Detailed Description of the Development Credit Authority
Development Credit Authority (DCA) is a broad financing
authority that allows the Agency to use credit to pursue
any of the development purposes specified under the Foreign
Assistance Act (FAA) of 1961, as amended. DCA seeks to provide
USAID with the flexibility to make more rational choices
about appropriate financing tools - loans, guarantees, grants
or a combination - used in project development. DCA activities
are designed and managed by USAID's overseas Missions. Credit
projects offer several distinct and very attractive advantages
over other forms of assistance:
- Access to local private capital – there is a large
reserve of untapped capital in the private sector, which
presently, is not available to certain sectors and markets.
The use of credit guarantees can provide the security to
make that capital available for projects to develop key
sectors and financial markets.
- Risk is shared to encourage lending - DCA guarantees cover
up to 50% of a lender’s risk in providing financing
and are often coupled with training and technical assistance
designed to strengthen local financial institution’s
long term interest in local credit markets, beyond DCA’s
support.
-
Mobilization of local private capital – credit guarantees
encourage local market participants to utilize private
capital to develop activities that may otherwise be cost-prohibitive
or infeasible due to lack of access to financial markets
or resistance in lending by financial institutions.
- Benefits of credit demonstrated (“the demonstration
effect”) – the benefits of credit guarantees
are demonstrated by providing local partners with access
to less expensive credit. Subsequently, by demonstrating
the sustainability and profitability of development activities
using that credit, local institutions are more likely
to expand financial services to traditionally underrepresented
economic sectors and social groups.
- Agency resources
are maximized - USAID can leverage up to
25 times the per-dollar-impact by using credit to finance
development activities.
As a broad authority, DCA is used for projects which demonstrate
that:
- USAID’s development goals and strategic objectives
can be achieved with credit assistance.
- The cost of each proposed activity can be reasonably
estimated and put on budget.
- The borrowers (sovereign or non-sovereign) are deemed
reasonably creditworthy.
Legislative History
In the FY 1998 Appropriations Act, Congress gave USAID
the general authority to provide credit assistance (loan
and
bond guarantees) for any of the development
purposes specified under the Foreign Assistance Act (FAA) of 1961, as amended.
In April 1999, the Office of Management and Budget (OMB) certified USAID's
capacity to properly manage credit programs, i.e., to accurately assess risk
and to operate
viable financial management and accounting systems.
Impact on Traditional Assistance Programs
While USAID is and will remain essentially a grant agency,
credit assistance under DCA is expected to have two advantages:
- Greater sustainable development impact and "results" impact
- Budget leverage - results from new budget rules under Credit Reform require
an agency to finance from its own resources only the estimated true costs
of a credit
project and not the principal amount of the loan and bond guarantees
issued.
Credit assistance is particularly useful in areas such
as micro and small enterprise, privatization of public services,
infrastructure, efficient and renewable energy,
and climate change.
For more detailed information about the DCA guidelines,
refer to Guiding
Principles.
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