The power of portfolio guarantees to deepen financial inclusion

  • Jorge RAMIREZ, European Microfinance Network (EMN)
  • Speakers
  • Adriano PALLARO, Banca Etica
  • Shadin VIRATHAM PULSAWATDI, European Commission
  • Perrine POUGET, European Investment Fund
  • Samuel PAULUS, Microlux

    Jorge RAMIREZ of European Microfinance Network (EMN), the moderator of the session, opened by explaining the main idea of the EaSI guarantee. Most guarantees are bank guarantees for MFIs to get access to more funding. EasI is a guarantee for the portfolio of MFIs. He argued that the EaSl guarantee serves as the backbone of the sector in Europe. It is a financial instrument managed by the European Investment Fund (EIF) on behalf of the European Commission. Ramirez then explained that the purpose of the session was to discuss the possibilities to replicate this type of guarantee outside of Europe. He introduced the speakers of the panel, which consisted of Perrine POUGET and Shadin VIRATHAM PULSAWATDI -who represented the perspectives of the European Investment Fund (EIF) and the European Commission, Samuel PAULUS of Microlux and Adriano PALLARO of Banca Etica who shared their experiences as Social and Sustainable Financial Intermediary practitioners of the EaSI guarantee. 

    As first speaker, Viratham Pulswatdi of the European Commission explained that a key priority of the European Commission is to build and invest in inclusiveness and job creation in the European Union. Microfinance is a powerful tool to encourage and promote people’s self-employment. He stated that financial inclusion can help to achieve social inclusion. The EaSI guarantee as a financial instrument is one tool in the toolbox of the EaSI programme, which also includes grants, technical assistance and repayable finance. The guarantee helps to mitigate risks for lenders. This guarantee allows MFIs to take on more risks to target the most vulnerable people and those furthest from the labour market who usually do not have collateral or a credit track record and are therefore often excluded from traditional bank financing. Since its launch three years ago, the EaSI guarantee has been met by strong market demand.

    Pouget of the EIF explained in more detail how the guarantee works. The purpose of the guarantee is to cover credit losses on the portfolio with three underlying features: the Guarantee is free of charge, up to 80% of each loan amount is covered by the Guarantee if the loan reimbursement fails, and the guarantee is capped which means that the EaSI guarantee will cover only up to a certain amount of loan default on a portfolio basis. Nevertheless, while it is free of charge, financial institutions do have to bear the extra costs of due diligence and extra reporting, including what is reported on social metrics. Moreover financial institutions need to adhere to the European Code of Good Conduct – a set of guidelines about best practices in microfinance management and consumer protection- in order to be eligible for the guarantee.

    Ramirez then moved to the practitioners of the guarantee. He mentioned that the EMN did a survey among their members. Among them, 60 have used the EaSI guarantee. Some of the benefits they mentioned were that the guarantee helped them to bring down their costs and that it served as a lifeline for the financial sustainability of the institution. Ramirez then asked Paulus from Microlux and Pallaro from Banca Etica to share their experiences. 

    Paulus explained that Microlux is a young MFI from Luxembourg that started in 2016. He stated that while Luxembourg is a rich country, there are also more vulnerable and unemployed people who do not have access to traditional banks and that there is a need for microfinance. The EaSI guarantee played a crucial role in the creation of the company because the main shareholders did not want to take all the risk. For Microlux, the value of the guarantee lies not only in the financial services but in the entire toolbox around it. Especially the process of adhering to the European Code of Conduct and the technical assistance they received was a valuable learning process and helped them to professionalise. 

    Pallaro explained that Banca Etica is a cooperative bank from Italy, inspired by the principles of ethical finance: participation, transparency, efficiency and awareness of the non-economic consequences of economic actions. The EaSI guarantee has supported the bank with sharing risks and this resulted in an increase of the portfolio. It also helped to finance different types of enterprises and issue different types of loans, namely social enterprises. The bank did struggle with the process of signing the agreement which took a long time and was complicated. Pallaro also mentioned that the administration and reporting was a challenge for the bank.


    Ramirez then opened the floor for questions. He asked if there were any suggestions from the audience on how this type of guarantee could be replicated outside of Europe. A first comment from the audience was about the fact that the guarantee was free of charge. He had experience in Latin America and mentioned that it would be difficult to promote a scheme without charging the client. Viratham Pulswatdi responded that the aim of the EU-backed guarantee is above all to help meet policy objectives and reach those clients who would otherwise not get access to finance. 

    Pouget added that the guarantee is not designed to help MFIs, the essence is to help the most vulnerable and riskier groups. Any financial benefit needs to be passed on to the client.

    Ramirez then mentioned the issue of dependency on the guarantee and how this can be mitigated. Pouget answered that this is an ongoing issue. The guarantee serves as a boost for financial institutions to become financially independent. She stated that in an ideal world, no guarantees or public intervention would be needed. Paulus added that at the moment Microlux is dependent on the EaSI guarantee, although they are also searching for other funds. According to him, they have to find funding or guarantees in order to balance their costs and benefits because their interest rates are not high enough to cover the costs.

    Another suggestion from the audience was to explore existing schemes and work with them to reach out to small and medium intermediaries in other continents. Pallaro, who has experience with working outside of Europe, agreed that it would be a good strategy to find similar instruments abroad. Ramirez added that the context is fundamental and the demand as well as the regulatory framework needs to be in place. He concluded the session by stating that there are very positive experiences from the sector. Institutional growth and the financial instruments are fundamental for this positive outcome.