Portfolio guarantees are financial instruments provided by IFC to help financial institutions manage and mitigate credit risk across a portfolio of assets. Key products under this category include risk-sharing facilities and synthetic risk transfers. These portfolio guarantees are designed to support portfolio growth by enabling institutions to manage risk more effectively and/or free up capital that can be redeployed into priority sectors.
Risk Sharing Facility
A risk sharing facility is an agreement between IFC and an originator of assets, typically a bank or financial institution, where IFC agrees to reimburse the originator for a portion of principal losses incurred on a portfolio of eligible assets (i.e. originated based on a pre-agreed eligibility criteria), following a pre-agreed risk sharing formula.
The structure of a risk sharing facility can vary depending on the needs of the originator and possible third-party participants. The facility typically covers newly originated assets, but coverage may also be extended to include existing assets originated prior to the initiation of the facility. A risk sharing facility is most appropriate for originators requiring credit risk protection but not funding but can also be combined with IFC credit lines if needed.
Risk sharing facilities are available for a wide variety of sectors, including SMEs, agribusiness, energy efficiency, and other asset classes. They allow the originator and IFC to form a partnership to grow a new business line or expand the originator's target market, sometimes in cooperation with third-party sponsors. Risk sharing facilities are particularly useful when introducing new products or when targeting new consumer or business segments and can help the originator build track record.
In addition to sharing the risk of losses in the portfolio, IFC can offer advisory services to help the originator with originating, monitoring, and servicing the assets.
Transaction examples:
- IFC and the European Union Partner with Credit Agricole to Empower Ukrainian Smaller Businesses
- IFC Guarantees Loan to Provide Farmers, Agribusiness SMEs in Morocco with Solar and Efficient Irrigation Systems
- IFC and National Bank of Samoa to Boost SME Finance to Support Entrepreneurs and Create Jobs
Synthetic Risk Transfer
Synthetic risk transfers (SRT) are transactions that allow banks to transfer some potential credit losses associated with loan portfolios to third-party investors, and therefore reduce regulatory capital allocated to relevant loan portfolios. Typically, in an SRT transaction, IFC sells credit protection on a mezzanine (and in some cases, junior) tranche of a pre-determined reference portfolio on the bank’s balance sheet. The structure is typically designed to comply with applicable regulations to achieve regulatory capital relief. SRT transactions are commonly used by European banks, but their popularity is growing in other markets as well.
The released capital can be redirected to priority sectors. SRT transactions, therefore, can be an efficient tool to make available risk capital for IFC’s priority sectors.
Transaction examples:
- IFC and Santander Sign a $300 million Facility to Boost Climate Loans and Support Small and Medium Enterprises in Chile
- IFC, BNP Paribas Bank Polska Launch SRT Transaction to Increase Climate Finance in Poland
- IFC Boosts Romania’s Green Transition with Two Key Projects
- IFC provides financing to Banco Santander Mexico to boost credit in Mexico
These are some of several World Bank Group guarantee products. For comprehensive information on the suite of all World Bank Group guarantee products, please visit the World Bank Group Guarantee Platform.
