Loan Guarantees Represent Growing Development Trend, USAID's Development Credit Authority Surpasses $2 Billion Mark

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U.S. Agency for International Development

Oct 28, 2010, 03:39 ET

WASHINGTON, Oct. 28 /PRNewswire-USNewswire/ -- USAID 's Development Credit Authority (DCA) recently surpassed a $2 billion milestone of private sector credit mobilized in developing countries. DCA uses partial loan guarantees to encourage local banks to invest locally.

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The $2 billion was made available from a new partnership with Sogebank and Sofihdes bank in Haiti for small and medium businesses in industries ranging from agriculture to waste management.

Since Haiti's devastating earthquake, established businesses lost most, if not all, of their property and equipment. Without these assets, small and medium enterprises no longer have the collateral needed to obtain loans to rebuild their businesses. The DCA guarantee will decrease collateral requirements for borrowers, enabling Sogebank and Sofihdes to lend up to $20 million of their funds to help small and medium businesses rebuild. Once these borrowers rebuild their credit history and businesses they will be able to continue receiving local bank loans without USAID involvement.

"The success of the Development Credit Authority is a positive step towards meeting the Millennium Development Goals of halving global poverty by 2015," said Wendy Abt, USAID's Deputy Assistant Administrator for the Bureau of Economic Growth, Agriculture and Trade. "USAID's overall goal is true economic empowerment. Increased lending enables entrepreneurs in developing countries to play a significant role in their nations' growth and development."

Without the incentive of loan guarantees, financial institutions in developing countries often hold onto their assets, investing mostly in safe government securities rather than local businesses. By offering to share the risks in case of loss, USAID has been changing banks' behavior as lenders realize that industries they once viewed as risky are in fact profitable. After USAID's guarantees expire, lending often continues without additional credit enhancements.

As the momentum for partial credit guarantees builds, DCA's portfolio has increased from $1.8 billion of local wealth mobilized at the end of 2009 to $2.3 billion today. The $2.3 billion in available credit has helped 87,000 enterprises at a cost of only $82 million to U.S. taxpayers. The $82 million has been set aside as a provision for defaults. Actual default rates have been lower than provisions. The balance remains secure in a U.S. Treasury account.

The cost of DCA has remained so low partially as a result of innovative partnerships that allow USAID to leverage U.S. aid dollars with additional funds from its donor partners. In the past few years, new partnerships between USAID's Development Credit Authority and the African Development Bank, Grameen Foundation, the Swedish International Development Cooperation Agency, Standard Chartered Bank, and others signal a growing trend of donor collaboration to increase efficiencies and impact. Joint guarantees with the Japan Bank for International Cooperation, for example, have resulted in financing for improved water service in the Philippines.

USAID is a U.S. government agency that provides economic, development and humanitarian assistance around the world in support of the foreign policy goals of the United States. USAID's Development Credit Authority, established by Congress in 1999, unlocks local capital through loan guarantees for sectors including agriculture, health, housing, clean energy, infrastructure, microfinance, and education.

For more information about USAID's programs, please visit: www.usaid.gov/.

The American people, through the U.S. Agency for International Development, have provided economic and humanitarian assistance worldwide for nearly 50 years.

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SOURCE U.S. Agency for International Development