4.2.6. DCA Loan Portfolio Guarantees for Financial Intermediaries
The USAID Development Credit Authority (DCA) uses partial credit guarantees to mobilize local financing in developing countries. Guarantee agreements encourage private lenders to extend financing to underserved borrowers. A bank interested in financing multiple projects may submit qualifying portfolios through USAID’s Credit Management System, and USAID responds by guaranteeing up to 60% of the bank’s loan, should the portfolio be approved. If the financed SMEs default, USAID is responsible for reimbursing the bank with up to 60% of the initial loan (Source: DCA One Pager). There are two other types of DCA guarantees: Single Loan Guarantees and Bond Issue Guarantees.
- Ability of borrowers to show formal registration
- Ability to file/record a security interest on movable property pledged as collateral
- Ability to file/record a security interest on real estate pledged as collateral
- Ability to have commercial disputes resolved in a timely manner
- Ability to recover and sell property pledged as collateral
- Ability to resolve bankruptcies in a timely manner
- Access to reliable credit information on borrowers
- Appropriate capital to meet borrower needs
- Cash flow uncertainty
- Exchange rate risk
- Interest rate risk
- Off-take risks associated with target sector/region
- Potential for higher inflation
- Production costs associated with target sector/region
- Rate of return on lending in target sector/region
- Unpredictable fiscal policy
The DCA partial credit guarantee is designed to: 1) reduce risks to generate additional lending to underserved markets and sectors, development objectives and 2) demonstrate the long-term commercial viability of lending in developing markets (Source: DCA One Pager).
MUST HAVE’S, CRITICAL POINTS, OR QUESTIONS TO CONSIDER
VIGNETTE: USAID/PHILIPPINES, USAID/INDONESIA, AND THE MELOY FUND
The opportunity to support sustainable fisheries-related enterprises is significant; however, businesses poised to take advantage of this opportunity often lack access to finance.There is a growing consciousness locally and internationally to support sustainable fishing. Consumers are demanding sustainable, traceable seafood, creating a very real opportunity for the private sector to catalyze community adoption of sustainable fisheries practices. Businesses need loans to adopt new technologies, implement best practices, grow, and, in some cases, start-up.
USAID/Philippines and USAID/Indonesia partnered with The Meloy Fund for Sustainable Community Fisheries to mobilize $17.5 million for sustainable fisheries and fisheries related businesses.
The loan portfolio guarantee supports fisher livelihoods and maintains ecosystems in coastal fishing communities in the Philippines and Indonesia. It is also helping the Fund crowd-in new investors to the sustainable fisheries sector.