FAQs

A financial guarantee is a promise from a third party — the guarantor — to repay a loan or debt to a lender if the borrower cannot. By reducing the risk the lender takes on, a guarantee makes a transaction more creditworthy, which makes it an important tool for helping borrowers secure credit.

A guarantee is a legal contract in which a guarantor promises to repay a debt to a lender if the original borrower defaults or becomes insolvent. This reduces the risk of lending to borrowers considered high-risk, and of extending credit during times of financial uncertainty.

Guarantees are one of the most powerful tools in development finance, yet they remain largely underused. As government aid budgets (known as Official Development Assistance) shrink worldwide, there is a growing need to ‘do more with less’. Guarantees offer the highest rates of private capital mobilisation, bringing private-sector finance in at scale and channelling it towards otherwise underserved sectors and regions that drive social and environmental impact.

A guarantee protects the providers of debt — for example, investors who buy bonds or banks that make loans. If the borrower or bond issuer fails to make all or part of a scheduled repayment, the guarantor steps in and pays the lender on time instead, under the terms and conditions of the guarantee.

A guarantee unlocks private investment that a borrower could not otherwise reach. Borrowers may also gain access to a wider range of investors — including global capital markets — larger investment amounts, and better loan terms, such as lower interest rates or longer repayment periods (tenors).

There are a number of credit guarantee types, including full, partial, framework, portfolio and counter guarantees:

• Full – the guarantor protects 100% of the lender’s principal and accrued return, taking on all of the risk.

• Partial – less than 100% of the loan is protected, so the lender and guarantor share the risk.

• Framework – a single structure set up to provide guarantees across multiple projects.

• Portfolio – a guarantee covering a whole portfolio of loans, on either a full or partial basis.

• Counter-guarantee – a guarantee given to another guarantor, allowing several guarantee providers to share the risk.

The Development Guarantee Group (DGG) provides guarantees through the guarantors it manages, mobilising funding for underserved sectors and helping to build global capital markets.

DGG’s guarantors currently include the Green Guarantee Company, which provides full and partial guarantees for single transactions, and portfolio guarantees for climate projects in Emerging Markets and Developing Economies. SAFE (Scaling Alternative Finance for Entrepreneurs) provides mainly portfolio guarantees, plus partial guarantees for single transactions, in Eastern Europe and the Middle East and North Africa. DGG is also setting up Nautilus, the Blue Guarantee Company, which will provide full, partial and portfolio guarantees for projects supporting the blue economy in coastal countries across the Global South.

The guarantors can also consider other guarantee structures, depending on what a project needs.

No. Eligibility depends on each guarantor’s mandate, including criteria such as sector, geography, transaction size and loan length (tenor).

For example, the Green Guarantee Company, managed by DGG, has a guarantee capacity of USD 1.3 billion. It operates in Emerging Markets and Developing Economies and covers five sectors: energy, transport, water, buildings, and waste & pollution control. It provides up to 100% cover for guarantees of between USD 20 million and USD 60 million, with tenors of up to 20 years.

A guarantee is an ‘unfunded’ product: it is a promise to pay only if a borrower defaults. By assessing the underlying risks and how likely each guarantee is to be called on, a guarantor can make this promise many times over to different lenders. The number of times it can do so is known as its leverage, and it is the key driver of a guarantee’s efficiency and value.

The Green Guarantee Company can currently leverage 10 times, so the USD 130 million of equity it has raised supports USD 1.3 billion of guarantee capacity. This operating model has been reviewed by the ratings agency Fitch, which has given the company an investment-grade rating of BBB (Stable).

A guarantee is a promise to repay a specific loan or debt if the borrower cannot. Insurance is a contract in which an insurer agrees to cover financial losses from specific, unforeseen events in return for regular payments (premiums). The main difference is one of focus: a guarantee covers a specific debt or obligation, while insurance protects against a broader range of possible losses.

Guarantees can be considered a form of blended finance because they help unlock private investment in high-impact projects that might otherwise be seen as too risky. They often bring together public capital (at the guarantor level) and private capital (at the investment level) in the same transaction.

That said, guarantees do not have to use public funds: the private sector can provide them entirely on a commercial basis. Guarantees also sit outside an investment’s capital structure, so they do not reduce the total amount of investment needed.