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Operationalizing the Partial Credit Guarantee Fund for Micro, Small, and Medium Enterprises in Djibouti

Project Development Objective (PDO)

This project aims to increase access to credit for micro, small, and medium-sized enterprises (MSMEs) in Djibouti through the operationalization of a partial credit guarantee for MSMEs.

Background

Micro, small, and medium enterprises (MSMEs) in Djibouti have limited access to bank financing. It is estimated that only 5 percent of formal enterprises in the country receive bank financing. Although banks in Djibouti are fairly liquid, banks are often unwilling to lend to MSMEs for several reasons, including insufficient collateral and a low appetite for risk. The Ministry of Economy, Finance, and Planning and the Central Bank of Djibouti realize the importance of MSMEs to job creation and economic growth; in 2014, they reached out to the World Bank and the FIRST (Financial Sector Reform and Strengthening) Initiative for technical assistance to design a partial credit guarantee (PCG) fund.
A PCG fund provides third-party credit risk mitigation to lenders, with the objective of increasing access to credit for MSMEs. In case of default, the fund mitigates risk by absorbing a portion of the lender’s losses on the loans made to MSMEs.

Activities

The project team is assisting in (a) designing Djibouti’s PCG fund, including its governance and institutional structure; (b) drafting legal documents for the fund’s establishment; (c) drafting regulations and the oversight framework for governance of the PCG fund; and (d) developing the fund’s operational rules, guidelines, and procedures.

Expected Outcomes

The main expected outcomes of the project are as follows:
Short-term outcome
     1.  Designing the key parameters for the PCG fund, including its legal framework, guidelines, and
         procedures
Medium-term outcome
     1.  Establishing a well-functioning PCG scheme
Longer-term outcomes
     1.  Increasing the number of loans that commercial banks provide to MSMEs
     2.  Creating better terms for MSME borrowers, providing more appropriate loan products, and
         formulating adequate solutions to the lack of collateral by MSMEs
     3.  Distributing up to 300 guarantees per year, which will stimulate MSME finance