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Development Credit Authority (DCA)

Development Credit Authority (DCA). An Effective Catalyst for Economic Growth that Supports Private Investments in Developing Countries. U.S. GOV’T APPROACH Investing in People Tapping Local Resources Attracting Trade and Investment

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Development Credit Authority (DCA)

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  1. Development Credit Authority (DCA) An Effective Catalyst forEconomic Growth that SupportsPrivate Investmentsin Developing Countries

  2. 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 Objectives for Successful Development Successful Development: Models for the 21st Century, USAID

  3. Development Credit Authority (DCA) • DCA is a dynamic tool: • Flexibly structured • Focused on risk-sharing • Fully supported by USAID resources

  4. Encourages increased lending bylocal 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 debtdenominated 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. DCA - what it does

  5. DCA provides significant budget leverage For 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. DCA Benefits – why it works

  6. 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. DCA Products – what it offers

  7. 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 Identify and Design Develop Review of cost to US Gov’t Monitor

  8. Development Analysis How does the project support a Mission’s Strategic Objective? Economic Viability Analysis Is USAID the “guarantor of last resort”? Is there a market imperfection in the sector and/or related to credit access? Financial Viability Analysis Will the borrower(s) generate sufficient income to cover operating and debt costs? Will the lender(s) make profits? 4. Credit Risk Assessment USAID Office of Development Credit to calculate “subsidy” cost = ‘loan loss reserve’ or insurance premium to the Mission. 5. Fees Justification How were the origination and utilization fees established? 6. Monitoring Plan How will the Mission manage the project? DCA – steps in the process

  9. DCA Costs – things to think about Less = Estimated Collected Fees Subsidy Cost 50% of Estimated Loan Defaults Cash Outflow Cash Inflow Cost to USAID Note: There are no initial USAID funds transferred to DCA partners; USAID funds are only paid after a borrower defaults on its loan/bond.

  10. 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.

  11. DCA Portfolio – Global Scope Europe & Eurasia (23) Armenia (4) Kazakhstan Bosnia (4) Romania Bulgaria (6) Russia Croatia Ukraine Moldova (4) Asia & Near East (20) Bangladesh (2) Egypt (2) India (2) Morocco (9) Philippines (2) Vietnam (3) Latin America &Caribbean (17) Ecuador Guatemala (2) Honduras (3) Jamaica Mexico (2) Nicaragua Peru (5) Regional (2) Africa (18) Ghana (2) Kenya (3) Mali (2) South Africa (4) Uganda (7)

  12. 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

  13. DCA example - Morocco Banks 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. USAID 50% Guarantee Loan Al Amana Loans Loans Micro-enterprises

  14. DCA example - Mali Bank of Africa 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. BICIM DCA 50% Guarantee Portfolio of Loans Portfolio of Loans Agri-businesses Agri-businesses Agri-businesses Agri-businesses

  15. DCA example - Uganda Managing Institution Type: Loan Portfolio Guarantees Loan: $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. Technical Assistance Uganda Banks Monitoring & Reporting DCA 50%Guarantee Portfolio of Loans TargetSectorMFIs TargetSector SMEs MFI = MicroFinance Institution

  16. 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. Banco del Café Loans USAID 50% guarantee Targeted Sectors NGOs MicroEnterprises Targeted Sectors

  17. 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

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