Theme 3: The application of a loan guarantee mechanism for small and medium sized rural agricultural businesses in Mongolia to access credit from commercial banks
The author established a Loan Guarantee Mechanism (LGM) in 2004 as part of its Rural Agribusiness Support Program. Rural agribusinesses experience difficulties accessing credit due to their lack of collateral. The LGM assists them to obtain commercial loans through provision of additional cash collateral. MC has gained important field experience applying a LGM in a remote rural setting. Many of these experiences may be transferable to other situations
The methodology is based on development of business plans by clients with technical assistance from independent BDS providers. The plan allows the business, banks and MC to identify the opportunities and risks involved. The business presents its business plan to banks who in turn underwrite the loan and make offers to lend. If there is a shortfall in collateral required, it is deposited by MC into an interest bearing savings account as additional cash collateral. To date as a result of LGM implementation, 460 rural agribusinesses have accessed commercial loans worth US$ 1.5 million; MC has provided US$ 858,400 as additional cash collateral. The repayment rate is 93.8% with 1.32% of loan collateral at risk (over 1 month late repayments).
The LGM has encouraged banks to lend to rural businesses, decrease their reliance on collateral, decrease their interest rates as risk is reduced and lengthen tenure. As a direct result the two main rural banks lowered their annual interest rates from 42% to 18-24% for rural businesses, and increased the average loan tenure from 8 to 15 months and decreased their reliance on LGM collateral from 82% (May 2004) to 40.58%.
The author plans to institutionalize the LGM within a national institution which will be able to continue the provision of additional cash collateral for rural agribusinesses in Mongolia once donor (USDA) support ends.