Development Credit Authority Putting local wealth to work IMPACT BRIEF 2011
In the 1960s, during USAID’s founding decade, official development assistance represented 70 percent of all capital flows to developing countries. Today, foreign aid makes up just 13 percent, having been replaced over time by trade, investment, and other sources of private capital. This changing landscape means our impact can be even greater. Rather than using our development dollars to substitute for missing private capital, we can use them to attract it. Even better, we can unlock existing local wealth and put it to work for development.
That’s what we do at the Development Credit Authority (DCA). In our 12 year history issuing credit guarantees, DCA has worked directly with more than 200 local private financial institutions, reaching more than 100,000 credit-worthy, but underserved borrowers. In 2011 we established 37 guarantees that will mobilize an additional $200 million in commercial capital in 21 countries. Among the highlights, we supported the first-ever municipal bond offering in Serbia, a historic step in the development
of their local capital markets. We finalized a $25 million deal with J.P Morgan Chase and a group of impact investors that will fuel economic growth in East Africa by providing equity financing for small businesses. And we signed a $34 million guarantee in Egypt that will mobilize capital for small businesses that lack access to credit following the turmoil of the Arab Spring.
Investment Officers are being deployed to our regional missions to originate innovative deals and ensure financing solutions become a critical component of USAID programming. This is a good start. In the coming year we will further deepen our work across the Agency, helping to incentivize private investment so that development continues long after we exit.
Aside from these unique deals, DCA created a Strategic Transactions Group in order to develop capital markets alternatives to typical development solutions. At the Agency level, Field Ben Hubbard Director Development Credit Authority USAID
MEET ABE. HE CAN’T GET A LOAN.
Abe lives in Ethiopia and wants a loan to build a poultry farm. His local bank has the money but prefers ultra safe investments.
Bond Markets A USAID guarantee supported the first municipal bond issuance in Serbia, a historic step in the development of local capital markets. The $48 million bond will raise funds for road construction and a wastewater project. Youth A $2.1 million guarantee will support lending in Kosovo to create jobs and foster an entrepreneurial culture for Kosovo’s youth.
2011 Guarantee Highlights
Arab Spring Political upheaval and uncertainty following the Arab Spring made conservative banks in Egypt even more reluctant to provide loans to small and medium sized businesses. A $34 million guarantee will mobilize local lending for businesses that will drive Egypt’s growth.
Environment A $17.2 million guarantee in Guatemala will strengthen access to finance for forestry enterprises, all of which will have to adhere to Rainforest Alliance’s Sustainable Forest Management practices.
Collaboration USAID, J.P Morgan, the Gates, Rockefeller, and Gatsby Charitable Foundations, announced a $25 million investment in a private equity fund to support small agriculture enterprises in East Africa. A USAID guarantee will back an $8 million commercial loan from J.P Morgan’s Social Finance Unit.
Microcredit $1.5 million in joint guarantees from Grameen Foundation and USAID will enable a Peruvian savings and credit cooperative to support $3 million in local currency financing for two Peruvian microfinance institutions.
PEPFAR USAID and the U.S. Global AIDS Program, PEPFAR, partnered to unleash $13.5 million in private capital for AIDS relief in Ethiopia.
Education USAID launched a credit guarantee that will make available $5 million in local private capital to support student loans for Indonesian students over the next 20 years, including those interested in studying in America.
View all of our 2011 Activity Online
Food Security A $4.5 million guarantee in Kenya will support food security by increasing access to finance for small enterprises in agriculture value chains. In 2011, 14 DCA guarantees totaling nearly $74 million were established to make the world more food secure.
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Guarantee with a Sharia Lender A $1.15 million guarantee with Indonesia’s oldest sharia bank will provide financing for low-income Indonesian women to run their own businesses, marking USAID’s first-ever guarantee with a sharia compliant institution.
USAID provides business guidance to Abe and shares risk with the bank if Abe cannot repay his loan.
37 21 10 million 200million 8.3 million 106,596 2.3 billion guarantees
dollars collected in bank fees
in private capital for entrepreneurs
dollars paid out on defaults
dollars banks are able to lend
Alemayehu Belete, a poultry worker at a DCA borrowerâ€™s farm in Ethiopia. Credit: Morgana Wingard
ABE GETS A LOAN TO BUILD HIS FARM LOCAL PRIVATE BANK
In 2011, DCA initiated 37 credit guarantees in 21 countries that will result in up to $200 million in private capital for local loans. This year we reached our 100,000th borrower. Since 1999, USAID has paid out $8.3 million on defaults, but collected $10 million in bank fees. With the security of the guarantees, up to $2.3 billion in credit has been made available in 67 countries.
Independent Evaluation 2011 Moldova In 2005, a five-year, $4 million loan portfolio guarantee to FinComBank supported loans to small agribusinesses in rural areas of Moldova.
48% 2 33%
48 percent of borrowers under the guarantee remain clients of FinComBank, and still receive loans without the backing of a USAID guarantee.
of borrowers remain clients
local guarantee funds were established
DCA Borrower in Moldova Credit: Stephanie Grosser/USAID
increase of credit to the agriculture industry
Two local guarantee funds for borrowers lacking credit history and sufficient collateral were created in Moldova and were inspired by USAID’s guarantees. Overall credit to the agricultural sector in Moldova increased 33 percent from 2004 to 2010, and the emphasis in lending shifted away from lending to larger agricultural enterprises in favor of smaller agricultural producers.
Erbeto Woldesenbet, an employee at a DCA borrower’s agribusiness in Ethiopia. Credit: Morgana Wingard
ABE’S FARM BENEFITS HIS COMMUNITY
ABE PAYS BACK HIS LOAN, JUST LIKE 98.25% OF USAID --SUPPORTED BORROWERS
Hannington and Justine with their three children Credit: Morgana Wingard
DCA’s 100,000 th Borrower
Hannington and Justine: Pineapple farmers in Uganda Client: Hannington and Justine Country: Uganda Business: Fruit Farm Product: Financial Loan, Loan Portfolio Guarantee
Hannington and his wife Justine started a fruit farm in southwestern Uganda because they wanted to grow something different from the crops traditionally grown in the country. They knew products high in vitamin C were in demand by the many people living with HIV/AIDS throughout the region. Therefore they started growing pineapples, mangos, grapes, and other fruits. However their farm was not operating at its full potential because it lacked an irrigation system. Thanks to a USAID-backed credit guarantee with a private, local bank in Uganda, Hannington and Justine qualified for a loan for an irrigation system.
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EMPOWERING PEOPLE LIKE ABE AROUND THE WORLD
After participating in USAID’s guarantee program, banks realize the profitability of lending to people like Abe. As a result, lending has been opened for tens of thousands of borrowers around the world without a guarantee.
As a result, their crop yields skyrocketed, allowing them to hire 20 additional workers more than the original 40 they already employed. Under this guarantee, designed to increase food production in Uganda by increasing the capacity of local farmers, a Ugandan bank has already lent threequarters of a million dollars to local farmers. Thus far there have been no defaults, increasing the bank’s confidence in the agribusiness sector.
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U.S. Agency for International Development Office of Development Credit 1300 Pennsylvania Avenue, NW Washington, DC 20523 Tel. (202) 712-5413 Fax (202) 216-3228