8 MAR 2019

Are Guarantees a Good Option for Nutrition Financing in East Africa?

Are Guarantees a Good Option for Nutrition Financing in East Africa?

During our previous work landscaping nutritious food enterprises in East Africa for the Global Alliance for Improved Nutrition (GAIN), iGravity noted that it appeared that there were many bank guarantees in the agriculture and SME space in Kenya that were being underutilized. Based on this observation, GAIN mandated iGravity to do a deeper analysis of: (i) the guarantees available for enterprises working alongside food value chains that could produce nutritious foods in Kenya and Tanzania, (ii) the issues impacting utilization of these guarantees in Kenya specifically, (iii) the best practices for creating guarantees with partner banks, and (iv) different options for risk sharing for nutrition financing in East Africa.

 

This work resulted in some interesting findings, including:

 

  • There are 62 active guarantees across Kenya and Tanzania with a total commitment value of USD 249 million, of which 63% are being provided by USAID’s Development Credit Authority (USAID DCA) and 70% are serving general SMEs or those in the agriculture sector. However, none of these schemes specifically focus on nutritional quality of food or associated social impacts.
  • Analysis of guarantees in Kenya shows a current simple utilization rate of 35% (meaning that of the USD 159 million committed, USD 56 million has been utilized to date ) even though the country historically benefits from at least twice the number of USAID DCA guarantees compared to other countries of comparable populations. Kenyan guarantee schemes (as well as those in other comparable countries) appear to be facing a number of similar issues, including geographical and sectoral limitations that reduce lending options, administrative complexity and hidden costs that discourage guarantee utilization, poorly timed fee structures which do not reduce risks, and perceptions from bankers that guarantees have limited utility.
  • Best practices for the design and implementation of bank guarantee schemes highlight the importance of market-research based planning; ensuring full, specialized, and experienced management attention for any guarantee product or program (including creating or working with a specialized, independent organization to manage guarantee funds that will operate at a national or regional level); selecting a banking partner that has genuine interest in working in new markets or testing new products; and how critical certain design elements (i.e. risk sharing amounts, fees, reimbursement policies, etc.) are for guarantee utilization.
  • Within risk sharing and financing mechanisms, iGravity proposes four different potential options for GAIN in Kenya: (i) opportunities to impact ongoing guarantees, (ii) creating a risk- sharing mechanism with a local bank, (iii) creating a standalone portable loan guarantee program, and (iv) creating or partnering with a domestic investment facility. Further, in order to promote a nutritional agenda, stakeholders need to recognize and value nutritional outcomes. As such, all of these structures could also employ an interest- rate buy-down schemes linked to nutritional outcomes of loans, which could provide powerful incentives to companies to reach nutritional goals while lowering the cost of financing, which remains a key barrier to SMEs.

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