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Moldova Impact Brief

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  • 1. DCA LOAN GUARANTEEMOLDOVAIMPACT BRIEF
  • 2. On the Cover: Horse-drawn wagonin the Orhei District, MoldovaPhoto credit: Commons/publicdomain BACKGROUND 2005, then the eighth largest bank in Moldova. The Moldova is one of the poorest countries in Europe purpose of the guarantee was to support loans to with a per capita Gross Domestic Product (GDP) micro, small and medium enterprises (MSMEs) in the around $1,600. Agriculture, including agri-business, agriculture, agribusiness, and related sectors such as remains one of the most important sectors in transport and services in rural areas of Moldova. Moldova, employing more than 40 percent of the FinComBank made 75 loans under the five-year loan population, accounting for 30–40 percent of GDP guarantee, which was almost fully utilized (97.6 and over 50 percent of exports. Lack of credit is percent) within the first 18 months. The average loan considered an size was $52,000, and 70 percent of loans wereABOUT DCA important granted for working capital. FinComBank made oneUSAIDs Development Credit constraint to claim for $2,344. The facility expired in August 2010.Authority (DCA) was created in expanding This guarantee leveraged $18 of FinComBank loans1999 to mobilize local private capital agricultural to the agricultural sector in Moldova for every onethrough the establishment of real businesses. dollar of USAID investment.risk sharing relationships withprivate financial institutions in ImprovedUSAID countries. The tool is competitiveness EVALUATION OBJECTIVESavailable to all USAID overseas and export This evaluation is the ninth in a series of DCAmissions and can be used as a performance thatvehicle for providing much-needed guarantee evaluations. The evaluation assesses the will come fromcredit to an array of enterprises and performance of the guarantee at three levels— expansion are keyunderserved sectors. The evaluation output, outcome, and impact. At the output level, thein Moldova is part of a set of to increasing rural evaluation explores additionality, i.e., howevaluations USAID is undertaking in employment and FinComBank used the guarantee for loans it woulddifferent countries, to test a series incomes. Where not have otherwise made. The outcome level asksof developmental hypotheses credit is available,related to the DCA guarantees. whether the new lending practices were sustained by short-term loans FinComBank after the guarantee or during the are the norm, guarantee period without using the guarantee’s discouraging needed investment in processing protection. At the impact level, the evaluation facilities and equipment. In addition, collateral analyzes the broader market impact of the guarantee requirements are high, sometimes two to three times and determines whether the guarantee influenced the value of the loan. Farmers and small agro- other banks to lend to the agricultural sector and processing firms have limited experience preparing whether that resulted in improved terms for the financial statements to document creditworthiness. borrowers. The scope of work for the evaluation The U.S. Agency for International Development focuses solely on the FinComBank guarantee. (USAID) responded to the lack of finance in the However, this DCA agreement was part of a Credit agricultural sector by providing a five-year, $4-million Enhancement Project (CEP) that provided a collective Development Credit Authority (DCA) loan portfolio DCA facility of $27 million in 2004–2010 to six guarantee (LPG) to FinComBank in August additional Moldovan financial institutions. TABLE 1. DCA LOAN PORTFOLIO GUARANTEE TO FINCOMBANK TABLE 1. DCA LOAN PORTFOLIO GUARANTEE TO FINCOMBANK Average Subsidy Starting Ceiling Number of Cumulative Utilization Average Ending Year Loan Tenor Amount Year Amount ($) Loans Utilization ($) Rate Loan Size ($) (months) ($) 2005 2010 4 million 75 3,904,493 97.6 % 52,000 18 226,000 Source: USAID Credit Management System (CMS)
  • 3. EVALUATION METHODOLOGY The DCA guarantee allowed the bank to implement andThis evaluation used a mixed-methods approach, test its strategy to expand its presence in less-servedincluding statistical analysis of loan data, key informant rural markets. By sharing risk, FinComBank gainedand group interviews, and document review. The experience in a challenging sector. The guaranteeevaluation team traveled to Moldova in April 2011 to helped FinComBank make loans to borrowers whomeet with USAID/Chisinau, FinComBank, other DCA would have been denied loans due to insufficientpartner banks, donors and multilateral development collateral and/or lack of credit history.banks (MDBs), and a wide range of key financial sector This positive picture is tempered to some extent by theinstitutions and practitioners. fact that more than half of FinComBank’s DCA- guaranteed loans were extended to previous bankOVERALL FINDINGS clients. The analysis of the loans to FinComBankTrends in lending to the agricultural sector are generally borrowers who then subsequently received a DCApositive, even post crisis guaranteed loan did not show that the guarantee wasThe overall purpose of the DCA guarantee with consistently used by the bank to provide either larger,FinComBank was to spur lending to MSMEs in longer-term loans to these clients or require lessMoldova’s agricultural sector. During the period of the collateral.loan guarantee to FinComBank (2005–2010) lending tothe agricultural sector increased. Even during the worst Findings in support of these conclusions include:of the global financial crisis that hit Moldova in 2009,agriculture lending did not decrease as much as other, Thirty-two of the 75 loans went to first-timeharder-hit sectors. Post financial crisis, lending to the FinComBank borrowers.agricultural sector has expanded due to better FinComBank required less than its standardprospects for the sector given the global rise in minimum 100 percent collateral on 11 of the 75agricultural prices, as well as an increase in donor/MDB DCA-guaranteed loans.credit lines for the agricultural sector. As a result,trends in financing the agricultural sector are moving in Of the 41 borrowers who had received a previousthe right direction. Banks are increasingly providing loan(s) from FinComBank, 26 received larger loans,short-term credits (two years or less) from their own 20 received longer-term loans, and six saw theirresources. Longer-term bank lending to the sector, collateral requirements go down when borrowingparticularly for investment purposes, continues to rely under the guarantee. Ten of these loans did not fiton funding from external credit lines. Slow progress on into any of these categories.modernization and mechanization of the agriculturalsector, weak land reform, and inefficient foreclosure OUTCOMEprocesses to recover collateral stymie stronger lending Conclusions FinComBank significantly increased itsto the agricultural sector. agricultural loan portfolio during the guarantee period. Between 2004 and 2008, both the number andOUTPUT outstanding value of agricultural sector loans more thanConclusions The $4-million DCA guarantee accounted doubled. Agricultural lending continues to be a priorityfor about 25 percent of FinComBank’s total agricultural of the bank and has remained robust post-financialloan portfolio when the guarantee began in 2005. crisis, compared to other sectors. At the end of 2009,FinComBank aggressively used the DCA guarantee to FinComBank loans to the agricultural sector were justmake loans to the agricultural sector, reaching the under 25 percent of its total loan portfolio. This ratio ismaximum guarantee authority in less than two years of significantly higher than the banking system as a wholethe five-year guarantee. There was only one small claim. in which agricultural loans account for about 15 percent
  • 4. of total lending. Almost half of the DCA borrowers IMPACTremain clients and still receive loans from FinComBank Conclusions While the $4 million FinComBank guaranteewithout any guarantees. More than half of the new was too small to have a broader market impact, theloans to previous DCA borrowers were short-term overall $27 million CEP probably did have a markedloans (24 months or less). impact on lending to the agricultural sector since it included four of the six largest banks in Moldova, whichFor loans of more than two years, FinComBank account for more than 75 percent of system assets. Ascontinues to rely almost completely on donor/ a result, there is growing competition among MoldovanMDB credit lines as it does not have access to banks to find and lend to rural borrowers and there hasany other source of medium- to long-term been a shift in lending from larger agriculturalfunding. While the credit lines allow the bank to enterprises to smaller agricultural producers.make longer-term loans, the bank assumes thefull credit risk. Thus, FinComBank needs to be The impact may have been bigger but lending to theconfident that the borrower will repay. Many of agricultural sector fluctuated during the guaranteethe bank’s new loans to previous DCA period given severe weather-related productionborrowers were financed from donor credit problems, the Russian embargos on Moldovalines for investment purposes on three- to 10- agricultural products and the financial crisis.year terms. Because of this, it stands to reasonthat the FinComBank’s positive experience with Findings in support of these conclusions include:the borrowers increased its confidence to makethe longer-term loans. Overall credit to the agricultural sector increased approximately 33 percent from 2004 to 2010.The guarantee did not appear to influence interest ratesor collateral requirements on FinComBank’s loans to There are now many new borrowers in the bankingthe agricultural sector. Interest rates remain at market system who have a credit history as well as morerates, and significant collateral is still required on loans valuable collateral that they obtained because of theto agricultural sector borrowers. initial DCA-guaranteed loan. Many DCA partner banks have established newFindings in support of these conclusions include: micro-lending programs with reduced documentation and no collateral; this may be a FinComBank significantly expanded its network and result of their positive experience and lessons staff in rural areas throughout Moldova, which learned about managing risk from the DCA helped increase the number and value of loans to guarantee. the agricultural sector supported by the guarantee. Two home-grown guarantee funds for borrowers FinComBank stated that it now feels confident to lacking credit history and/or sufficient collateral use its own resources to provide short-term credit were created in Moldova and were directly (two years or less) to the agricultural sector. influenced by the DCA experience. This publication was produced for review by the United States Agency for International Development. It was prepared by SEGURA Partners LLC under the SEGIR Global Business, Trade and Investment II – IQC Indefinite Quantity Contract, Number EEM-I-00-07-00001-00 Task Order # 04, Development Credit Authority Evaluation CONTACT INFORMATION U.S. Agency for International Development Office of Development Credit 1300 Pennsylvania Avenue, NW Washington, D.C. 20523 http://www.USAID.gov

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