"What do I find most important in a financial institution interested in the NASIRA guarantee?" Ilayda Atalay takes a few moments to consider the question. "That would be a shared vision. While we can work together to address practicalities, it is crucial that we have a common goal of mobilizing liquidity towards new segments and bridging the finance gap."
Ilayda Atalay Structured Finance Officer at FMO
As a Structured Finance Officer in the Financial Institutions department at FMO, Ilayda is involved with the NASIRA guarantee program on a daily basis. She explains that around three years ago, FMO introduced this innovative program based on guarantees instead of loan facilities to its clients to support lending to underserved groups in emerging and developing economies. "We realized that liquidity constraints are not always the primary issue preventing financial institutions from serving small businesses," she elaborates. "The banking sector, by nature, tends to be conservative due to regulatory requirements and stringent credit policies, which makes them risk-averse."
With the NASIRA guarantee in place, financial institutions are empowered to step out of their comfort zones, while still remaining within their risk appetite.
This risk aversion makes it particularly challenging for certain groups such as young and female entrepreneurs, as well as smallholder farmers, to qualify for loans as they often cannot meet the conservative underwriting criteria or collateral requirements. However, with the NASIRA guarantee in place, financial institutions are empowered to step out of of their comfort zones, while still remaining within their risk appetite.
The key proposition is that financial institutions can relax their criteria for these specific groups or venture into new client segments, as any loss in the portfolio will be covered by the guarantee after the initial first loss tranche. Ilayda provides an example: "Let's say a financial institution starts lending to small agricultural clients under the guarantee program, a group they would be typically reluctant to serve as agriculture in particular is deemed a risky sector. If a drought hits the country, many farmers are unable to repay their loans. The NASIRA guarantee will compensate the financial institution for all the losses in the NASIRA portfolio, above the first loss threshold. This effectively eliminates all the downsides related to that portfolio, while allowing the financial institution to enlist new clients, gain experience serving these new segments, and grow its credit book."
She emphasizes the significance for financial institutions to strategize towards micro, small, and medium-sized businesses (MSMEs) in today's landscape. "Yes, MSMEs are deemed to be the riskiest segment, but they are also the main contributors to most countries' GDP and the segment presenting the fastest-growing credit demand. We assist financial institutions in targeting this demand within a controlled environment, all without impacting their credit losses." Additionally, Atalay highlights that NASIRA guarantees may also qualify for regulatory capital relief and allow banks to hold less capital against the NASIRA portfolio since the guarantee acts as a safety net using FMO’s strong credit rating (AAA).
As onboarding a new segment of customers is not an easy task, the NASIRA program offers a wide range of technical assistance as well. Through consultants, financial institutions can receive support not only on a strategic level, but also for practical and operational challenges. "Providing smaller loans can be costly for a financial institution, but digitizing the customer journey and automating the approval through scorecards can help streamline it." Ilayda has many more examples: "We have supported NASIRA clients with strategy validation, market analyses, product development, and even more specific training modules for credit officers in assessing new client segments." With agriculture loans, she explains, consultants can help develop the expertise of how to consider crops, harvest cycles, land size, and livestock assessment in determining repayment capacity and financial soundness. And it's only the beginning.
Atalay’s overall objective, along with the entire team supporting the NASIRA program, is to ensure that the shared vision endures, even after the program runs out with a client.
"Ultimately, what we want is for financial institutions to adapt to these new groups and continue serving them, even without the guarantee, providing a new generation of entrepreneurs with access to finance as well."