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2.2.7. DCA Loan Guarantees for Financial Intermediaries

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DESCRIPTION

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 a project may submit a qualifying proposal through USAID’s Credit Management System, and USAID responds by guaranteeing up to 60% of the bank’s loan, should the proposal be approved. If the financed SME defaults, 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: Portfolio Loan Guarantees and Bond Issue Guarantees.

CONSTRAINTS ADDRESSED

  1. Ability of borrowers to show formal registration
  2. Ability to file/record a security interest on movable property pledged as collateral
  3. Ability to file/record a security interest on real estate pledged as collateral
  4. Ability to have commercial disputes resolved in a timely manner
  5. Ability to recover and sell property pledged as collateral
  6. Ability to resolve bankruptcies in a timely manner
  7. Access to reliable credit information on borrowers
  8. Appropriate capital to meet borrower needs
  9. Cash flow uncertainty
  10. Exchange rate risk
  11. Interest rate risk
  12. Off-take risks associated with target sector/region
  13. Potential for higher inflation
  14. Production costs associated with target sector/region
  15. Rate of return on lending in target sector/region
  16. Unpredictable fiscal policy

ADVANTAGES 

Coming soon.

DISADVANTAGES

Coming soon.

MUST HAVE’S, CRITICAL POINTS, OR QUESTIONS TO CONSIDER

Coming soon.


VIGNETTE: TIDEG’S CONSTRUCTION SUPPLY BUSINESS IN ETHIOPIA

SITUATION

A woman named Tideg owns a construction supply store in Mekelle, the capital city in the northern Tigray Region of Ethiopia.

STRUCTURE

She invested a 1 million Ethiopian Birr (approximately $62,000 USD) DCA-guaranteed loan in 2010 in her business to open two warehouses in addition to the retail store and was able to hire three new employees.

IMPACT

After she repaid her DCA-guaranteed loan, she was approved for another loan. Now that she has built a credit history with the help of DCA, she feels confident in her ability to access additional finance in the future. She dreams of becoming a wholesaler of imported goods, such as agricultural inputs, and eventually opening her own factory.