Development Credit Program (DCP)

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Democracy and Governance Economic Growth and Agricultural Development Environment Human Capacity Development Population, Health and Nutrition Women in Development Program Development and Strategic Planning Development Credit Program Glossary Abbreviations and Acronyms Last updated: 59     Private investment and effective credit markets are critical for economic growth in developing countries. Abundant private domestic capital exists in most of these countries but is not properly mobilized and put to work. USAID believes that a combination of technical assistance and true risk-sharing DCP guarantees is an effective tool to address the historical, cultural, and other factors that cause this fundamental problem. Moreover, the US has a unique comparative advantage in this sector with US financial intermediation serving as a model of efficiency and US financial experts viewed as world class leaders. DCP assistance is intended to induce lending to creditworthy but underserved credit markets such as the small and medium scale businesses and farmers who frequently benefit from DCP guarantees. With DCP training and technical assistance, local financial institutions, companies, and USAID missions work together to develop innovative demonstration activities to mitigate market distortions, mobilize local private capital, and expand credit services. In the three years since the inception of DCP, USAID mission demand has grown rapidly. Increasingly, private sector activities formerly assisted through grant funding are now being assisted with disciplined, less costly DCP credit enhancement. When the private banks and investors successfully experiment with providing credit to underserved sectors, the expectation is that they will continue to direct credit to these sectors when DCP assistance is no longer available. USAID is requesting consolidation of all credit assistance under a single allocation of DCP transfer authority. Activities previously funded under a separate Micro and Small Enterprise Development (MSED) authority will be funded under DCP according to priorities established by the Congress. The consolidation of all credit activity under DCP will result in accounting and administrative efficiencies and avoid separate accounting duties and expense. Transfer authority subject to a set ceiling is requested in lieu of a direct DCP line item appropriation. Transfer authority will assure that mission development objectives drive the use of DCP and not the imperatives to fully expend appropriated accounts. The added flexibility of the transfer authority also gives Congress and the Agency a versatile financing tool that can be used as needed to quickly respond in times of emergency or shifting priorities. DCP Guiding Principles: Projects contribute to the achievement of USAID objectives; Risk is shared with private sector partners; Host-country participants commit to financial discipline leading to a more appropriate and efficient use of U.S. funds; Prudent risk management methods are used to assess project risk; Projects will address market failure; and DCP will emphasize credit support to private sector institutions over sovereign loans and guarantees. Full-text description DCP is not an additional source of funding, but merely an alternative use of existing appropriations, whereby funding from other USAID-managed accounts can be transferred to the DCP account. DCP augments grant assistance by mobilizing private capital in developing countries for sustainable development projects. Since the inception of DCP in 1998, a total of fourteen projects in ten countries have been approved. These projects permit a credit portfolio of $141 million in local currencies at a credit subsidy cost to the Agency of $5.4 million. The contingent liability of the existing DCP portfolio amounts to $65.8 million. In FY 2001, 22 USAID Missions and bureaus submitted 49 proposals requesting the use of DCP. Together, these activities could mobilize over $400 million in local currency financing, at an estimated credit subsidy cost of $30 million. Additionally, more than a dozen new projects are in early stages of development for FY 2002. These projects could mobilize up to $100 million more in local currency project finance at an estimated subsidy cost of $7 million. These activities include large infrastructure projects in Egypt and loan guarantees for earthquake reconstruction efforts in India and El Salvador. Full-text description The FY 2001 projects address almost every targeted development sector. The Agency is confident that credit can be used effectively to support private-sector involvement in the financial, healthcare, infrastructure, trade & investment, housing, mortgage, micro-finance and energy sectors in developing economies. DCP has also proven especially effective for supporting the growth of small and medium enterprises, obviating the need for the appropriated authority provided under the MSED Program. New demand for DCP credit enhancement in FY 2002 is likely to exceed current demand. For FY 2002, USAID is requesting $8 million in directly appropriated funding for credit administrative expenses and $25 million in transfer authority for DCP credit subsidy. Development Credit   FY 2000 Actual FY 2001 Appropriation FY 2002 Estimate Credit Subsidy    Transfer authority for DCP [3,000,000] [5,000,000] [25,000,000]    Appropriation for DCP - 1,500,000 -    Appropriation for MSED Program 1,500,000 1,500,000 -    Appropriation for UE Program 1,500,000 - - Administrative Expenses    Appropriation for DCP - 4,000,000 8,000,000    Appropriation for MSED Program 500,000 500,000 -    OE Funding for MSED Program 1,100,000 335,000 -    Appropriation for UE Program 4,990,000 - -    OE Funding for Direct Loan Program 2,600,000 - - To conform with the Federal Credit Reform Act of 1992, the $8 million appropriation request for credit administrative expenses reflects the total cost of the development, implementation and financial management of all Agency credit programs, including certain costs previously funded by the Agency OE appropriation. It covers a total of 23 full-time direct-hire staff associated with management and oversight of new DCP activities and the continued administration of existing credit portfolios with outstanding principal in excess of $13 billion. In addition to providing direct support to field missions contemplating or using the transfer authority, it also includes funding for legal support and financial accounting services. The $25 million of DCP transfer authority will be used to guarantee loans and loan portfolios in every region of the globe and in every economic sector targeted by USAID. In FY 2002, the Global Bureau will assist Missions in supporting such activities as bond financing; small- and medium- enterprise (SME) development, competitive financial services; and creative municipal financing and clean energy. Activities funded through DCP add value to the Agency's overall efforts by: Demonstrating to financial institutions in developing countries that mobilizing local private capital to fund activities in their own countries is a profitable, worthy venture; Creating competitive markets by providing local financial institutions with an incentive to provide financial services to historically disadvantaged social groups and all viable economic sectors; Improving policies and increase transparency within financial institutions and the legal framework guiding those organizations; Establishing efficient credit markets by helping institutions develop business plans, revise credit policies and train staff properly; and Increasing Employment through increased lending to SMEs and spillover effects into related sectors.

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