Development Credit Authority
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Banks in developing countries have extremely conservative lending practices. They often prefer to invest in high-yielding government treasuries, or in large corporations that they view as low-risk. Consequently, smaller businesses face difficulties accessing the credit they need to invest in growing and expanding their enterprises. Frequently these potential borrowers are unable to qualify for a loan. If they are able to qualify, they are often unable to meet collateral requirements that can be as high as 100-200 percent of the value of the loan.
To encourage financial institutions to lend to creditworthy but underserved borrowers, USAID uses the Development Credit Authority (DCA). DCA is a tool that USAID missions use to stimulate lending through the use of partial credit guarantees. These guarantees, which cover up to 50% of defaults on loans made by private financial institutions, use the wealth that already exists in developing countries --money held in local financial institutions-- to stimulate broad-based development that is truly sustainable. These guarantees have been used in a variety of ways, for example: to support municipal lending in countries with recently legislated decentralization reforms; to enable health clinics to borrow money to invest in medical equipment; and to enable businesses and families to recover after natural or man-made disasters.
Since DCA was established in late 1999, more than 200 partial credit loan and bond guarantees have enabled approximately $1.6 billion of private capital to be lent in more than 60 countries. The cost to USAID is approximately $53 million, meaning that for every dollar spent by the U.S. Government on a DCA guarantee, an average of $30 is made available by the private sector. Actual defaults are less than one percent of the overall portfolio, proving to partner financial institutions that underserved borrowers are indeed worthwhile and profitable investments.
DCA News
New Memorandum Signed Between USAID and Standard Chartered to Increase Access to Financial Services in Africa
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| Former USAID Administrator Henrietta H. Fore and Standard Chartered Bank CEO Peter Sands show signed MOU |
On October 9, 2008, USAID Administrator Henrietta H. Fore, and Peter Sands, CEO of Standard Chartered Bank, signed a Memorandum of Understanding (MOU) in support of African economic growth. The partnership will enable USAID and Standard Chartered to increase trade throughout sub-Saharan Africa, promote the development of the financial sector in those countries, and encourage local financial institutions through the issuance of risk-sharing credit guarantees. The MOU will bring to scale on-going cooperation between these two organizations. Read the joint press release.
USAID Moves Forward with African Development Bank Co-Guarantee
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| Small scale enterprises like this Ghanaian wood working carving wooden masks will benefit from DCA guarantees |
In July 2008 USAID approved a co-guarantee with the African Development Bank (AfDB) for Ghana. The loan portfolio guarantee with two banks, one with Barclays Bank Ghana and the other with Prudential Bank Ghana, is a 10-year $48 million guarantee facility whereby the AfDB will cover 40 percent of the exposure on outstanding loans and USAID will cover 10 percent. Target beneficiaries are export-oriented small and medium-sized enterprises, in particular producers of non-traditional exports (e.g. agriculture products like papaya, pineapple, and horticulture; garments; handicrafts). These borrowers are too small for corporate loans but have financing needs larger than what microfinance institutions can provide (the so-called “missing middle”).
USAID Approves New Guarantees in Education Sector
On July 15, 2008, USAID approved two new Development Credit Authority (DCA) guarantees in the education sector, in Kyrgyzstan and in Ghana. In Kyrgyzstan, $1.5 million in guaranteed financing will be made available by two financial institutions, Microcredit Company Kompanion and Kyrgyz Investment and Credit Bank. It will enable students to obtain loans to finance tuition for vocational and higher education and will allow them more choices in deciding which educational institutions to attend.
In Ghana $5 million in private financing will be made available to a portfolio of private primary and junior secondary schools that serve low-income households. It will complement technical assistance to the private education sector, enabling schools to continue to access finances after the guarantee expires.
New Agreement Signed with the African Development Bank
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| Henrietta Fore, formerUSAID Administrator and Donald Kaberuka, President of the African Development Bank. |
On April 15, 2008, USAID and the African Development Bank (AfDB) signed a Memorandum of Understanding (MOU) to launch a partnership in support of entrepreneurs in Africa. This groundbreaking public-private initiative will formalize a collaborative arrangement to focus on accelerating investment in African small and medium enterprises.
Through joint guarantees, each organization will be able to maximize its comparative advantage which will lead to increased financing for African entrepreneurs. The two organizations will also collaborate on technical assistance.
. Read more in the joint press release.
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