“I really appreciate that you are helping us build ourselves and improve our lives through these loans.” Jackie Jambo, founder of Lumaja Gift Boutique.

For Jackie, this is what access to finance made possible. Since starting her business in 2018, she had built a loyal customer base and a clear vision for growth. But like many women entrepreneurs in Zambia, she ran into the familiar constraint of access to finance, a barrier that continues to hold back many small businesses with strong potential. At a critical moment, she needed capital to relocate her shop and invest in inventory. While the opportunity was there, without sufficient collateral, traditional lending limited how much she could access, despite her strong repayment history and business potential.

Through loans from FINCA Zambia, supported by UNCDF’s first portfolio guarantee in a Least Developed Country (LDC), that constraint shifted. By sharing lending risk, the guarantee enabled FINCA, to lend beyond what collateral alone would typically permit. That financing allowed her to stabilize operations during relocation, restock her business, and maintain income flows. More importantly, she gained confidence in a financial system that recognized her potential.

Jackie’s story mirrors the reality of many entrepreneurs across Zambia. It is precisely this gap between potential and access that guarantees are designed to close, and the reason UNCDF has focused on deploying such instruments in LDC contexts.

Jackie Jambo at her shop, Lumaja Gift Boutique in Zambia, which grew and expanded following improved access to finance. Credit: FINCA

Why guarantees matter for MSME finance

This gap is not unique to Zambia. Across LDCs, the challenge of MSME finance often stems from a disconnect between perceived risk and actual risk. MSMEs represent around 90 percent of businesses globally and account for more than half of employment. Yet in developing economies, they face an estimated financing gap of over $5.7 trillion, highlighting the scale of unmet demand in these markets.

In Zambia, this challenge is particularly pronounced. MSMEs represent about 97 percent of all businesses, contribute around 70 percent of GDP, and account for nearly 88 percent of employment, underscoring their central role in the economy as highlighted in the country’s National Financial Inclusion Strategy II 2024-2028. Yet many remain excluded from formal finance due to collateral constraints, limited financial records, and lenders’ concerns around credit risk and non-performing loans when lending to them. These constraints reflect how risk is assessed and priced in MSME lending.

But evidence shows that risk-sharing mechanisms such as credit guarantees canhelp shift part of the risk from the lender, creating space for financial institutions to look beyond collateral and assess the underlying strength of a business.

“With the guarantee in place, we were able to extend credit more confidently to clients we would previously have considered too risky. It allowed us to look beyond collateral and focus on the underlying strength of the business,” said Chris P. Kizza, CEO of FINCA Zambia.

How the Zambia guarantee worked

Launched in November 2022, as part of a broader UNDP-led initiative to support post-COVID-19 recovery for MSMEs in Zambia, UNCDF’s first portfolio guarantee in Zambia, was deliberately structured to influence how lending decisions were made, while also expanding the availability of capital. Rather than guaranteeing individual loans, UNCDF provided a portfolio guarantee, covering up to 60 percent of losses across a pool of new loans issued by FINCA Zambia. This structure ensured that risk was shared, not transferred, and that the financial institution retained strong incentives for prudent lending.

Two distinct facilities were deployed under this structure. The first targeted women, youth, and persons with disabilities, segments already active in the economy but underserved by formal finance. The second focused specifically on women engaged in small-scale cross-border trade, a group often excluded due to informality, mobility, and limited documentation.

Loans ranged from small working capital amounts to modest expansion financing, typically between $250 and $17,500, with a tenure of up to three years. Importantly, the guarantee applied only to new lending, ensuring that it generated additional credit rather than supporting existing portfolios. This design mattered. It meant that each loan made under the facility was one that likely would not have happened without the guarantee.

Unlocking finance at scale

The most compelling outcome of the Zambia facility was the scale of financing unlocked relative to the initial guarantee.

From a guarantee amount of $160,000 under the first facility, FINCA Zambia disbursed approximately $2.7 million in loans, unlocking this scale of financing over the three years of implementation (2022-2025) This represents a 16-fold leverage, a striking demonstration of how catalytic capital can mobilize private lending. In practical terms, this translated into 427 MSMEs accessing finance, the majority of which were microenterprises. Notably, 349 of these businesses were owned by women, underscoring the role of guarantees in advancing gender inclusion when intentionally designed.

This reinforces a key insight that when guarantees are structured well, they help development finance unlock more private capital without requiring significantly more public funding.

What worked and what did not

Yet the Zambia experience cannot be fully understood through its successes alone. The second facility which targeted women cross-border traders tells a very different story. Despite a larger allocation of $200,000, the facility supported just one borrower, with disbursements amounting to approximately $6,000.

Rather than treating this only as a weak result, the contrast between the two facilities offers an important lesson Not all underserved segments are alike, and not all are equally ready for formal financial products.

While the first facility aligned with an existing pipeline of bankable clients, that is entrepreneurs like Jackie, who were active, visible, and already partially integrated into the financial system, the cross-border trader segment presented a more complex set of constraints. These extended beyond credit, including issues of informality, regulatory barriers, mobility, and the absence of conventional financial records, challenges that are common across many cross-border trade contexts.

In this context, the guarantee alone was not enough to drive uptake, as many traders lacked the documentation, formal financial records, or stable transaction histories required to access credit, even within a risk-sharing framework.

Four lessons for guarantee design

The contrasting performances of the two facilities offer a set of lessons that extend far beyond a single country or project.

First, they demonstrate that guarantees can be exceptionally powerful tools for unlocking finance, but only where there is underlying demand. In segments where entrepreneurs are already operating viable businesses but face access constraints, guarantees can catalyse rapid scale. Where those preconditions are absent, their impact is more limited.

Second, the experience underscores the importance of leverage as a core metric of success. The ability to transform relatively small amounts of public capital into significantly larger volumes of private lending is what makes guarantees particularly suited to LDC contexts, where resources are constrained but needs are vast.

Third, the results highlight the importance of design. The portfolio structure, the focus on new lending, and the deliberate targeting of underserved groups were not incidental, they were fundamental to the success of the first facility. The impact of guarantees depends on whether they reach businesses that would not otherwise receive credit, highlighting the importance of targeting and design.

Fourth, the partnership itself proved critical. FINCA Zambia’s willingness and capacity to adapt its lending practices, to look beyond collateral and engage new client segments was central to the outcome.

Finally, and perhaps most importantly, Zambia shows that mixed results are part of early learning. The weaker performance of the second facility highlights the need to adapt guarantees to different segments, especially where challenges go beyond access to finance.

Scaling what works

Zambia was UNCDF’s first portfolio guarantee in an LDC, but it is not the last.

The experience confirms that guarantees can play a foundational role in expanding MSME finance in high-risk, underserved markets. They make it easier for financial institutions to lend in ways that also support development priorities, enabling them to extend credit while managing risk responsibly. This approach is already being applied in other contexts, including a recent $900,000 portfolio guarantee signed between UNCDF and the Co-operative Bank of Kenya to expand financing for digital platform MSMEs.

Scaling guarantees will require adapting them to different contexts and not just repeating the same model. Guarantees need to respond to the realities of the markets and businesses they aim to serve. For entrepreneurs like Jackie, this means greater access to capital, stronger opportunities, and a financial system that recognizes potential as much as it manages risk.