Helping People Help Themselves

Just outside Kigali, in the central African country of Rwanda, Emmanuel Harelimana goes to work at a coffee roasting company. Set high on a hill, CAFERWA's walls are filled with large machines that roast coffee for export to countries as far away as the United States and Switzerland. Speaking over the hum of the coffee roasting machines, Emmanuel tells a visitor about the strategic decision he and his colleagues made in 2003 to produce higher-value specialty coffee, hoping to increase the company's profit margin. But to make better coffee, CAFERWA needed better machinery, and to get better machinery, CAFERWA needed money.

Every day, businesses apply for loans around the world. But banks in developing countries like Rwanda lend considerably less to small businesses than here in the United States. Why? Lenders prefer safer investments such as high-yielding government securities and are less willing to lend to unfamiliar projects or sectors that they view as too risky. The global financial crisis exacerbated this problem. Over the last decade, according to the World Bank's World Development Indicators, the average amount of credit provided by banks to the private sector in least developed countries has dropped, from 31 percent to 22 percent of GDP. By contrast, and despite the crisis, high income countries over the same time span have seen an increase from an already high 180 percent to 190 percent of GDP.

While Rwandan banks have historically been reluctant to lend to small agribusinesses, CAFERWA was able to get two separate loans for approximately $100,000 each because they were guaranteed by the U.S. Agency for International Development (USAID). The company used the financing to complete the renovation of a coffee washing machine and triple its workforce. Today CAFERWA is Rwanda's third-largest coffee exporter.

Since 1999, the Development Credit Authority, USAID's credit guarantee program, has made over $1.9 billion of private credit available across 64 countries. These guarantees, which cover banks for partial losses in the event of a loan default, encourage banks to use their own resources to "test" new businesses like CAFERWA that often become long-term customers after proving their ability to repay. Since the beginning of the program, USAID has paid out less than two percent in claims, proving that there are viable businesses worthy of credit if developing country lenders will just give them a chance.

Today I will sign an agreement on behalf of USAID with the Swedish Development Cooperation Agency (Sida) to work together to issue joint credit guarantees to financial institutions in developing countries around the world. This partnership will leverage each organization's comparative advantage and allow credit to flow to more businesses in more countries. USAID and Sida will soon issue joint guarantees in Bosnia and Haiti, and we plan to design more guarantees to mobilize private investment in sectors such as climate change, post-disaster reconstruction, food security, and health.

One key advantage of credit guarantees is that they promote sustainable lending that capitalizes not on donor resources, but on resources that already exist in developing countries. And they help to develop the capacity of local banks as they expand lending to new clients that they would not have lent to without a guarantee. President Obama, speaking in Ghana last summer, stressed the importance of this approach to development assistance when he said, "The true sign of success is not whether we are a source of perpetual aid that helps people scrape by -- it's whether we are partners in building the capacity for transformational change."

The countries in which USAID, Sida and others in the donor community work have the ability to achieve great accomplishments with their own resources. It is up to us to support the people of these nations along the way.