Criticism Done To Bank Guarantees

By Wade Henderson on July 16, 2009

The arguments of critics of the bank guarantee system can be summarized as follows:

Users of bank guarantees feel generally safe because of the fact that guarantee funds will cover any unpaid invoices. This is often criticized because this fact will not motivate people to meet their commitments.

Another argument against bank guarantees is related to their source of management. When the guarantee system is managed by public or governmental institutions, it is argued that they tend to be unnecessary and ineffective.

Many bank guarantee systems are based on the principle of joint guarantee. This type of warranty does not cover management costs. The range of security products must be more open and adapted to each situation.

In recent years, many evaluations of guarantee schemes have been carried out. These assessments were mostly confronted with the difficulty of obtaining viable information to draw realistic conclusions. However, all these studies have highlighted the role of external guarantor in the distribution of risk.

In general, these studies have concluded that access to credit for small business is an inconvenience. They show that when the market is at the worst state of development, it becomes harder for micro, small and medium business to find sources of credit.

The strategy to take under these circumstances is to improve the relationships between the micro financing institutions and the banks in order to reduce the gap for business owners. The objective of these type of strategies is facilitating credit for small, medium businesses through the strengthening of micro financing institutions. Bank guarantees serve to make this link.

A number of bank guarantee systems have not succeeded as much because of some distortions caused by the subsidized credit and the dependence related to the governmental financial support.

There is more than one type of bank guarantees. The criteria that some guarantee systems follow is the one that gives priorities to loans with interest rates dictated by the market. The financial ability to pay the loan and keep certain liquidity is also highly considered in order to reduce risk.

The viability of schemes should be considered a long-term. The direct subsidies to guarantee schemes are less harmful subsidies in the interest rate. Indeed, the latter tending to promote the mobilization of savings while the subsidized credit does not create any incentive to save.

Bookmark/Share this Post by:

Readers Comments