Rwanda: BDF Introduces Enhanced Partial Credit Guarantee Product

The Business Development Fund (BDF) has launched its new and improved “Partial Credit Guarantee” product, which aims to enhance access to finance for Micro, Small, and Medium Enterprises (MSMEs).

A credit guarantee is an agreement that assures a lender that a debt will be repaid by another party (in this case, BDF) if the borrower defaults.

Under the revised product, BDF will provide a guarantee fund of up to 50 percent for SMEs and 75 percent for special groups such as women and youth-owned SMEs. These groups often face difficulties in obtaining loans from financial institutions due to a lack of sufficient collateral.

The launch of the enhanced guarantee product took place on Wednesday, May 31, during a breakfast meeting attended by heads of financial institutions and various partners.

Vincent Munyeshyaka, CEO of BDF, explained that the revised product aligns with the organization’s new strategic plan for 2023-2027. The plan aims to build the capacity of MSMEs, preparing them for investment and ensuring they have adequate access to finance.

Munyeshyaka stated that the product underwent revisions based on feedback from a survey conducted last year, which highlighted the need for improvement. The survey revealed that 59 percent of partner financial institutions were satisfied, indicating that 41 percent were not entirely content with BDF’s services in terms of products, processes, and turnaround time for application approval and guarantee or compensation.

“The main concern raised by financial institutions was the guarantee coverage rate. Banks often requested a 50 percent coverage or 75 percent coverage for special categories. However, due to our calculations assessing whether borrowers had other recoverable assets, we could only offer guarantee coverage of up to 30 percent of the defaulted amount,” Munyeshyaka explained.

To address this issue and provide predictability in risk coverage, the revised product fixes the guarantee coverage ratio at 50 percent and 75 percent for special groups. The collateral requirement will now be determined between the business and the bank.

Munyeshyaka further noted that previously, in the event of loan default and business collapse, banks were compensated in two phases. Initially, they would receive only half of the guarantee coverage from BDF and were then required to recover the remaining amount to receive full guarantee coverage.

However, with the product reforms, the compensation model will shift from partial (50 percent) to full (100 percent) compensation in case of default claims. The banks will then partner with BDF to recover the funds, and the recovery results will be shared later.

Another issue addressed by the new product is the insufficient guarantee offered to SMEs applying for working capital. Previously, BDF provided a guarantee fund for SMEs requesting up to Rwf20 million. However, based on feedback from the survey, the guarantee is now extended to those requiring more than Rwf20 million in working capital, as requested by banks.

These improvements aim to boost the uptake of BDF guarantee products, which experienced a decline in popularity over the past five years.

To enhance corporate relationships, BDF has dedicated staff to maintain regular communication with partnering financial institutions, promptly addressing any issues that may arise.

Over the past 11 years, BDF has provided collateral guarantees worth Rwf56 billion to 48,000 SMEs, facilitating loans totaling Rwf100 billion. This achievement was made possible through partnerships with over 400 financial institutions, including 40 commercial banks, 15 microfinance institutions, and 373 SACCOs.

Munyeshyaka stated, “In the next five years, we aim to support 52,000 SMEs with collateral guarantees, enabling them to access finance from financial institutions. Furthermore, we are committed to digitizing all our services to enhance service delivery.”

Herbert Asiimwe, Director General in charge of the banking and non-banking sector at the Ministry of Finance and Economic Planning (MINECOFIN), emphasized that the Credit Guarantee product would contribute to SMEs’ growth in terms of revenue generation, job creation, and tax payment, ultimately contributing to national GDP growth.

Christian Abijuru, the Head of Business Banking at I&M Bank Rwanda, welcomed the revised credit product, stating that it would increase the number of SMEs utilizing financial services. He highlighted that the new product would streamline the loan application process, as SMEs previously had to undergo a lengthy process of applying for a loan from a bank and then separately applying for collateral guarantee from BDF.

Gertrude Munyana, Business Development and Partnership Manager at Goshen Finance Plc, expressed gratitude for the shortened process of receiving compensation in the event of loan defaults. She also appreciated BDF’s commitment to extending the guarantee fund to SMEs seeking loans above Rwf20 million, which will particularly benefit women in need of finance.