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Credit Guarantees: Challenging Their Role in Improving Access to Finance in the Pacific Region

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Despite adequate liquidity, commercial banks in the Pacific are often reluctant to extend business credit, which is a serious constraint to business operations and broader economic development. The Pacific Private Sector Development Initiative—a regional technical assistance facility cofinanced by ADB, the Government of Australia, and the Government of New Zealand—has undertaken landmark secured transaction reforms in eight Pacific Island countries. These reforms have unlocked the value in “movable” assets such as machinery, inventory, and accounts receivable for use as collateral in borrowing, according to the authors of this report. And, they have the potential to benefit businesses and financial institutions that offer business loans. Yet, despite these reforms, financial institutions remain unwilling to lend. Businesses still find it hard to access the credit they need to grow, which in turn creates jobs and drives the economic activity so desperately needed in the Pacific. Credit guarantees are often proposed as an instrument to overcome this problem. However, as this publication demonstrates, there is no strong theoretical justification for their use.