Opening Doors: A Performance Evaluation Of The Development .
Credit: Courtesy of Leila Ahlstrom, USAID Development Credit AuthorityOpening Doors: A Performance Evaluation of theDevelopment Credit Authority (DCA) in EthiopiaWolday Amha, ConsultantWilliam M. Butterfield, Mission Economist, USAID/EthiopiaFasika Jiffar, Senior SME Development Specialist, USAID/EthiopiaLeila Ahlstrom, Financial Management Specialist, USAID/DCAUSAID/EthiopiaMay 2016, Addis Ababa
Opening Doors: A Performance Evaluation of the Development Credit Authority (DCA) in Ethiopia
ContentsContentsList of boxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iiAcronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iiExecutive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iii1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11.1 Statement of the problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11.2 Objectives of the DCA program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31.3 Assessment objectives and methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31.4 Method of data collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52. Salient features and outreach of the DCA program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63. The performance of the DCA product – Views of stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103.1 Macroeconomic factors influencing the performance of the DCA program . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103.2 Bankers’ views on the DCA program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123.3 Borrowers’ views on the DCA guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .153.4 Capacity-building support to partner banks and borrowers under DCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .173.5 Views of women - A gender perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .194. Assessment of outcomes and impact of the DCA program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .214.1 Appropriateness of the design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .214.2 Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .214.3 Credit additionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .224.4 Financial sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .224.5 Program sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .234.6 Impact on the beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .245. Conclusions and recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29Annexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30Annex 1: Public policies for micro-, small and medium enterprises (MSMEs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30Annex 2: Credit guarantee initiatives in Ethiopia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31Annex 3: Establishing lease financing institutions to address the collateral issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33Annex 4: Definition of micro- and small enterprises in Ethiopia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34Annex 5: First-time borrowers from a DSA facility by sector and bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34Annex 6: Summaries of loan portfolio guarantees under DCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35Annex 7: Information provided by SHOPS to potential borrowers under DCA for private health facilityservice providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37Annex 8: Interview schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39i
Opening Doors: A Performance Evaluation of the Development Credit Authority (DCA) in EthiopiaList of boxesBox 1: The effect of the recent drought on SMEs in the agriculture sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16Box 2: SHOPS – An example of effective TA to support DCA guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18Box 3: The high potential impact of loan guarantees: The case of Ethio Chicken . . . . . . . . . . . . . . . . . . . . . . . . . . GSHOPSSSASMEsTATINUSAIDVATVPiiAgricultural Growth Program-Agribusiness and Market DevelopmentAgricultural Growth Program-Livestock and Market Development Programbusiness development servicesbond guaranteeConstruction and Business BankCommercial Bank of EthiopiaChief Executive OfficerDCA’s Credit Monitoring SystemDevelopment Bank of EthiopiaDevelopment Credit Authoritygross domestic productGovernment of EthiopiaGrowth and Transformation PlanHousehold Asset Building Programloan guaranteeLivestock and Market Development Programloan portfolio guaranteemicrofinance institutionMinistry of Financemicro- and small enterprisemicro-, small and medium enterprisesNational Bank of Ethiopianon-performing loanportable guaranteePrivate Health Sector ProgramSustainable Development GoalStrengthening Health Outcomes through the Private SectorSub-Saharan Africasmall and medium enterprisestechnical assistanceTax Identification NumberUS Agency for International Developmentvalue-added taxVice President
Executive summaryExecutive summaryLending to small and medium enterprises (SMEs) inEthiopia, in new sectors to new clients, while offeringnew lending products, is perceived by banks to be riskierthan lending to large enterprises and known borrowers,using traditional forms of finance. At the same time,microfinance institutions (MFIs) have done an adequatejob of reaching micro- and small enterprises, creating asituation commonly described as ‘the missing middle’.Asymmetric information, inadequate expertise and alack of incentives to expand balance sheets due to thecurrent market environment together mean that banksoverwhelmingly base their lending decisions oncollateral coverage and target sectors with lowerperceived risk. The collateral rate (compared to the loansize) required by banks in Ethiopia is much higher thanthat required in many of the countries in Africa, Asiaand Latin America. These features have discouragedSME owners from pursuing bank loans, especially sincethe preferred form of collateral for first-time borrowersis a primary family residence.The Development Credit Authority (DCA) in Ethiopiaoffers partial credit guarantees that cover either a singleloan or a loan portfolio in order to motivate privatecommercial banks to lend to SMEs, new sectors or newclients. In Ethiopia, DCA has focused mainly onproviding loan portfolio guarantees (LPGs) for firmsin the agricultural value chain, health sector, and todiaspora and women entrepreneurs. In offering partialcredit guarantees to banks that cover loans in default,DCA aims to reduce collateral requirements forborrowers, incentivize banks to take more risk, createdemonstration effects if the new clients are successful,and ultimately help spur private-sector-led economicgrowth in the countries where it operates.This performance evaluation seeks to understand theeffectiveness and impact of the DCA program inEthiopia, both for the borrowers, in terms of improvedaccess to credit and business profitability, and forpartner banks, in terms of improved lending practicesthat more effectively reach SMEs in targeted sectors.Attempts are also made to assess the contribution oftechnical assistance (TA) providers (which are partnerUS Agency for International Development [USAID]projects) in building the capacity of partner banks andDCA borrowers. The outcome and impact of the DCAprogram are assessed along six main dimensions:appropriateness of the design; utilization; creditadditionality (i.e. the degree to which the programexpands access to finance for target borrower groupsrelative to what we could expect in the absence of theprogram); financial sustainability; programsustainability; and impact on the borrowers. Theevaluation focuses on primary and secondaryinformation from key stakeholder interviews.Appropriateness of the designOverall, DCA guarantees in Ethiopia were found tohave been effective in meeting its primary objective ofincentivizing commercial lenders to serve segments andsectors targeted by the partial guarantees. There is nearconsensus among both surveyed borrowers and lendersthat the DCA guarantee, while less effective in alteringthe terms of loan agreements in the form of reducedcollateral requirements, successfully ‘opened the door’to previously under-served clients by prioritizing theirapplications. However, in the current marketenvironment, serious questions were raised about thesustainability of the loan portfolio guarantee design,while the need to reconsider various aspects of the DCAmodel in the Ethiopian context also became evident.DCA’s primary objectives are to foster increased access tocapital and capital market development. By not crowdingout market-driven interventions by providing subsidizedcredit or other below-market financial products andservices, DCA attempts to foster competitive behavioramong participating banks (by changing theirinstitutional attitude towards lending to target sectorsand segments) and supports a sustainable deepening ofthe financial sector, which ensures the delivery of loans tothose types of borrowers after the termination orexpiration of the guarantee. DCA partner banks areexpected to benefit from the guarantee product byassisting them in opening up new markets for profitableiii
Opening Doors: A Performance Evaluation of the Development Credit Authority (DCA) in Ethiopiacommercial operations. On top of the guarantee, DCAemphasizes the importance of technical assistance toboth partner banks and borrowers, normally provided byparallel USAID projects that are operational in thecountry. This assistance was found to be of high qualityon average. By reviewing many credit guarantee schemesimplemented by development partners in differentcountries and the experience in Ethiopia, the team foundthat, overall, the DCA model is more effectively designedand can serve as a benchmark for other credit guaranteeschemes in Ethiopia.was 47,369,550. To date, under the various DCAguarantees, a total of 316 beneficiaries accessed loansfrom banks. About 41.1 percent of the beneficiaries ofDCA were engaged in trade/commerce, followed byagriculture (24.7 percent), the health sector (23.4percent), and tourism (7 percent). Bank of Abyssiniaextended about 30.4 percent of DCA-backed loans,followed by Dashen Bank (24.4 percent) and NibInternational Bank (21.8 percent). Out of the totalborrowers, only 8.5 percent were identified by partnerbanks as being female-owned businesses.However, the largest exogenous challenge facing theDCA program in Ethiopia is the shortage ofcommercial bank liquidity, driven by the large demandfor loanable funds due to recent high economic growthrates, lack of foreign competition, and the requirementsince April 2011 for commercial banks to purchaselow-yield Development Bank of Ethiopia (DBE) bondsworth 27 percent of the principal value of all loansmade. The incentive of private commercial banks toseek out new and perceived higher-risk clients istherefore greatly diminished, as is the ability of DCA toalter this dynamic. For example, some current partnerbanks report little interest in continuing to support theagriculture sector given the higher perceived risks. Inthe current commercial lending environment, the designof the DCA loan portfolio guarantee is becoming lessrelevant, although the program can still be effective atredirecting limited liquidity to target borrowers at themargin, which continues to be important for these SMEs.Of the 316 borrowers under DCA-backed loans, 37percent were first-time borrowers. This compares with aglobal average of 22.7 percent, so Ethiopia has donecomparatively well. Of the 117 first-time borrowers, 51.3percent were engaged in establishing private facilities inthe health sector, followed by the agriculture sector (25.6percent), with tourism and trade/commerce tied at 10.3percent. Nib Bank had the highest ratio of first-timeborrowers (41.9 percent), followed by Dashen Bank(32.5 percent) and Bank of Abyssinia (12 percent).UtilizationUSAID/Ethiopia began sharing risk under theDevelopment Credit Authority in 2004, and has sincesigned 17 guarantee facilities through 2015 with sevenprivate financial institutions and one privatecorporation. Since the initial guarantee in 1999 (underthe Micro and Small Enterprise Development [MSED]authority), USAID/Ethiopia has facilitated more thanUS 96,309,045 in credit to SMEs in the agriculture andhealth sectors, at a cost of 9,621,444 – leveragingapproximately 10 of private sector financing for every 1 of USAID funds obligated. As of March 2016, thecumulative value of current guaranteed loans and loanportfolios to the seven partner banks wasUS 90,604,045, while the total cumulative utilizationivThe utilization rates are relativelyhigh and demonstrate the value ofDCA productsAlthough the utilization rate varied from bank to bankand depended somewhat on the age of the guarantee, theoverall LPG utilization rate to date is 61.1 percent. Ofexpired guarantees, the utilization rate was just over 77percent. These rates are relatively high overall anddemonstrate the value that DCA products have offered tocommercial banks and the effectiveness of the design intargeting under-served sectors and borrowers. The largestfactor affecting the few instances of low utilization hasbeen sector strategy shifts within partner banks. Forexample, both Dashen Bank and Bank of Abyssiniamade the decision to shift out of the agriculture sectordue to increased perceived risks, while the latter also nolonger wishes to do business with diaspora borrowersfor similar reasons. DCA products need to ensure thecoherence of bank strategies with the objectives ofDCA and the development objectives of the USAIDMission, as well as the durability of those strategiesprior to making future agreements.
Courtesy of Leila Ahlstrom, USAID Development Credit AuthorityExecutive summaryA borrower under the DCA loan facility; this woman owns a building supplies store.Credit additionalityThere was a clear consensus among borrowers that DCAenabled them to access finance that they otherwise mightnot have been able to access, but these views ranged indegree. Some claimed that accessing finance withoutthe DCA guarantee in place would have been‘unthinkable’ for them. Others admitted that they‘probably could have’ accessed finance without DCA,but felt that DCA reduced the time and inconvenienceof obtaining finance. To a lesser extent, borrowers feltthat DCA likely increased the amount of the loan thatthey were able to obtain as well as decreased thev
Opening Doors: A Performance Evaluation of the Development Credit Authority (DCA) in Ethiopiarequired collateral. Our interviews with banksconfirmed these beliefs as all claimed to prioritize DCAloan applications, often with documents being sentdirectly to a Vice President’s office. All banks alsoclaimed that the DCA guarantee generally enabledthem to lower collateral requirements and/or increasethe amount of the loan available, which also coincideswith some of the borrowers’ beliefs.DCA guarantees have been comparatively successful inachieving credit additionality by lending to 117 firsttime borrowers, or 37 percent of the DCA-backedloans. The senior executives of the partner banksunderstand that there is a strong need to extend loansto targeted segments and sectors in order to meet thecountry’s growth and transformation objectives. Yetwhile some banks have a strategy to provide financialservices to segments and sectors targeted under theDCA, others have no such formal strategy. There was ageneral agreement that DCA incentivized their banksto extend loans to the targeted sectors and sectorsunder the guarantee (e.g. SMEs in the agriculturalvalue chain, private health service providers, womenentrepreneurs, and diaspora), even though lending tothese areas was perceived to be riskier and lessprofitable and also required additional staff time.Without DCA, the banks would likely have continuedto lend to preferred and larger clients, especiallyIn general it is the relationshipwith USAID, rather than theproduct itself, that is more highlyvalued by partner banksexporters given the current foreign exchange premium.While DCA guarantee products do in fact often lowerrequired collateral, in practice collateralization ratesof loans under the DCA program often exceed 100percent and normally run much higher depending onthe type of collateral offered, normally the primaryresidence of smaller borrowers. Since DCA only paysclaims on 50 percent of the remaining principal balanceof a defaulted loan after collateral has been collected,when realized collateralization rates exceed 100 percent,DCA products have no real financial value when thebank is able to fully liquidate seized collateral.viFinancial sustainabilityFormal attempts were not made by partner banks toestimate the financial costs and benefits of implementingDCA-backed loans. However, in general, it is therelationship with USAID and its implementing partners,rather than the guarantee product itself, that is morehighly valued, as many bankers did not consider theguarantee products to be profitable in and of themselves.Partner banks enjoy USAID’s ability: to offer technicalassistance to qualified clients and refer them to the bank;to connect the bank with a wider
Opening Doors: A Performance Evaluation of the Development Credit Authority (DCA) in Ethiopia Wolday Amha, Consultant William M. Butterfield, Mission Economist, USAID/Ethiopia Fasika Jiffar, Senior SME Development Specialist, USAID/Ethiopia Leila Ahlstrom, Financial Management Specialist, USAID/DCA USAID/Ethiopia May 2016, Addis Ababa Cre dit .
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