Earlier this month, Bloomberg News published an article explaining how USAID is undergoing a transformation – attracting private capital, rather than U.S. tax dollars, to finance development:
It’s a sea change for an agency that for years simply gave out money. The program, called the Development Credit Authority, was begun in 1999 [...] with authority from Congress to provide loan guarantees, but in the 10 years before 2011 it backed $2.2 billion in credit. Since 2011, the authority has issued $1 billion in guarantees.
As one of the newest employees of USAID’s Development Credit Authority, I recently had the opportunity to see the impact of this major shift.
I traveled just outside of Dar es Salaam, Tanzania, on my first overseas trip with USAID to visit one of the 140,000 entrepreneurs USAID has helped access local capital from a private entity. As a new portfolio manager for DCA’s guarantees, I wanted verification that a difference was being made here, on this farm, in this entrepreneur’s life.
The farm belongs to Alex, a local farmer that started his business 13 years ago with three pigs and a $30 microloan. His ultimate goal: to rebuild his father’s house and improve the lives of his family members. After his father’s death, his role as the eldest son changed. His drive to succeed is fueled by responsibility toward his family and his will to secure them a better future. He is proud and he is kind. He smiles through the entire visit and is generous and joking, eager to tell his story.
It is a story heavy with reference to microfinance, small loans he was able to secure, and how those first loans gave him the leg up he needed.
Here’s how it works:
- Access to financing enabled him to grow the farm from three pigs to 30. The loan also helped him acquire more than 1,000 chickens, two cows, and a side business renting rooms.
- Today, he owns land, his children are in school, and his dream of rebuilding his father’s house has been realized. But it almost never happened. “It was difficult,” he says, “I did not have any collateral.”
- Things fell into place for Alex in part thanks to a 2010 partnership between USAID and the local microfinance institution PRIDE Tanzania. With a DCA loan guarantee, PRIDE was able to offer the first ever bond of its type in Sub-Saharan Africa.
Through the bond, PRIDE raised $10 million from private investors, allowing the MFI to open 18 new branch offices offering loans to micro and small entrepreneurs. This opened the door to credit financing not only for Alex, but for 60,000 other entrepreneurs, many of them poor farmers who previously lacked the collateral to qualify for loans.
Through DCA, USAID partners with financial institutions like PRIDE to guarantee loans or bond issuances targeting underserved sectors. The guarantees help to change the perception of creditworthiness of those potential entrepreneurs generally ignored by banks. With the help of a USAID/Tanzania guarantee, Alex was given a chance. Now his financing is growing: in 2013 he secured a loan with PRIDE worth $3,200.
Small businesses are economic drivers. And all small businesses are run by entrepreneurs with big ideas. But ideas cost money, and money is hard to find.
In places like rural Tanzania, the demands of daily necessity can stifle a dream before it begins. Even a $30 loan can be life-changing. And that’s why I work in development: to be a part of some seemingly small but life-changing moment in someone’s life.