46970 - Khan Green MSME

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Summary of Investment Information

Project Number

46970

Company Name

KHAN BANK JSC

Date SPI Disclosed

Nov 2, 2022

Country

Mongolia

Region

East Asia and the Pacific

Projected Board Date

Dec 16, 2022

Environmental Category

FI-2 - Limited

Status

Active

Last Updated Date

Jan 20, 2023

Department

Regional Industry - FIG Asia & Pac

Industry

Financial Markets

Previous Events

Approved : Dec 15, 2022
Signed : Dec 23, 2022
Invested : Jan 18, 2023

Sector

Commercial Banking - General

Additional Project Attributes

Blended Finance

Project Description

The proposed investment in Khan Bank LLC (Khan Bank or the Bank) is up to US$180 million, consisting of (i) a 5-year green bond to be privately issued by the Bank of up to US$50 million to finance eligible climate-related projects, comprising (a) IFC’s subscription of up to US$15 million, and (b) a mobilization of up to US$35 million; and (ii) a 5-year senior loan of up to US$130 million, comprising (a) up to US$70 million from IFC’s own account, and (ii) up to US$60 million mobilized from international lenders, to support the recovery and growth of micro, small and medium enterprises (MSMEs) in Mongolia, including women-MSMEs (the Project). The green bond will be the first green bond to be issued in Mongolia. The senior loan element of the Project may be supported by the Women Entrepreneurs Opportunity Facility (WEOF) and the Women Entrepreneurs Finance Initiative (We-Fi) as described in the Blended Finance Section.

Sponsor / Cost / Location

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	85.0
Equity

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
Syndications	Loans to MSME (mix of Micro and SME)
Syndications	Loans to Woman-Owned SMEs
Syndications	Others (only if UoP is not available)
Straight Senior Loan	Labeled: Green;Blue;Social-Loans/Bonds
Straight Senior Loan	Loans to Woman-Owned SMEs
Straight Senior Loan	Loans to MSME (mix of Micro and SME)
Syndications	Labeled: Green;Blue;Social-Loans/Bonds

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

Development Impact

Project Outcome Increased access to finance for MSMEs: IFC’s proposed investment in a senior loan will support Khan Bank through its largest branch network in growing its MSME loan portfolio and contribute to addressing the financing gap for MSMEs in Mongolia. Increased access to green finance: The proceeds from IFC’s investment in the green bond to be issued by the Bank will be used for financing eligible green assets. IFC’s proposed investment in the green bond will support Khan Bank in growing its green portfolio. Market Creation Sustainability: The green bond to be issued by Khan Bank is expected to contribute to improving sustainability of financial market in Mongolia, as IFC will support a systemically important bank in the country to issue the country’s first green bond. The green bond will follow the Green Bond Principles, thus reinforcing harmonized green practices in the market via demonstration and market enabling channels. Moreover, the growth of the Bank’s climate portfolio is likely to demonstrate the importance of climate finance as a separate asset class, sending a strong signal to the market and motivating other financial and non-financial institutions to replicate and contribute to the development of the green bond market.

Financial Additionality Innovative Financing Instrument – IFC will support the issuance of the country’s first green bond as the anchor investor. This will mark a milestone for Khan Bank as well as the banking sector and contribute to establishment of green bonds as a new asset class in Mongolia. Financing Structure - The proposed investment will provide Khan Bank with a stable longer-term funding, which is not readily available in the market amid the uncertainty of global and domestic macroeconomy. This is much needed given that the Bank’s existing borrowings mostly have a remaining tenor of less than 4 years and IFC’s proposed investment will help them to provide loans with longer tenors to its clients and to manage asset and liability match. Resource Mobilization – IFC’s investment in the green bond as an anchor investor and the senior loan will send a strong signal to the market and boost potential investors’ confidence. This is expected to also support the diversification of the Bank’s funding sources and to bring greater attention to the nascent green bond market in the country. Non-Financial Additionality Knowledge and Capacity Building - IFC anticipates advising Khan Bank on the Green Bond Framework and guide them through a Second Party Opinion as part of IFC’s investment support. In addition, IFC may propose an advisory service engagement related to green financing. Blended Finance Section: The Project is expected to be supported by WEOF and We-Fi in the form of a performance-based incentive (PBI) of up to US$216,416 (equivalent to up to 0.17% of the IFC senior loan of US$130 million) to incentivize on-lending to underserved WSMEs in Mongolia. The estimated subsidy to be provided by WEOF and We-Fi assumes that the Project will fully reach the agreed impact and shall only be paid out upon achievement of the pre-defined gender targets. WEOF is an initiative which IFC is undertaking in partnership with the Goldman Sachs Foundation to help expand access to capital for women entrepreneurs in developing countries and demonstrate the commercial viability of investing in women and We-Fi is a multi-donor initiative to address barriers to financial access and provide related services that address public and private-sector constraints to women entrepreneurs and women-led SMEs across developing countries, thereby promoting jobs and boosting economic growth. Further details and historical information on estimated subsidy levels in IFC’s blended finance portfolio can be found at: www.ifc.org/blendedfinance. As is the case with all of IFC’s blended concessional finance co-investments, this Project has been assessed against the Enhanced Blended Concessional Finance Principles for DFI Private Sector Operations adopted by IFC and more than 20 other DFIs in 2017. Further information on these Enhanced Principles and IFC’s blended finance approach and governance can also be found at: www.ifc.org/blendedfinance.

E&S Category Rationale / Risks and Mitigation

The proposed Project entails a green bond and a senior debt investment in Khan Bank for supporting eligible climate-related subprojects and MSMEs (including women-owned MSMEs). Higher E&S risk activities including those involving (a) involuntary resettlement, (b) risk of adverse impacts on indigenous peoples, (c) significant risks to or impacts on the environment, community health and safety, biodiversity, cultural heritage, or (d) significant occupational health and safety risks, will not be eligible for financing from the proceeds of the Project. Coal-related activities including coal mining, coal transportation or coal-fired power plants, as well as infrastructure services exclusively dedicated to support any of these activities, will not be supported by this Project either. The Project has been categorized as FI-2 as the activities supported by the Project are expected to be of moderate E&S risks that are few in number, generally site-specific, largely reversible, and readily addressed through mitigation measures. The applicable E&S performance requirements for the Project will include IFC Exclusion List, applicable Mongolian E&S laws and regulations, and screening out higher E&S risk activities. Use of proceeds from the green bond will also follow the Green Bond Principles. The main E&S risks and impacts of the proposed Project, while moderate in nature as described above, may arise from the eligible climate- or MSME-financing activities of Khan Bank using the proceeds of the Project. They may include risks and impacts related to occupational health and safety, labor and working conditions, pollution management, among others. Khan Bank will be required to implement an Environmental and Social Management System (ESMS) to assess and manage such risks at the level of asset class supported by the Project consistent with the above applicable E&S performance requirements.

Under the previous IFC investments, Khan Bank has developed an ESMS and established capacity for its implementation. The ESMS includes the following key aspects: E&S policy, E&S roles and responsibilities, internal organization and competency development, E&S screening procedures and tools to identify the risks and impacts of client activities, monitoring and review of portfolio, and external communications. For this new Project, Khan Bank will enhance its ESMS by incorporating the eligibility criteria and relevant elements of international good practices for activities supported by the Project proceeds. It will be required to continue to maintain proper capacity and implement the ESMS to meet the above applicable E&S performance requirements. The Project will not trigger IFC subproject disclosure requirements based on the size and nature of the Project as well as the eligibility restrictions as agreed with Khan Bank. Khan Bank’s labor management was found to be consistent with the requirements of IFC Performance Standard 2 on Labor and Working Conditions.

Contacts

For Inquiries About the Project, Contact

Khan Bank LLC
Mr. Uuganbayar Terbish
VP - Wholesale Banking
+976 7515 3333

Khan Bank Tower, Chinggis Avenue-6, Stadium Orgii-1, Khan-Uul District, Ulaanbaataar 17010, Mongolia
https://www.khanbank.com/

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Task Title & Description	Anticipated Completion Date
Staff Training	01/31/2023
Enhance ESMS	01/31/2023

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