The proposed investment consists of an unfunded Risk Sharing Facility (“RSF”) with a maturity of up to 8 years in an amount of up to US$3.0 million equivalent in Tongan Pa’anga. The RSF will cover up to 50% of the credit risk on a portfolio of loans to very small enterprises (VSEs) and small and medium enterprises (SMEs) to be originated by Tonga Development Bank (the “Project”). The proposed Project would come under the Small Loan Guarantee Program (“SLGP”), a programmatic approach to risk sharing which aims to enhance and strengthen the capacity of financial institutions for risk taking and financing of SMEs in IDA-PSW countries. The Project seeks to leverage the Bank’s liquidity position, through the de-risking product, to support underserved SMEs, including those in the tourism sector.

Blended Finance

The SLGP is supported by a pooled first loss guarantee provided by the IDA IFC-MIGA Private Sector Window’s Blended Finance Facility (“IDA PSW-BFF”). IDA PSW-BFF was created by the Word Bank Group to catalyze private sector investment in IDA countries, with a focus on fragile and conflict-affected states. IDA PSW-BFF’s support would enable IFC to rapidly roll out a program of risk sharing facilities to reach the underserved SME segment of the market including women owned or women-led VSEs and SMEs that IFC could not otherwise serve due to the associated high risk. The concessional support from IDA PSW, will, therefore, also enable TDB to expand lending to the VSEs and SMEs where lack of financing is limiting the capacity of those clients to grow their business.

The level of concessionality (i.e., “subsidy”) provided by the blended concessional finance co-investment is estimated to be around 9% of the total portfolio of US$800 million for the entire SLGP. The estimated level of concessionality is based on the difference between (i) a “reference price” (either a market price if available, the price calculated using IFC’s pricing model, which comprises three main elements: risk, cost, and profit; or a negotiated price) and (ii) the “concessional price” being charged under the Program.

The Project is also expected to be potentially supported by a gender performance-based incentive (“PBI”) to incentivize on-lending by TDB to women-owned and women-led VSEs and SMEs. The estimated subsidy which will be computed once the PBI is approved, would assume that the Project will fully reach the agreed impact and shall only be paid out upon achievement of the pre-defined targets. This support would enable IFC to reach more women VSEs and SMEs that may otherwise not be served without its support. As is the case with all IFC’s blended concessional finance co-investments, this project has been assessed against the Enhanced Blended Concessional Finance Principles for Development Finance Institution (“DFI”) Private Sector Operations adopted by IFC and more than 20 other DFIs in 2017. 

Further information on these Enhanced Principles, IFC’s blended finance approach and governance, and historical information on estimated subsidy levels in IFC’s blended finance portfolio can be found at: www.ifc.org/blendedfinance. The SLGP is a platform approach that can be accessed by other financial institutions in Tonga and other IDA PSW markets.   

IFC’s Advisory Services support will primarily consist of SLGP onboarding support, pipeline development and thematic capacity building (gender and tourism). Depending on IFC’s and TDB’s interest, targeted support in risk management, ESG and financial services skillset development, may be considered.