Overview of USAID’s Partial Credit Guarantees
Background Banks in many developing countries
are very conservative in their lending practices. Much of
their capital is invested in low-risk government bonds. When
banks make loans, it is typically to established customers
and subject to collateral requirements of 100% to 200%. As
a result, many creditworthy borrowers are unable to access
financing.
 |
Monthly
meeting of
Finca-Tanzania's borrowers, with their children.
This young man was named after the microfinance institution
that enabled his mother to run her own business. |
The U.S. Agency for International Development (USAID) is
working with the private sector in developing countries to
expand investment in local development activities. Since 1999,
USAID’s field offices, or “missions” have
used the Development Credit Authority (DCA) to facilitate
these public-private partnerships.
DCA is a tool within USAID that enables the missions to provide
partial credit guarantees for private-sector investments to
reduce the risk associated with lending to new sectors or
new borrowers. These guarantees help stimulate development
by increasing the flow of credit to areas and activities that
need it most, including specific sectors where the need exists
to encourage sustainable local economic growth and represents
a tremendous resource for local businesses, public health
and education, financial services, and infrastructure projects,
just to name a few.
Functionality / Sustainability
The Agency’s loan or bond guarantees are often complemented
by USAID-assisted training that develop banks ability to perform
cash-flow analysis, due diligence and risk management on loans
to underserved sectors. The combination of training and partial
guarantees has introduced local financial institutions to
new lending opportunities in microfinance, infrastructure,
energy, housing and agribusiness sectors, among others.
In addition to mobilizing financing for specific projects,
partial guarantees help demonstrate to local banks that loans
to underserved sectors can be profitable. This fosters self-sustained
financing because lenders become willing to finance projects
on a continuous basis without the support of guarantees from
USAID or other donors. Partial guarantees are a powerful catalyst
for unlocking the resources of private credit markets to spur
economic growth while advancing development objectives.
As a broad authority, DCA is used for projects demonstrating
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.
- Borrowers are deemed creditworthy and the projects are
bankable (have positive cashflow).
Impact on Traditional Assistance Programs
While USAID is and will remain essentially a grant agency,
credit assistance using a partial guarantee is expected to
have two advantages:
- Greater sustainable development and "results"
impact
- • Budget leverage – outcome of new budget
rules under Credit Reform Act require an agency to finance
from its own resources only the estimated true cost 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.
Benefits of USAID’s Partial Guarantees
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. Credit projects offer several distinct and very attractive
advantages over other forms of assistance:
Promotes private-sector investment - Large
reserves of untapped private capital are available within
the private sector of developing countries. To encourage
financial institutions to lend that capital for developmentally
beneficial projects, credit guarantees can be used to cover
part of the risk on new loans where financing had been unavailable
or inaccessible.
Encourages lending by reducing risk - USAID
guarantees up to 50 percent of the net loss on principal
for investments covered by a guarantee, sharing the risk
with the private-sector partner.
Builds banks lending capacities - Guarantees
provide local financial institutions with the security to
extend credit and expand into new sectors. In this way,
banks invest in their capacity to lend into new and potentially
profitable markets while increasing the credit available
to developing areas. These guarantees are often coupled
with training and professional assistance from USAID designed
to strengthen a financial institution’s long-term
involvement in local credit markets, beyond the coverage
of a DCA guarantee.
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.
U.S. Government funding maximized - By
using credit from local sources to finance development activities,
one dollar from the U.S. Government can leverage up to 50
dollars in loans.
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.
For more detailed information about the guidelines
on which USAID’s guarantees are based, please refer
to the Guiding
Principles.
Back to Top ^
|
