On the Cover: Sorting coffee cherries inEthiopia BACKGROUND In early 2005, EGAT/DC decided to further support Rural, small and medium enterprises (SMEs) struggle Root Capital with another guarantee to help the to obtain the capital they need to operate and expand organization expand its model into East Africa. their businesses. Yet, SMEs have the potential to EVALUATION OBJECTIVES provide much-needed employment for rural EGAT/DC, which administers the DCA guarantees, inhabitants, increase food security, and enhance a commissioned an evaluation of the Root Capital country’s export revenues. guarantees in 2010. This evaluation assesses the ABOUT DCA The financial sector has USAIDs Development Credit Authority performance of the guarantees relative to their historically viewed (DCA) was created in 1999 to mobilize objectives as defined in the Action Packages agriculture as a risky local private capital through the developed by USAID, i.e., increasing access to credit investment, subject to the establishment of real risk sharing for SME agribusinesses in Latin America and East relationships with private financial vagaries of weather, Africa. The evaluation assesses the outputs, institutions in USAID countries. The tool seasons, and sometimes is available to all USAID overseas outcomes, and impacts of the guarantees. widely fluctuating prices. In missions and can be used as a vehicle addition, rural producers The evaluation covers Root Capital’s lending behavior for providing much needed credit to an array of enterprises and underserved typically lack acceptable and potential demonstration effects in the financial sectors. The Root Capital evaluation is guarantees or collateral, an sector. It does not examine EGAT/DC’s or USAID’s part of a set of evaluations that existing credit history, and administration of the guarantees, nor does it examine EGAT/DC is undertaking in different bank-required paperwork. the guarantees’ contribution to USAID Mission countries, to test a series of developmental hypotheses related to strategic objectives. The non-profit the DCA guarantees. organization Root Capital EVALUATION METHODOLOGY provides credit to village- This evaluation used a mixed methods approach, based producer businesses to enhance community including statistical analysis of loan data, key informant economic development in Latin America. Its and group interviews, and document review. It began innovative model uses Fair Trade/Organic Certified with a review of background documents on Root businesses’ purchase orders with international buyers Capital and its DCA guarantees, and continued in as collateral. It also provides technical assistance in Cambridge, Massachusetts (Root Capital’s financial management. headquarters) from July 12 to 16 with semi-structured interviews with Root Capital staff and review of the Recognizing a synergy in vision and goals, USAID’s organization’s portfolio data. The evaluator used Bureau of Economic Growth, Agriculture and Trade, comparative analysis, statistical analysis, and content Office of Development Credit (EGAT/DC) decided in pattern analysis to draw findings from the collected 2003 to support Root Capital’s lending to qualified data, from which she drew conclusions. producer/cooperative groups in Latin America with a loan portfolio guarantee. ROOT CAPITAL LOAN GUARANTEES Average Starting Ending Ceiling Number of Aggregate Utilization Average Loan Loan Size Year Year Amount ($) Loans Amount ($) Rate Tenor (days) ($) 2003 2008 2 million 22 3,982,250 99.56 % 181,011 425 2005 2008 1 million 15 1,602,000 80.1 % 106,800 161
KEY FINDINGS AND CONCLUSIONS $2.9 million. Root Capital intends to sustain lendingOUTPUTS to small and medium Fair Trade and/or OrganicConclusions Root Capital entered into the guarantees Certified producers and processors in Latin Americato enable it to expand lending to riskier borrowers and Africa, thereby sustaining the DCA guarantees’and markets. The first guarantee allowed Root outcomes.Capital to extend lending to needier clients, while the Since Root Capital’s officers asserted that thesecond guarantee helped Root Capital expand its organization would not have lent to these borrowersoperations to East Africa. In both cases, Green in the absence of the DCA guarantees, theMountain Coffee Roasters’ (GMCR’s) partnership guarantees contributed to these outcomes. Otherwith USAID was instrumental in both Root Capital’s contributing factors to Root Capital’s continuedexpansion and its link to the DCA guarantees. lending to these customers and markets are likely (a)Findings in support of these conclusions include: increased trust between Root Capital and its clients as they got to know each other; (b) Root Capital’s• Senior Root Capital officers said one of Root rising knowledge of the East African market; (c) Root Capital’s main partners, GMCR, had a partnership Capital’s desire to expand; and (d) increased investor with USAID and learned of the DCA interest in Root Capital’s target markets. opportunity. With the DCA guarantee, Root Capital could expand through bringing loans to its The primary, exogenous factors responsible for Root credit committee which were too risky to Capital’s growth are: (a) large, unmet need among its approve in the absence of the guarantee. target market; and (b) increased capital base. Fueling• Root Capital’s Regional Director for Latin both has been the increased interest among America said Root Capital used the first DCA consumers, buyers, and investors in Fair Trade and guarantee to provide loans to riskier businesses Organic Certified products from SMEs in developing than those to which Root Capital normally lends. countries.• According to senior Root Capital officers, Root Findings to support these conclusions include: Capital’s Memorandum of Understanding (MOU) • Of the 19 borrowers which the Latin America with GMCR included the intention to expand DCA guarantee supported, 14 received lending to Africa. subsequent, non-DCA-guaranteed loans, at an• Africa was very risky for Root Capital because of average value of $480,000. Six were new Root its unfamiliar languages and cultures, fewer Fair Capital clients when they received their DCA Trade-Certified businesses, lower education guaranteed loans. levels, and more fraud and corruption than in • Root Capital’s subsequent, nonguaranteed loans Latin America. The DCA guarantee, Root to these six new clients accounted for a $7.6 Capital’s officers said, made the board and million increase in Root Capital’s Latin investors comfortable with lending to Africa. American portfolio over 1999-2002 levels.• Fifteen of the 31 (48 percent) borrowers under • Eight of the 12 borrowers under the Africa both guarantees were new borrowers to Root DCA guarantee received subsequent, non- Capital. DCA-guaranteed loans, at an average value ofOUTCOMES $228,479. Five of the eight borrowers wereConclusions The Latin America guarantee helped new clients.triple Root Capital’s nonguaranteed Latin American • Subsequent, nonguaranteed lending to these fiveportfolio from $3.3 million pre-guarantee to $10.9 new clients accounted for a $1.6 millionmillion. The second guarantee contributed to nearly increase in Root Capital’s Africa portfolio overtripling Root Capital’s Africa portfolio from $1 to 2004 to 2005 levels.
• Root Capital’s senior officers said the organization’s ROOT CAPITAL’S NONGUARANTEED LENDING objective is eventually to “graduate” their clients to $60,000,000 accessing finance from locally-available, commercial sources of financing. $50,000,000• Root Capital’s nonguaranteed lending portfolio increased from $9 million to $53 million between Other 2004 and 2009. Asked to what they attribute this $40,000,000 Latin America growth, all Root Capital staff interviewed cited the Africa large demand among targeted clients for Root $30,000,000 Capital credit.• By the end of 2009, Root Capital counted 20 major $20,000,000 philanthropic and corporate investors in its operations, thanks to increased interest in social $10,000,000 investing and the attractiveness of Root Capital’s 100 percent repayment rate in an unstable financial $0 environment. 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009• Buyers have become increasingly interested in Organic and Fair Trade Certified products. • 14 of 15 respondents to the Latin America borrowerIMPACTS survey realized an increase in loan amounts. 67 percentConclusions Root Capital has increased access to finance for of respondents currently have credit valued at moreits own clients. There are specific cases of producer groups than $500,000. 65 percent of respondents reportedthat have gained access to finance through Root Capital and their first loan amounts at less than $100,000.gone on to access other sources of finance. The DCA • Eight of 11 East African borrower survey respondentsguarantees contributed to this by allowing Root Capital to reported higher current loan amounts than their firstprovide loans to otherwise too risky borrowers. loan amount, including six DCA beneficiaries. 35As organizations gain lending experience and additional percent of respondents currently have credit valued atlenders enter the market, borrowers have increased the more than $500,000. 57 percent of respondentsamounts they borrow, although not necessarily their loan reported first loan amounts at less than $100,000.tenors. More government programs, international donors, • 29 percent of Latin American respondents realized aNGOs, and social investors lend to this sector, and collateral longer loan tenor for their current loans. One Africanrequirements have become less stringent for some producer DCA beneficiary reported a longer current loan tenor.groups. Root Capital is making a positive difference in its • 4 of 12 Latin American respondents, and 3 of 12 Africaclients’ businesses and the DCA guarantees supported that respondents reported a decrease in collateralassistance. requirements (no collateral requirement). • 80 percent of Latin American respondents and 79Findings to support these conclusions include: percent of African respondents said that access to • The training that Root Capital and others provide credit has improved over the last 7 years. increases investor confidence in both the trained and untrained organizations because people see overall a This publication was produced for review by the United States Agency for International Development. It was prepared by SEGURA/IP3 Partners LLC under higher level of financial management in the sector, said SEGIR Global Business, Trade and Investment II – IQC Indefinite Quantity Contract, Number EEM-I-00-07-00001-00 Task Order # 04, Development Credit Authority Root Capital’s Latin America Regional Director. 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 Keyword: DCA