In his small office in Washington, Hubbard has assembled a team of young ex-investment bankers who dropped out of commercial finance during the 2008 crisis (he calls them his “financial crisis refugees”) to rework old development funding models. Together, they are quietly changing the rules of development by using foreign assistance to leverage private capital.
Toward this end, Hubbard and his team are forging partnerships with local banks and microfinance institutions (MFIs) to direct private lending to nearby development projects including well-digging, vaccination programs, farm improvement, and many others programs that stabilize living conditions and bolster local economies. USAID, he argues, can bring its long-standing technical expertise together with the power of private finance to take development to a whole new level.
The problem lies in the fact that most private bankers prefer sticking to government securities and safe lending to make revenue, and typically avoid investing in social entrepreneurship and development, which are much riskier. The DCA, who understands this risk, also sees the development potential of connecting these borrowers with local capital.
“We live and breath how to work with these types of borrowers,” says Hubbard. “We know their credit potential.”
To counter this problem, the DCA shoulders part of the lending risk, which makes it easier for private finance institutions to buy in. It also means that, even after their guarantee expires, many banks continue lending to previously “undeserved” borrowers, which establishes sustainable relationships for growth.
Their approach has seen great success. The DCA office has a 1.75% default rate—a number on par with commercial banking around the world. And the office continues to add to its partnerships. In 2009, they leveraged $200 million in private funding. And in 2012, that number reached $525 million.
Hubbard is confident that the DCA will maximize the potential of USAID’s budget and change the way the way people think about development.
– John Mahon
Sources: Devex, USAID