An Overview of USAID's Credit Guarantees

Guarantee agreements encourage private lenders to extend financing to underserved borrowers in new sectors and regions. By opening up local channels of financing, USAID is empowering entrepreneurs in developing countries at a minimal cost to the U.S. taxpayer. Risk-sharing partnerships are a key component of DCA's approach. Financial institutions with USAID guarantees make loans using their own capital. The cumulative default rate of all loans supported by USAID guarantees is only 1.85%. These same loans have cost-effectively mobilized up to $3.1 billion in private, local funds to finance development. USAID charges banks fees to avoid guaranteeing loans banks would have made without the guarantee. Additionality is another key benefit of DCA's guarantees. Guarantees allow lenders to take on additional risk, whether by creating a new loan product, offering improved loan terms, or lending to a new sector. In some cases, competitor banks have entered the same market after observing the success of USAID partner banks. The design of a partial credit guarantee ensures that banks perform their own due diligence to understand new sectors and are therefore more likely to continue lending on their own. Since 1999, USAID's Development Credit Authority has been designing and delivering investment alternatives that unlock private financing for entrepreneurs in the developing world. In Uganda, a USAID guarantee enabled an entrepreneur to receive a loan large enough to expand his business. As a result, his profits increased from $6,500 to $22,000 annually and he was able to hire an additional 40 workers. The borrower repaid his loan in full and has since received another loan, double in size, without a guarantee. USAID's standard guarantee products include the Bond Guarantee, Loan Guarantee, and Portfolio Guarantee. The Bond Guarantee provides a guarantee for a specific bond issue, while the Loan Guarantee provides a guarantee for a specific loan. The Portfolio Guarantee provides a guarantee for a portfolio of loans. USAID's guarantees have been used in a variety of sectors, including agriculture, health, environment, small business, microfinance, housing, water, energy, infrastructure, and education.