIC or Sida, and others, MEII must raise all of the operating funds for its guarantee operations and its technical assistance and training programs from donors.