USAID

The U.S. Agency for International Development (USAID) is working with the private sector in emerging markets 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 the most.

DCA activities are designed and managed by USAID's overseas missions in conjunction with the Office of Development Credit in USAID-Washington, DC. Credit guarantees offer several distinct and very attractive advantages over other forms of assistance.

DCA is…

• The legal authority for USAID missions to issue credit guarantees;
• An innovative financial tool that mobilizes private capital to support USAID development goals;
• A mechanism to partially guarantee loans extended by private-sector lenders to creditworthy borrowers or debt instruments issued to raise capital in local markets;
• A means to support new or increase financing in areas limited by conditions such as a lender’s aversion to risk or overly-burdensome collateral requirements;
• A complement to USAID’s traditional and professional assistance, engaging the private sector in lending its own capital for bankable projects.

Benefits of DCA

Promotes private-sector investment– there is a large reserve of untapped private capital available for investment in emerging market 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 has previously been unavailable or inaccessible.

Encourages lending by reducing risk – USAIDcovers up to 50% of the net loss on the principal amount of loans, sharing the risk with the private-sector partner.

Builds the lending capacity of local financial institutions –guarantees provide local financial institutions with the security to extend credit and expand into new sectors. Encourage local market participants to utilize private capital to develop activities that may otherwise be cost-prohibitive or not feasible due to lack of access to financial markets or resistance in lending by financial institutions.

Provides a demonstration effect–By demonstrating the sustainability and profitability of development activities supported by credit guarantees, local institutions are more likely to expand financial services to traditionally underserved economic sectors and social groups.

Maximizes the use of Agency resources- USAID can leverage up to 25 times the per-dollar-impact by using credit to finance development activities.

Types of Guarantees

The following links provide graphic information on the four types of partial guarantees:

Loan guarantee
Provides up to 50% coverage on principal
Both Lender(s) and Borrower(s) are identified up-front
Lump sum or multiple disbursements

Loan Portfolio guarantee
Provides up to 50% coverage on a series of loans from a lender(s) to a pool of borrowers
USAID mission decides on definition of “borrowers”

Bond guarantee
Provides up to 50% principal coverage to bond investors
Issue rating strengthened
Capital market deepening

Portable guarantee
Provides up to 50% coverage on principal
Allows target institution (borrower) to “shop” around for best loan package
Becomes a Loan Guarantee once the lender is identified