USAID Credit Guarantees Unleash Private Financing
Small businesses in the developing world find it difficult to get the financial support they need from local investors. The reasons vary—few Small and Growing Businesses (SGB) have collateral they can offer as a loan guarantee, and few local banks understand the businesses in which these SGBs operate well enough to make an accurate risk assessment. For more than fifteen years, the United States Agency for International Development (USAID) has addressed this challenge through its Development Credit Authority (DCA), which guarantees 50% of the principle on loans issued by local institutions in developing countries. These guarantees can be issued on an individual loan, on a portfolio of loans, on a bond guarantee, or on other lending instruments. Whatever the mechanism, guarantees share some of the risk with local lenders, encouraging them to lend to new sectors and borrowers.
Since its inception, the DCA has unlocked $ 4.3 billion in private sector financing through 473 loan guarantees across 75 countries. This not only helps to build the capacity of local lending institutions, it also promotes growth and modernization in the businesses they support. In El Salvador, for example, a DCA loan guarantee allowed a local financial institution to issue a $300,000 loan to a dairy processor who used the loan to make equipment and process upgrades needed to get USDA approval on its milk products—a necessary requirement to enter the export market. Within three years, the savings alone allowed the processor to pay back the loan. DCA guarantees also encourage investment in specific sectors, as with a recent partnership between DCA, the Kenya Commercial Bank, and equipment manufacturer GE, which aims to grow the health delivery infrastructure in Kenya by guaranteeing loans to SGBs building or upgrading retail health facilities in Kenya.