A Crisis of Guarantees Exposes Fragile Protection and Puts Microfinance to the Test of Survival

Nu’man Yousif Mohammed
It is no longer possible to treat the crisis of microfinance guarantees as a temporary malfunction or a passing disruption that can be resolved through procedural fixes. What has now emerged is a fully-fledged structural crisis—one that has struck at the very core of trust in non-traditional guarantee systems and placed one of the most important tools of financial inclusion and social development under an existential test.
Non-traditional guarantees—adopted to enable banks and microfinance institutions to finance vulnerable groups and small entrepreneurs—were not merely regulatory arrangements. They formed the foundation for financing decisions. Instruments such as microfinance guarantee certificates, wholesale guarantee letters, and fidelity coverage were intended to compensate for the absence of traditional collateral and provide a reasonable safety net for institutions operating in a high-risk sector.
However, at the first real test, this safety net proved to be little more than a fragile cover.
With the outbreak of war, market disruption, the halt of productive activity, and the collapse of clients’ repayment capacity, the microfinance sector entered a phase of widespread default. This was precisely the moment for which these guarantees were designed—the moment when risk materialises and the burden shifts from the financier to the guarantor.
Yet, what happened in practice was the opposite:
Guaranteeing entities withdrew
Insurance companies evaded responsibility
Coverage mechanisms failed
As a result, banks and microfinance institutions found themselves bearing the losses alone, despite having operated under the assumption of a comprehensive protection system.
The reality must be stated plainly:
Guarantees that fail when risk materialises are not guarantees at all.
They are costly regulatory arrangements devoid of real effectiveness.
The crisis revealed that some guarantors treated their obligations as selective commitments—collecting premiums and fees in normal times, but retreating when claims arose. This is not merely an implementation failure; it represents a collapse of the contractual relationship itself. The essence of a guarantee is that the guarantor absorbs the impact of risk—not that it seeks justification to evade liability.
Similarly, some insurance companies narrowed their interpretation of coverage terms, rejecting compensation claims on technical or arbitrary grounds. This cannot be regarded as legitimate risk management. In reality, it strips the guarantee of its practical meaning.
A risk that is not covered during systemic crises is not truly insured.
A policy that collapses at the moment of need is not protection—it is false reassurance.
The same applies to other institutional guarantees that were either delayed or poorly executed. When liquidation procedures stall, and claims are lost in administrative ambiguity, the outcome is inevitable: the guarantee loses its function, and the financial institution bears the burden alone.
This crisis extends far beyond financial losses. It has triggered a deeper erosion of institutional trust in the microfinance regulatory environment.
A bank that discovers that regulator-approved guarantees fail in times of crisis will inevitably lose confidence in those tools. This will lead to:
Stricter lending policies
Contraction of financing portfolios
Reduced appetite for the microfinance sector
The ultimate consequence is clear: reduced access to التمويل for the very groups the sector is meant to serve.
Thus, the crisis is not merely one of client default; it is a crisis of institutional confidence threatening the viability of microfinance as a development instrument.
Microfinance does not rely on physical collateral—it relies on trust in alternative protection mechanisms. If that trust collapses, the entire foundation of the sector collapses with it.
Responsibility does not rest solely with regulators. It also extends to Sharia and legal reference bodies, which should have played a decisive role in clarifying:
The obligations of guarantors when risk materialises
The legitimacy of holding microfinance institutions liable for losses arising from force majeure
The absence of clear, authoritative rulings has created a vacuum, leading to inconsistent interpretations and weakening contractual certainty. This, in turn, has enabled parties to evade obligations under loosely framed justifications.
When such authoritative bodies fail to provide clarity in moments of crisis, they introduce an additional layer of fragility into the entire system.
Leaving this system unreformed sends a dangerous message to the market:
Guarantees are not real commitments, but formalities
Financiers bear all risks, while others share only the benefits
If this perception takes hold, it will fundamentally undermine the trust required for the sector to function.
The required reform cannot be superficial. It must be comprehensive and structural, including:
Re-evaluating standards for approving non-traditional guarantees
Subjecting guarantors to real solvency and stress tests
Enforcing strict accountability for fulfilling obligations
Strengthening regulatory oversight with decisive enforcement
Any tolerance in this area effectively encourages continued failure and erodes confidence in the financial system.
The crisis has exposed a critical truth:
Some non-traditional guarantees provided only a symbolic cover for risk, appearing as safety nets but collapsing under real pressure—leaving financial institutions exposed without effective protection.
This is the danger of the current moment.
When financial institutions lose trust in guarantees, the first casualty is financing for vulnerable populations, because this sector depends fundamentally on alternative risk-sharing mechanisms. The result is not just a banking problem—it is a direct threat to:
Financial inclusion
Poverty reduction
Support for small-scale production
What is required now is a bold regulatory and institutional stance to rebuild trust on solid foundations:
Either guarantees are capable of performing during crises,
or their existence loses all economic and financial meaning.
A guarantee that fails at the moment of risk loses its function.
An institution that fails to honour its obligations undermines risk management.
A framework that tolerates such failures turns protection into an illusion.
The future of microfinance now hinges on resolving this equation:
Either a fundamental reform restores credibility and capacity,
Or continued erosion of trust will ultimately destroy the sector itself.
If this crisis is not seized as a turning point, the next failure will not be client default. It will be the failure of the entire system.

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