Loan guarantee schemes are set up by governments and international financial institutions
such as the International Finance Corporation with the purpose of covering some portion of
the losses incurred if borrowers default on loans, thus reducing the perceived risk of SMEs to
the lending institutions. The objectives of these schemes are: to help small entrepreneurs with
good projects but little collateral to obtain loans; to encourage banks to overcome their
reluctance to deal with SMEs; and to provide banks with the opportunity to learn more about
how to deal with SMEs’ loan-portfolios and how to lend profitably to SMEs.