Development Credit Authority
The Development Credit Authority (DCA)[1] was the authority the United States Agency for International Development (USAID) used to issue loan guarantees backed by the full faith and credit of the U.S. government to private lenders, particularly for loans made in local currency. It merged with the Overseas Private Investment Corporation (OPIC) to form the U.S. International Development Finance Corporation (DFC) on December 20, 2019.
The partial loan guarantees extended by USAID, and now through the DFC, allow the U.S. Government to use credit to pursue the development purposes specified under the Foreign Assistance Act (FAA) of 1961, as amended. These guarantees typically cover up to 50% of the principal of loans to entrepreneurs, small-, and medium-sized businesses, and other projects that advance the U.S. Government's international development objectives.
In addition to mobilizing the financing of 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.
Benefits of using a credit guarantee
Credit assistance is particularly useful in areas such as microenterprise 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:
- They promote private sector investment: Large reserves of untapped private capital are present in 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.
- They encourage 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.
- They enhance banks' lending capacities: Guarantees provide local financial institutions with the security to extend credit and expand into new sectors. In this way, banks can develop 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 to strengthen a financial institution's long-term involvement in local credit markets, beyond the coverage of a partial guarantee.
- The value of U.S. Government funding is maximized: By using credit from local sources to finance development activities, one dollar from the U.S. Government leveraged an average of 24 dollars in loans under DCA guarantees.
Criticisms of DCAs
- DCAs do not cover interest income lost: In a country that has, for example, a 30% interest rate, the interest income would represent almost 50% of the total loan value and is not insured via the DCA. In this case, the DCA covers 50% of the principal, but only 25% of the total loan exposure.