Guarantee Funds in El Salvador

The Salvadoran economy is turning its attention to micro, small, and medium enterprises (MSMEs), recognizing their importance to the country’s entreprenuerial fabric as providers and distributors of goods and services for large firms and for the general economy, for their contribution to gross national production, and for being the largest creators of productive employment in the country.

Despite their contributions to El Salvador’s economy, MSMEs encounter many difficulties in accessing credit through the formal financial sector, in part due to their informality, poor financial planning, and lack of collateral to guarantee loans. This lack of access to credit hinders MSMEs’ expansion and development.

The Salvadoran financial sector has demonstrated a legitimate interest in serving the MSME market but still faces the aforementioned challenges. One instrument that can act as a catalyst in these circumstances is a Guarantee Fund, which by sharing credit risk with financial intermediaries (FIs), allows them to enter the large MSME market securely and profitability and develop appropriate banking technology to efficiently serve this important segment of the country’s productive economy.

While El Salvador has ample experience in guarantees, it has not always been positive. Existing guarantee facilities do not have the capacity to expand credit to all of the businesses that require it. However, they have stimulated interest on the part of banks and savings and credit cooperatives in guarantee mechanisms.

This study concludes that this is an opportune time to create a Guarantee Fund that has the potential to comply with USAID’s mission of expanding access to credit to the thousands of micro, small, and medium enterprises in El Salvador and enabling them to grow at more accelerated rates. Interest exists on the part of all actors involved, including government, multilateral development agencies, the financial sector, and the business community. This interest should facilitate development of a new, properly designed entity that can achieve important impacts in the economic development of El Salvador in a short period of time.

Related Resources