47455 - XacBank Syn 2022

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Summary of Investment Information

Project Number

47455

Company Name

XACBANK JOINT STOCK COMPANY

Date SPI Disclosed

Nov 18, 2022

Country

Mongolia

Region

East Asia and the Pacific

Projected Board Date

Dec 20, 2022

Environmental Category

FI-2 - Limited

Status

Active

Last Updated Date

May 21, 2023

Department

Regional Industry - FIG Asia & Pac

Industry

Financial Markets

Previous Events

Approved : Dec 19, 2022
Signed : Dec 28, 2022
Invested : May 19, 2023

Sector

Commercial Banking - Microfinance

Project Description

The proposed investment is an up to US $130mn senior loan syndication to XacBank LLC (the Bank), an existing IFC partner and the fifth largest bank in Mongolia, consisting of up to US$40 million for IFC’s own account and mobilization of up to US$90 million from international lenders. The loan aims to support XacBank to grow its lending portfolio in two key priority sectors - climate and micro, small and medium enterprises (MSMEs) finance, including women-owned MSMEs in Mongolia and is expected to be supported by the Women Entrepreneurs Finance Initiative (We-Fi) and the Women Entrepreneurs Opportunity Facility (WEOF) (the Project).

Assuming that the Project will fully reach the agreed impact targets, IFC as implementing entity of WEOF and We-Fi is expected to provide up to US$329,000 (equivalent to up to 0.25% of the total project cost of US$130 million) as a performance-based incentive (“PBI”) to support additional on-lending to women-owned small and medium enterprises (“WSMEs”) and women-owned very small enterprises (“WVSEs”) to help counter the gender financing gap in Mongolia. IFC is open to engaging further with financial institutions and consider structures similar to the one proposed in this investment with the support of WEOF and We-Fi. 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 also be found at: www.ifc.org/blendedfinance.

Associated Advisory Engagement

Sponsor / Cost / Location

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	40.0
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 Woman-Owned SMEs
Syndications	Labeled: Green;Blue;Social-Loans/Bonds
Syndications	Loans to Woman-Owned SMEs
Syndications	Labeled: Green;Blue;Social-Loans/Bonds
Straight Senior Loan	Loans to Woman-Owned SMEs
Straight Senior Loan	Labeled: Green;Blue;Social-Loans/Bonds
Syndications	Loans to Woman-Owned SMEs
Syndications	Labeled: Green;Blue;Social-Loans/Bonds
Syndications	Loans to Woman-Owned SMEs
Syndications	Labeled: Green;Blue;Social-Loans/Bonds

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

Development Impact

Stakeholder Effects: Increased access to finance for women-owned/led MSMEs: Access to finance has been cited as one of the top three obstacles for firms (2019 Enterprise Survey), with high interest rates, high collateral requirements, and stringent documentation as commonly mentioned barriers, and these issues are more acute for women-owned/led enterprises. Through this Project, IFC expects to support the Bank in growing its women-owned/led MSME portfolio. Stakeholder Effects: Increased access to green finance: Through this Project, IFC anticipates to help the Bank grow its climate finance portfolio. More specifically, the proceeds from the loan will be used for financing of eligible green assets in the areas of renewable energy, energy efficiency, green buildings, pollution prevention and control. The supported projects are expected to contribute towards the reduction of GHG emissions in the country. Market Creation: Sustainability: As part of a programmatic approach to support climate finance in Mongolia, IFC anticipates that this Project, together with the green bond issuance being processed with Khan Bank in parallel (Project# 46970), will promote greater sustainability by promoting and reinforcing internationally recognized best practices in climate-finance in the country. By supporting leading banks in Mongolia to establish a viable climate-finance portfolio, these investments by IFC, through demonstration and replication channels, will showcase best practices in developing climate finance portfolio and demonstrate the importance of climate finance as a separate asset class. Moreover, this is expected to create competitive pressure among other financial institutions within the country and contribute to the development of the climate finance market.

Financial Additionality Financing structure: IFC will provide an up to US$130 million 3-year loan package to the Bank. IFC is thus supporting the Bank to raise medium-term funding in hard currency during rising macro-economic uncertainty in the country. While the Bank currently has access to credit lines of similar tenors with other lenders, average loan sizes from these loans are at US$20-30 million only. Thus, the Bank will require further funding support to grow target segments such as WMSMEs and climate. Resource mobilization: IFC will look to mobilize at least US$90 million from international investors, bringing in additional external financing that may not be possible without IFC's anchor investor role in the transaction. IFC's role is expected to provide comfort to other investors to bring in needed funding to Mongolian banks. Non-Financial Additionality Knowledge, innovation and capacity building: IFC will consider providing advisory services to strengthen the bank's climate and gender finance by leveraging IFC's technical and international experience: (i) advisory support on the gender inclusive financial product development (design and detailed process) and capacity building on gender finance. (ii) phase II climate finance advisory support following the 2013 sustainable energy finance engagement, aiming to help the bank to embark on a green transition path and grow its green finance portfolio, including but not limited to focus on MSMEs' energy efficient appliances and equipment.

E&S Category Rationale / Risks and Mitigation

The proposed Project entails a senior loan syndication to XacBank to support its lending to eligible climate-related activities and women-owned/led 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. 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 XacBank 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. XacBank 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, XacBank has implemented an ESMS and established capacity for its implementation. The ESMS include 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. For this new Project, XacBank 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 XacBank. XacBank’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

XacBank
Erdenebayar Ganzorig
CFO
+976 7577-1888 ext.826
erdenebayar.g@xacbank.mn
XacBank HQ Bldg, Ulaanbaatar-14200, Post Branch 20A, PO Box-72, Mongolia.
https://www.xacbank.mn/

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Task Title & Description	Anticipated Completion Date
Staff Training	01/09/2023
Enhance ESMS	01/09/2023

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