Development Credit Authority & Other Guarantees
Despite advances within the industry, microfinance institutions (MFIs) have had difficulty attracting commercial capital necessary to become self-sufficient. Credit enhancements from USAID’s Development Credit Authority (DCA) and other sources offer one way to expand access to capital by MFIs and to catalyze sustainable MFI relationships with formal financial sector actors, thereby increasing the availability of credit to micro and small enterprises.
DCA is a risk-sharing mechanism that encourages commercial banks and other lenders and creditors to expand credit to sectors and industries they currently do not serve, or to lend with less collateral than previously required. The expectation is that during the guarantee period, the lender will get to know the industries and associated risks so that in the future, the lender will have the confidence to issue comparable credit without enhancements.
For fast-growing MFIs that are not licensed to take deposits, a major limitation to growth is the need to source funds for on-lending. The USAID Microenterprise Development office (MD) has sought to review the role that the DCA has played in increasing access to lendable funds from bank loans and other sources.
MD, jointly with the Office of Development Credit, commissioned on-site visits or desk studies of six microfinance DCA or pre-DCA guarantee facilities (a) to determine whether the credit enhancements had the effect of increasing sustainable access to credit, and (b) to assess the environmental and structural considerations that should be in place for the guarantee to achieve the desired effect.
The guarantee facilities reflected a wide range of deal structures, in a wide range of countries. In Morocco, two large MFIs were given portable guarantees so they could shop for their own loans. A commercial bank was also given a loan portfolio guarantee for loans to MFIs, and the mission worked with the bank to identify appropriate MFI borrowers. In Uganda, several commercial banks were given dual-purpose loan portfolio guarantees for lending both to small and medium enterprises and to MFIs. In Mexico, an MFI was given a portable guarantee to source its own loan. In Peru, the DCA enhancement was used to re-guarantee enhancements issued by a private guarantee facility, FOGAPI, to encourage lending to non-governmental organizations and other micro-lenders. A partial guarantee was issued for one of the debt tranches of the Global Commercial Microfinance Consortium, a microfinance investment fund sponsored by Deutsche Bank, to encourage purchase of notes issued by the fund. In Colombia, two loan guarantees were issued for loans for an MFI that did not want to take the route of seeking a deposit-taking license.
KNOWLEDGE AND PRACTICE
All of these facilities were associated with increased levels of lending, and most of these have encouraged lending beyond the period of the guarantee. Guarantees had a catalytic effect in increasing lending to MFIs when macroeconomic conditions were right, including dropping interest rates, lower inflation, market demand for microfinance, and licensing MFIs as deposit-taking institutions. While some banks perceived MFIs as a threat because the banks were going down-market themselves, in most cases participating banks saw this as an opportunity to indirectly reach a new market by developing a niche lending specialty.
Another important lesson is that the guarantee is more effective as a part of a stream of technical support to MFIs, rather than as a stand-alone activity. Evaluations of several deals concluded that USAID support was critical in bringing credibility to the borrower institution. Banks were more interested in lending to MFIs if USAID was encouraging the loan, and Deutsche Bank found that the USAID role encouraged many first-time entrants to make microfinance investments. USAID does, however, need to guard against its “endorsement” being used incorrectly, as one MFI implied that the guarantee was a substitute for deposit insurance.
Other findings included concerns about overlapping guarantees that distort the learning goal for the lenders, because of a perception of a full guarantee. In addition, guarantees offered through funds have leverage potential for USAID because structuring and monitoring services are incurred only once.