4.2.7. DCA Loan 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 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.
- 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
MUST HAVE’S, CRITICAL POINTS, OR QUESTIONS TO CONSIDER
A woman named Tideg owns a construction supply store in Mekelle, the capital city in the northern Tigray Region of Ethiopia.
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.
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.