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Development Credit Authority (DCA)

An Effective Catalyst forEconomic Growth

that Supports Private Investments

in

Developing

Countries

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Objectives for Successful Development

U.S. GOV’T APPROACH

Investing in People

Tapping Local Resources

Attracting Trade and Investment

Attacking Poverty through Productivity

DCA COMMITMENT Facilitate access to credit that

otherwise would not be feasible

Build partnerships with local financial institutions to share risk

Develop key sectors with demonstration effects that show financial viability

Widen economic growth opportunities to be shared with a more diverse base

Successful Development: Models for the 21st Century, USAID

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DCA is a dynamic tool:

• Flexibly structured

• Focused on risk-sharing

• Fully supported by USAID resources

DCA is a dynamic tool:

• Flexibly structured

• Focused on risk-sharing

• Fully supported by USAID resources

Development Credit Authority (DCA)

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DCA - what it does

• Encourages increased lending by local banks to new areas and various “development” sectors.

• Enables financing of ‘bankable’ projects that otherwise lack access to credit from private financial markets.

• Shares up to 50% of debt risk with private sector partner.

• Covers debt denominated in local currency, so exchange rate risk is eliminated.

• Demonstrates the financial viability of lending to new areas to promote development or expansion of credit market.

• Allows for technical assistance to lenders and borrowers.

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DCA Benefits – why it works

DCA provides significant budget leverageFor every dollar (or local currency equivalent) loaned

pursuant to a DCA guarantee, the cost to USAID is approximately 2 to 7 cents.

DCA leverages the knowledge and resources of its partners Since DCA partners’ money is at equal risk, the partners

can be relied on to provide highly reliable information on due diligence and monitoring.

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DCA Products – what it offers

Loan Guarantee

– Financial institution receives up to 50% coverage on principal amount of loan.

Bond Guarantee

– Protects investors on a portion of a bond issuance. Used for municipal or private sector financing.

Portable Guarantee

– A DCA letter of commitment allows borrower to seek best terms from financial markets.

Portfolio Guarantee

– Financial institution receives up to 50% coverage on principal amount of a portfolio of loans they provide to their customers.

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DCA Process – how it works

Overseas Missions identify and design projects with DCA Partners (e.g., private banks, non-bank financial institutions, NGOs, and municipal governments).

Economic and financial viability analyses, monitoring plan, fees justification

Credit Risk Assessment – country, lender, borrower and transaction risk components

USAID/Washington reviews subsidy ‘cost’ estimate and financial viability analysis

Utilization and development impact reporting, fees collection and claim payments

Review of cost to US Gov’t

Develop

Monitor

Identify and Design

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DCA – steps in the process

1. Development AnalysisHow does the project support

a Mission’s Strategic Objective?

2. Economic Viability AnalysisIs USAID the “guarantor of last

resort”? Is there a market

imperfection in the sector

and/or related to credit access?

3. Financial Viability AnalysisWill the borrower(s) generate

sufficient income to cover

operating and debt costs? Will

the lender(s) make profits?

4. Credit Risk AssessmentUSAID Office of Development

Credit to calculate “subsidy” cost

= ‘loan loss reserve’ or insurance

premium to the Mission.

5. Fees JustificationHow were the origination and

utilization fees established?

6. Monitoring PlanHow will the Mission manage the

project?

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DCA Costs – things to think about

50% of Estimated

Loan Defaults

Estimated Collected

Fees

Less = Subsidy Cost

Note: There are no initial USAID funds transferred to DCA partners; USAID funds are only paid after a borrower defaults on its loan/bond.

Cash Outflow Cash Inflow Cost to USAID

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DCA Portfolio

• 95 guarantees have been approved since FY1999 for a potential $754 million of loans under coverage.

• 78 projects with a total obligated amount of $601 million for guaranteed loans is currently in effect.

• Current utilization is $66 million.

Approved DCA Guarantee Facilitities

0

10

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30

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60

FY 99 FY 00 FY 01 FY 02 FY 03

0

50

100

150

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250

300

350

Amount (US$ millions)

No of Facilities

Guarantee Facilities in Effect

0

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30

40

50

FY 99 FY 00 FY 01 FY 02 FY 03

0

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Amount (US$ millions)

No of Facilities

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DCA Portfolio – Global Scope

Latin America & Caribbean (17)EcuadorGuatemala (2)Honduras (3)JamaicaMexico (2)NicaraguaPeru (5)Regional (2)

Asia & Near East (20)Bangladesh (2)Egypt (2)India (2)Morocco (9)Philippines (2)Vietnam (3)

Europe & Eurasia (23)Armenia (4) KazakhstanBosnia (4) RomaniaBulgaria (6) RussiaCroatia UkraineMoldova (4)

Africa (18)Ghana (2)Kenya (3)Mali (2)South Africa (4)Uganda (7)

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DCA Portfolio – Sectoral Distribution

Housing: Develop housing mortgage lending and secondary mortgage markets

SME: Promote productive investment in small and medium sized enterprises

Agriculture: Promote lending for agribusiness

Water: Support investment in water supply initiatives

Infrastructure: Support infrastructure investments for municipal service delivery

Environment: Facilitate credit toward environmental conservation and protection initiatives

Micro: Encourage private lending to micro enterprises

Health: Encourage investments in health and medicine

Education: Develop private sector credit mechanisms to support education projects

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DCA example - Morocco

Type: Portable Loan Guarantee

Amount: $1,000,000 (Moroccan Dirham equivalent)

Guarantee Ceiling: $500,000

Purpose: Increase Al Amana’s capital and thereby enable it to provide additional financing to micro-enterprises in Morocco. The USG guarantee commitment letter allows Al Amana to secure more favorable financing terms from local banks that have been reluctant to lend to the microfinance industry.

Leverage Ratio: 50 to 1. The estimated cost to the USG for issuing the Guarantee on the $1,000,000 loan is approximately $20,000.

Loan USAID 50% Guarantee

Banks

Al Amana

LoansLoans

Micro-enterprises

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DCA example - Mali

Type: Loan Portfolio Guarantee

Amount: $3,700,000 (equivalent in Mali CFA Francs)

Guarantee Ceiling: $1,850,000

Purpose: To expand medium-term lending opportunities for agribusinesses to support fixed asset investment lending.

Leverage Ratio: 37 to 1. The estimated cost to USAID is approximately $99,000.Role of Technical Assistance: Chemonics International, through its Agro-Enterprise Center (AEC), has assisted numerous agribusinesses since the late 1990s. AEC continues to emphasize the development of business plans, which identify fixed asset investment opportunities and the capacity of these enterprises to repay the external financing required for the debt portion of the investment. USAID/Mali and AEC view DCA as a means to provide access to financing for these investments.

Agri-businesses

Portfolio of Loans

Agri-businesses

Agri-businesses

Agri-businesses

Portfolio of Loans

DCA 50%Guarantee

BICIMBank ofAfrica

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DCA example - Uganda

Type: Loan Portfolio GuaranteesLoan: $30,000,000 (equivalent in Ugandan shilling)

Guarantee Ceiling: $15,000,000 Purpose: To increase credit access to small and medium enterprises (SMEs) and agribusinesses, and to expand commercial bank lending to trade finance deals involving the export of grains and lending to MFIs. Leverage Ratio: 31 to 1. The estimated cost to USAID is approximately $975,000.Role of Technical Assistance: To provide significant technical assistance in conjunction with these guarantees, including as the “Managing Institution” identified in the diagram at right, through a variety of ongoing contracts. Target

SectorSMEs

TargetSectorMFIs

UgandaBanks

Portfolio of Loans

ManagingInstitution

Technical Assistance

Monitoring &Reporting

DCA 50%Guarantee

MFI = MicroFinance Institution

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DCA example - Guatemala

Type: Loan Portfolio Guarantee

Loan: $5,000,000 (equivalent in Guatemalan Quetzale)

Guarantee Ceiling: $2,500,000

Purpose: To promote public and private sector investments in rural market towns to provide agribusinesses with expanded opportunities for processing and selling their products.

Leverage Ratio: 23 to 1. The estimated cost on $5,000,000 loan portfolio is approximately $220,000.

Loans

Banco del Café

USAID50% guarantee

Targeted Sectors NGOs

Targeted SectorsMicroEnterprises

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Development Credit Authority

US Agency for International Development

Ronald Reagan Building

1300 Pennsylvania Ave NW

Washington, DC 20523-3800

Phone: +1.202.712.1380

Fax: +1.202.216.3593

Email: odc@usaid.gov