The Use of Credit to Promote Financial Intermediation The Development Credit Authority (DCA)

1. The Use of Credit to Promote Financial IntermediationThe Development Credit Authority (DCA)

2. What is DCA? • Legal Authority for USAID to issue Credit Guarantees • Guarantees backed by US Treasury • Tool for Missions (like grants or contracts), not a separate program

3. Guiding Principles • True Private Sector Risk-Sharing (covers no more than 50% of lender’s risk of loss) • Reduces “Moral Hazard” • Leverages resources of local banks (financial and human resources)

4. Four Tools • Loan Guarantee (LG) • Portable Guarantee (PG) • Loan Portfolio Guarantee (LPG) • Bond Guarantee (BG)

5. Loan Guarantee • Provides up to 50% coverage on principal • Both Lender(s) and Borrower(s) are identified • Lump sum or multiple disbursements 50% Guarantee Identified Lender Identified Borrower USAID

6. Loan Guarantee - Examples • SME Lending – Kenya (Co-operative Bank of Kenya) • To strengthen the ability of Co-operative Bank of Kenya to finance MSME development in Kenya, USAID/Kenya partially guaranteed a $1.5 million five-year loan extended by this bank to the Kenya Women Finance Trust, a local microfinance institution. The proceeds of this loan will be on-lent primarily to women-owned businesses in the rural areas. • The guarantee will allow Kenya Women Finance Trust to gain access to capital from the commercial banking sector and, hence, potentially open the door to other borrowing arrangements. It will also signify to other banks that lending to MSMEs outside of the urban area can indeed be a profitable undertaking. • Housing Finance – Romania (Raiffeisen Bank Austria-Domenia Credit S.A.) • The guarantee will cover a 10-year US$7 million loan extended by Raiffeisen Bank to Domenia Credit, a new mortgage finance institution created by the Romanian-American Enterprise Fund (RAEF). This loan will enable Domenia to fund the expansion of its mortgage loan portfolio and attract other forms of investment. • The guarantee will provide individuals with access to longer-term financing for the purchase of primary residences in Romania and, through its support for Domenia, stimulate the development of a dynamic mortgage market based upon a secondary mortgage market model.

7. Portable Guarantee • Provides up to 50% coverage on principal • Allows target institution (borrower) to “shop” around the best loan package 50% Guarantee ? Identified Borrower Un-Identified Lender USAID

8. Portable Guarantee – Examples • Microfinance & Housing – Morocco (Al Amana, Zakoura) • Multiple Portable guarantees to assist with capital lending from various private commercial banks to these non-governmental institutions (NGOs). • The guarantees initially reduced bank risk, allowing these NGOs to demonstrate the ability to repay their loans and gradually increase bank confidence in the potential viability of microfinance in Morocco. • Capital Markets Development – Armenia (Cascade Credit) • A portable guarantee covering the issuance of $12 million in commercial paper was offered to Cascade Credit, a newly formed non-bank financial institution, to assist the latter in attracting private capital to expand it lending operations. Proceeds of the commercial paper issue will be on-lent to Armenian businesses engaged in export production. T • The guarantee will serve to spur the development of capital markets by introducing a new investment product - the first of its kind - in the Armenian market.

9. Loan Portfolio Guarantee • Provides up to 50% coverage on a series of loans from a lender(s) to a pool of borrowers • Mission decides on definition of “borrowers” 50% Guarantee Unidentified Borrowers within Target Definition Lending Institution USAID

10. Loan Portfolio Guarantee-Examples • Agribusiness –Ethiopia (Bank of Abyssinia) • A five year $4.5 million guarantee facility covering loans to small holder farmers, agricultural cooperatives, livestock marketing groups and agribusinesses. • Offers short and medium term financing for marketing and capital investment in the coffee, food grains, horticulture, livestock and livestock products sectors to promote rural economic growth. • Education –Panama (Banco Panameno de la Vivvienda) • Provides for $5.0 million in loans to private university students to support tuition costs. A trust fund serves as the “first loss”, which is funded by 20% discounts on the loan disbursements. This is the first private sector student loan product in Panama. • This activity was GDA-funded in cooperation with Laureate Education Inc., formerly the Sylvan Learning Institute.

11. Bond Guarantee • Provides up to 50% principal coverage to potential buyers of bonds • Issue rating strengthened • Capital Market deepening USAID 50% Guarantee Funds Issuing Institution Investors Bonds Loans or Borrowers

12. Bond Guarantee - Examples • Water –India (two guarantees) • Pooling of resources/needs of small municipalities to issue bonds • First guarantee predominantly focused on refinancing of existing bank loans; however, due to an innovative and new structure, it was necessary for DCA to be involved to achieve higher credit rating. • Energy – Georgia • The guarantee will support the issuance of a series of bonds by the Bank of Georgia not to exceed US$3 million. The bonds issued under this program are anticipated to be dollar-denominated as are the resulting loans financed by the bond issue proceeds. This will be the first corporate bond issue in Georgia. • The bond will support medium and long-term loans to private sector projects that contribute to cleaner and/or more efficient energy supply and use in Georgia.

13. DCA Guarantees Worldwide Statistics… Performance to Date (9/30/05) Projects approved and obligated since DCA was implemented in FY 1999: Number: 143 Aggregate Amount: Over $1 billion!! Subsidy Cost: $38.1 million

14. DCA Guarantees WorldwideSome Statistics… DCA Guarantees by Region (9/30/05)

15. Questions? http://www.usaid.gov Search on “DCA Guarantees”