USAID Credit Guarantees Background
The Development Credit Authority (DCA) provides USAID Missions
the authority to issue loan guarantees to private lenders,
particularly for local currency loans. These guarantees cover
up to 50% of the risk in lending to projects that advance
USAID’s development objectives.
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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. |
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. A DCA loan guarantee
can make funding available to specific sectors where the need
exists to encourage sustainable local economic growth. DCA loan or bond guarantees are often complemented by USAID-assisted
training that help banks better perform cash-flow analysis,
due diligence and risk management on loans to underserved
sectors. The combination of partial guarantees and training
has introduced local financial institutions to new lending
opportunities in the housing, microfinance, infrastructure,
energy and agribusiness sectors. In addition to mobilizing financing for specific projects,
DCA partial guarantees help demonstrate to local banks that
loans to underserved sectors can be profitable. This fosters
self-sustaining financing because lenders become willing to
lend on a continuous basis without the support of guarantees
from USAID or other donors. DCA is a powerful catalyst for
unlocking the resources of private credit markets to spur
economic growth while advancing development objectives.
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