Arguments About Bank Guarantees
The arguments of critics of the bank guarantee (BG) system can be summarized as follows:
One of the main criticisms that bank guarantees receive is the one related to its effect on savings. When a user is under bank guarantee, he or she is not motivated to keep savings because the guarantee covers for expenses not pain.
Another argument against the BG is related to their source of management. When the guarantee system is managed by public or governmental institutions, it is argued that they tend to be unnecessary and ineffective.
Many bank guarantee systems are based on the principle of joint guarantee. This type of warranty does not cover management costs. The range of security products must be more open and adapted to each situation.
There have been efforts to evaluate the effectiveness of the BG through studies. The challenges have mostly been around the collection of feasible and relevant information. In spite of the difficulties, the common thread is the importance of the use of collateral to reduce risk.
In general, these studies have concluded that access to credit for small business is an inconvenience. They show that when the market is at the worst state of development, it becomes harder for micro, small and medium business to find sources of credit.
The strategy to take under these circumstances is to improve the relationships between the micro financing institutions and the banks in order to reduce the gap for business owners. The objective of these type of strategies is facilitating credit for small, medium businesses through the strengthening of micro financing institutions. Bank guarantees serve to make this link.
Bank guarantees have been less effective in countries whose governments provide subsidies to small credits. When bank guarantees are subsidized, people tend to save more and increase their dependency to the government.
There is more than one type of bank guarantees. The criteria that some guarantee systems follow is the one that gives priorities to loans with interest rates dictated by the market. The financial ability to pay the loan and keep certain liquidity is also highly considered in order to reduce risk.
There are arguments regarding the use of subsidies in bank guarantees. When subsidies are applies directly to bank guarantees are more productive in the long run than those applied to interest rates. Subsidizing credit reduces the motivation to save.