FOGAPI offers for the development of the SME in Peru, three kinds of services or three (03) models of guarantee :

1. Guarantee Letters (the individual guarantee)

2. Guarantee Portfolio Service (the portfolio guarantee)

3. Guarantee Intermediate Service (the intermediate guarantee )

Guarantee Letters

The first model, the individual guarantee , consists of a letter of guarantee issued by a first tier bank to enable a small or medium sized company - SME to obtain credit from its suppliers, advance payments and to provide compliance guarantees in public and private tenders.

As a matter of policy this model has been reserved for ensuring sources of work for SME who have to perform service or supply contracts.

Guarantee Portfolio Service

The second model, the portfolio guarantee is provided by second tier banks and is aimed at giving the SME sector access to formal loans from financial institutions. To that effect, FOGAPI has entered into agreements with financial intermediaries (FIS) to guarantee automatically up to 50% of the capital balance of SME loans which meet the requirements set forth in the agreements.

The operating mechanism is described in the agreement signed by the financial institution and FOGAPI.

The foundation has been appoint by the Development Finance Corporation - COFIDE - as the intermediate executive entity for the guarantee programme covered by E.D. 056 - 96, now the SME Multiple Cover Fund, in favour of small and micro businesses, whether individuals or companies engaged in any economic activity.

From October 2004, law Nº 28368 increased the size of the reserve fund created by Emergency Decree Nº 056-96 and changed its name to " SME Multiple Cover Fund", to include guarantees and insurance; the relevant executive regulations have yet to be promulgated.

This model of guarantee is based upon two (02) principles: “additionality" and "No adverse selection". The principle of additionality consists of facilitating access to formal credit for a larger number of small and micro businesses. The principle of “no adverse selection" consists of considering all direct loans disbursed to SME which, in strict chronological order, meet the requirements established in the said agreement between FOGAPI and the IFI to be covered and cover cannot be refused.

For the development, monitoring and control of guarantee operations, the foundation uses information processing software together with the intermediate financial institutions and this software is continually updated to provide a better service to the target group.

The principal advantages of the portfolio guarantee model are as follows:

a. A reduction in the operating costs of the guarantor FOGAPI.

Evaluation, granting, monitoring, recovery and other activities are carried out by the intermediate financial institutions (IFIs).

b. A reduction in risk to FOGAPI as there is no adverse selection, because the credit risk is diversified rather than concentrated as is the case with individual guarantees to which higher risk operations are channelled.

c. This model creates more interest among IFIs in supporting SME because the guarantees share the risk and because, according to SBS ruling Nº 808-2003, FOGAPI is responsible for making provisions for the loans under guarantee up to the value of its coverage, in accordance with the provisions of article 212 of the Banking Act as a counterpart risk.

d.  In turn it enables financial institutions to increase their loan operations as FOGAPI is a strategic ally with respect to the risk which is reduced and shared with the granting of the guarantee.

e.  This guarantee mechanism facilitates access to credit by SME throughout Peru as they can make use of the offices of the IFIs.

f.  Reduction in transaction costs for PYMES as they no longer have to submit two sets of documentation, to the lending institutions and to the guarantor institution, as the guarantee cover by FOGAPI is automatic, based on approval of the loan by the IFI.

The guarantee commission is therefore minimal and is based on the term, amount and perception of the risk. This commission applies to the amount loaned.

g.  This guarantee service enables the IFIs to recover their capital if a loan granted to a SME is not repaid.

h. Thus FOGAPI provides resources to the IFIs (up to the amount covered) so that the institution can continue to lend to the SME sector whilst it recovers non-performing loans.

i. This guarantee service has some interesting strengths for the IFIs, which report a lower level of arrears and do not make provisions of up to the value of the guarantee, in accordance with Ruling Nº 808-2003 issued by the Banking and Insurance Regulator.

j. This product enables the IFIs to increase the volume of their operations and to protect their loan portfolios, facilitating the development of loan technology suitable for the different types of SME loans.

k. For the IFIs that use this FOGAPI instrument, it is an advantage to have additional backing which, in turn, enables them to obtain funds for lending from other financial institutions, thus stimulating in the medium term development and sustainable growth which will be reflected in the consolidation of the IFIs and a significant portfolio of SME loans.

l. Under no circumstances does this service constitute a subsidy of any kind for the IFIs or SME as the interest rate on the loans is defined freely by the IFI and SME in accordance with the market. Neither is there a subsidy on the guarantee commission as this is adjusted to reflect the risk.

Guarantee Intermediate Service

The third model, the intermediate guarantee, was designed in 2002. Its purpose is to guarantee unregulated EDPYMEs and NGOs that do not accept public funds, to obtain the funds they need for their work from the financial system.

In addition, FOGAPI has an refinancing agreement with USAID, signed on the 30th of September 2002, to cover intermediate guarantees and to guarantee the portfolios of these institutions: EDPYMEs regulated by the Banking and Insurance Regulator and unregulated NGOs.