Sida's guarantee instrument creates a way to mobilise capital for developmental purposes and is an important part of our development work.
Via the guarantee instrument, private capital is introduced into the development work. The method allows each Swedish krona that is invested into an aid project to be multiplied, thus ensuring that the development reaches more persons and more locations.
The guarantees allow Sida to fund programmes in the field of health, small business, sustainable infrastructure, and environment and climate. A large number of these projects are either global collaborations or collaborations in Africa.
The overall purpose of using guarantees is to reduce the risks which banks take when they lend money, allowing these projects to be launched. The risk that Sida takes can be likened to the risks that insurance companies take. For instance, Sida issues payment guarantees in which we guarantee the repayment of a loan to improve the borrower's status.
The guarantee means that Sida, and by extension the Swedish state, pays the guaranteed creditor – which is usually a bank – in the event that the borrower fails to make his or her payment. An important principle of Sida's guarantee instrument, is that we must always share the risk with the actor who provides the loan. As long as the project goes well, the guarantee does not constitute any extra costs for Sida.
Sida issues other types of guarantees as well, for instance, to reduce market risks, such as price and demands fluctuations.
Four types of common guarantees for achieving development impact:
- A loan guarantee involves guaranteeing a loan between identified lenders and identified borrowers.
- A portable guarantee is a letter of commitment which enables a borrower to approach a financial institute and to negotiate more favourable terms.
- A volume guarantee is an agreement that buyers make with suppliers in regards to purchasing a minimum volume of products or services. This is often combined with a low supply contract that determines the prices of future deliveries.
- A loan portfolio guarantee is a guarantee that collects several investments or loans in one portfolio.