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KNOWLEDGE MANAGEMENT
SPOTLIGHT Smart Subsidies & Guarantees April 2025
SUMMARY The Challenge: Helping financially excluded populations gain access to loans presents higher cost and greater risk to financial institutions and clients, but subsidies and guarantees can have limited scale and sustainability. Opportunity’s Solutions: Opportunity delivers a variety of “smart” subsidies and guarantees, carefully tailored to target populations and markets, designed to provide temporary incentives that stimulate sustainable financial inclusion at scale. Opportunity also provides subsidized client training and capacity building to financial institutions as part of subsidy and guarantee packages. Ongoing Dilemmas: Through innovation and learning, Opportunity is grappling with challenges in implementing smart subsidies. These include the “moral hazard” of clients and staff not taking repayment seriously when a loan is under guarantee, and sustaining training and technical assistance after a program ends.
THE CHALLENGE: FINANCIAL INCLUSION CAN BE COSTLY AND RISKY, BUT SUBSIDIES AND GUARANTEES MAY DELIVER LIMITED SCALE AND SUSTAINABILITY To empower people living in poverty to transform their lives, their children’s futures, and their communities, Opportunity facilitates financial inclusion for people living in extreme poverty. In Opportunity’s model, financial inclusion is delivered by commercial banks and microfinance institutions.1 For these sustainable financial institutions (FIs), serving people who are currently outside of the financial system presents higher cost and greater risk – whether perceived or actual. For example, when considering serving refugees, Ugandan FIs faced high cost of delivery in remote locations, and perceived high risk because most refugees had no Ugandan identification documents and no known track record of borrowing. In the face of higher cost and risk, a logical solution is to subsidize and guarantee – to cover some of the cost and risk of loans to financially excluded populations. The challenge with subsidies and guarantees is that funding is limited, and may only support a small number of people, for a limited time. The hope is that FIs will use subsidies and guarantees to learn and will then continue to serve the target population after the subsidies and guarantees end. The risk is that FIs will lend to the intended target population while some costs and risk are covered by a program, but go back to business as usual once the program ends. What are subsidies? In the context of financial inclusion, subsidies are a form of financial assistance that lower the cost of lending to a target population. Subsidies can be directed to the financial institution, the target clients, or both. Subsidies to FIs include grants that may be used as capital for lending; to cover the cost of delivering finance to the target population; low-interest loans; and long-term loans or equity investments that provide “patient capital.” Subsidies may be targeted to clients in the form of lower interest rates. What are guarantees? In this context, guarantees reduce the risk of financing market segments that FIs otherwise find too risky. A guarantee can be delivered after a loan defaults, or guarantee funds can be deposited into a FI to replace collateral that clients would otherwise be required to provide (in the form of cash, land, or other certified property). Ideally, FIs pass the lower risk to clients by requiring less collateral for loans, and/or lower risk-related interest rates.
OPPORTUNITY’S SOLUTION: SMART SUBSIDIES AND GUARANTEES “Smart” subsidies and guarantees incentivize FIs to serve a previously excluded target population as part of their mainstream business model. What makes a subsidy “smart” is a subject of debate and learning in financial inclusion and an area where Opportunity has experience and lessons to contribute. Opportunity designs smart subsidies and guarantees in response to target client needs and the cost and risk facing partner FIs. In addition, Opportunity actively collaborates with 1
Opportunity also forms and strengthens community-based savings and loan groups, but in many situations, Opportunity is also attempting to help these groups gain access to formal loans in order to expand lending to members.
KNOWLEDGE MANAGEMENT SPOTLIGHT highlights Opportunity International innovations and industry trends.