Development Credit Authority (DCA)

USAID's partial loan guarantees allow the Agency to use credit to pursue any of the development purposes specified under the Foreign Assistance Act (FAA) of 1961, as amended.^[1] The Development Credit Authority (DCA) is the tool that provides USAID Missions the authority to issue loan guarantees to private lenders, particularly for local currency loans. These guarantees cover up to 50% of the risk in lending to projects that advance USAID’s development objectives.

In addition to mobilizing financing for specific projects, partial guarantees help demonstrate to local banks that loans to underserved sectors can be profitable. This fosters self-sustaining financing because lenders become willing to lend on a continuous basis without the support of guarantees from USAID or other donors. Partial guarantees are a powerful catalyst for unlocking the resources of private credit markets to spur economic growth while advancing development objectives.

What are the benefits of using a credit guarantee?

Credit assistance is particularly useful in areas such as micro and small enterprise, privatization of public services, infrastructure, efficient and renewable energy, and climate change. Credit projects offer several distinct and very attractive advantages over other forms of assistance:

Promotes private-sector investment - Large reserves of untapped private capital are available within the private sector of developing countries. To encourage financial institutions to lend that capital for developmentally beneficial projects, credit guarantees can be used to cover part of the risk on new loans where financing had been unavailable or inaccessible.

Encourages lending by reducing risk - USAID guarantees up to 50 percent of the net loss on principal for investments covered by a guarantee, sharing the risk with the private-sector partner.

Builds banks lending capacities - Guarantees provide local financial institutions with the security to extend credit and expand into new sectors. In this way, banks invest in their capacity to lend into new and potentially profitable markets while increasing the credit available to developing areas. These guarantees are often coupled with training and professional assistance from USAID designed to strengthen a financial institution’s long-term involvement in local credit markets, beyond the coverage of a partial guarantee.

U.S. Government funding maximized - By using credit from local sources to finance development activities, one dollar from the U.S. Government leverages an average of 28 US Dollars in loans.

References

1. ^ http://www.usaid.gov/our_work/economic_growth_and_trade/development_credit/index.html