38405 - IP Senior Loan

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Summary of Investment Information

Project Number

38405

Company Name

IPOTEKA BANK JSC MORTGAGE BANK

Date SPI Disclosed

Apr 30, 2019

Country

Uzbekistan

Region

Central Asia and Turkiye

Projected Board Date

May 31, 2019

Environmental Category

FI-2 - Limited

Status

Active

Last Updated Date

Jun 12, 2021

Department

Regional Industry - FIG - ECA

Industry

Financial Markets

Previous Events

Approved : Jul 2, 2019
Signed : Jun 22, 2020
Invested : Dec 1, 2020

Sector

Commercial Banking - SME Finance

Project Description

The proposed IFC investment in the Bank comprises a senior loan of up to US$35 million equivalent in Uzbek Soum for IFC’s own account. The senior loan will have a conversion option at IFC’s full discretion.

Sponsor / Cost / Location

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	35.0
Equity	0.0

IFC's loan to the financial institution described in this SII is targeted for on-lending to the following sector(s):

Product Type	Use of Proceeds
Quasi-Equity	Loans to SME Borrowers

IFC's Definitions of Targeted Sectors can be found here.

Development Impact

The proposed project is expected to create the following benefit, which would not be possible without IFC's involvement: (i) The Project will provide the Bank and its SME borrowers with access to longer-term finance (up to 5 years) in local currency, not readily available in Uzbekistan; (ii) This project together with the IFC advisory services will catalyze the regulatory changes in the country; (iii) The proposed project will support the transformation of the Bank into a commercially run institution and will result in the Bank's compliance with IFC's Environmental and Social (E&S) requirements.

E&S Category Rationale / Risks and Mitigation

The project is a convertible senior loan of up to US$35 million equivalent in Uzbek sums to a state-owned entity Ipoteka Bank, a new investment client, in the Republic of Uzbekistan to support SMEs. The bank's portfolio is invested in corporate, retail and SMEs loans. Bank's portfolio (and similarly SME portfolio except for mining) is distributed in sectors of manufacturing (steel works, mining, oil and gas, textile), individuals/mortgages, trade and services, construction, agriculture, transport and communication, municipal services, and others. The portfolio to be supported with this loan will likely comprise low and medium E&S risk investments with potentially limited adverse environmental or social risks or impacts that are few in number, generally site-specific, largely reversible, and readily addressed through mitigation measures. The project has therefore been categorized as FI-2 according to the IFC's Sustainability Policy. For this particular project, IFC's applicable requirements for the Bank will be to ensure that all eligible projects are screened against the IFC Exclusion List, and the applicable environmental and social national laws and regulations. In addition, the Bank will comply with the requirements of IFC's PS2 on Labor and Working conditions. If/when the loan is converted into equity, the additional requirements for the bank, such as changing the scope of the implementation to the entire portfolio of the Bank and relevant subsidiaries as well as applying IFC Performance Standards towards the bank's and relevant subsidiaries' corporate portfolio and higher risk transactions will be applicable and added to the agreement(s) with the client.

The key project risks and impacts are associated with the Ipoteka Bank's capacity to operate the Environmental and Social Management System (ESMS) for its SME portfolio to meet the E&S applicable requirements, as well as to sufficiently manage cotton sector related contextual risks in its supply chain and in the bank and operate a solid external communications mechanism to mitigate any contextual reputational risks. The Bank has an ESMS in place and ESMS Officers appointed. The ESMS is applied to the Bank's entire portfolio, and outlines the E&S policy, procedures, tools and responsibilities for E&S risk management of Bank's lending activities including the SMEs. The ESMS, which has been revised as per IFC requirements, sets up the following E&S due diligence steps: (i) project screening against the IFC Exclusion list and coal related activities, (ii) assigning E&S risks categories, (iii) assessing E&S risks in accordance with the developed checklists to screen out higher risk activities, and supply chain risks in cotton industry, (iv) agreeing corrective action plans with the clients, (v) setting up the monitoring and reporting requirements, and (vi) enhanced external communications mechanism. E&S due diligence and monitoring of higher risk projects may include engagement of external competent experts. In 2020 Ipoteka Bank had its portfolio invested in retail (42%), SME (33%), and corporate (24%). SME portfolio is distributed in sectors of processing industry (30%), agriculture (22%), trade (17%), construction (13.5%), transportation (4.5%), real estate (3%), education (2%), accommodation and food services (2%), and others. The SME loan portfolio is of low to medium risk.

As of 01.01.2021 the share of coal projects is 0.23% of the bank's total portfolio. This exposure comes from one client involved in mining and quarry development (lignite mining). This information is published on the bank's website. The bank commits making all reasonable efforts to reduce the coal exposure to zero by December 31, 2022.

Task Title & Description	Actual Due Date	Status	Completion Date
Staff Training	10/09/2018	Completed	03/31/2021
Other1 Revise and enhance ESMS	07/11/2018	Completed	11/10/2020
Other2 Develop training plan	07/11/2018	Completed	11/10/2020
Other3 Enhance HR procedures (in particular, in part of grievance mechanism)	07/11/2018	Completed	11/10/2020
Other4 Submit ESMS implementation records for three high/medium risk loans	03/31/2022	Rescheduled
Other5 Develop external communication mechanism	07/11/2018	Completed	11/10/2020

The bank has developed a sufficient ESMS, which consists of E&S Policy stating the bank's major commitments to E&S risk management (including compliance with Exclusion List, national E&S laws and regulations and IFC Performance Standards for corporate portfolio) and E&S Procedures detailing the E&S risks assessment and monitoring processes in the bank. The procedures are sufficiently detailed and cover the major risks associated with the bank's portfolio of loans. They are applicable to the bank's entire portfolio, provide for E&S risk categorization and corresponding level of E&S due diligence, include ESDD tools and forms and external communication mechanism. The E&S Procedures include a tool to assess contextual risk of forced labor for textile projects, as well as provide for involvement of external consultants for higher risk projects, including those with potential forced labor risk. The bank has appointed sufficient human resourced to manage the E&S risk - there is a separate unit involved in this - and allocated resources for ESMS implementation.

Contacts

For Inquiries About the Project, Contact

JOINT STOCK COMMERCIAL MORTGAGE BANK “IPOTEKA BANK”
Aziz Muhitdinov
Chief Financial Officer
+998 78 1508952
azizhon@ipotekabank.uz
30 Shakhrisabz. Str. 100000, Tashkent, Uzbekistan
Websitehttp://www.ipotekabank.uz/

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IFC supports its clients in addressing environmental and social issues arising from their business activities by requiring its real sector clients to set up and administer appropriate grievance mechanisms and/or procedures to address complaints from Affected Communities in relation to environmental and social issues arising from IFC's clients' business activities. Since 2012, IFC's Financial Intermediary clients applying the Performance Standards are required to develop External Communications Mechanisms to receive and review inquiries or complaints from any interested party regarding the E&S risks and impacts of their operations.

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This Summary of Investment Information (SII) is prepared by IFC to disclose a factual summary of the main elements of the potential investment. It also includes findings and recommendations related to environmental and social considerations regarding this potential investment. The purpose of the SII is to enhance the transparency of IFC’s activities. For any project documentation or data included or attached herein, whether prepared by the project sponsor or otherwise, authorization has been given for public release by the project sponsor. IFC considers that this SII is of adequate quality for release to the public, but has not necessarily independently verified all of the project information therein. It is distributed in advance of IFC Board of Directors’ consideration and may be periodically updated thereafter. Board dates are estimates only and this document should not be construed as presuming the outcome of the Board Directors’ decision. The following SII is disclosed in accordance with IFC's Access to Information Policy (AIP) that went into effect on January 1, 2012.

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