23088 - FirstRand BEE

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Summary of Proposed Investment

Project Number

23088

Company Name

FIRSTRAND BANK LTD

Date SPI Disclosed

Nov 9, 2004

Country

South Africa

Industry

Financial Markets

Projected Board Date

Dec 10, 2004

Status

Completed

Sector

Commercial Banking - General

Department

Global Industry, Financial Markets

Environmental Category

C - No Impact

Previous Events

Approved : Dec 10, 2004
Signed : May 3, 2005
Invested : May 13, 2005

Project Description

The project under consideration is to finance the acquisition and transfer of 6.5% of FirstRand Limited’s (FirstRand or FR) common shares to a select number of broad based Black Economic Empowerment (BEE) groups in South Africa (SA). The project marks a significant step by FirstRand towards satisfying the BEE requirements of South Africa’s new Financial Sector Charter. In addition to the ownership transfer financed under this project, FR will allocate another 3.5% of its shares for the benefit of its black South African staff and non-executive directors. Together, these share transfers will amount to 10% of FR’s outstanding shares.

Under the terms of this project, FirstRand will create the FirstRand Empowerment Trust (the trust), an entity which will hold 6.5% of FR’s common shares with an approximate value of ZAR4.5 billion (appr. $740 million), and whose beneficiaries are four BEE groups. FirstRand will capitalize the trust with ZAR1.5 billion (appr. $245 million) by donating an equivalent of 2.1% of FR’s shares to be issued. The required funding of ZAR3.0 billion (appr. $490 million) for the rest of the 4.4% of FR’s shares will be raised from senior and subordinated (mezzanine) lenders. IFC is one of the mezzanine lenders with a proposed participation of $30 million equivalent. The funded shares will be acquired directly from select shareholders of FirstRand.

Black ownership and control through board representation constitute only one element of FirstRand’s BEE program. In accordance with the Financial Sector Charter, which was voluntarily developed by the entire sector, FirstRand is committed to a host of measures to address the social and economic inequalities which hold back South Africa from realizing its full economic potential. These measures include skills development and training for black professionals and managers, senior appointments, access to financial services, procurement and sourcing from black owned ventures. In brief, FirstRand is pursuing a comprehensive transformation program, with specific and measurable targets over the next decade.

Sponsor / Cost / Location

FirstRand Limited is one of the four largest financial groups in South Africa with diversified holdings in corporate, retail, merchant banking, brokerage, and insurance. It is listed on the JSE Securities Exchange South Africa (Bloomberg: FSR JJ) and the FirstRand Bank Holdings Ltd., which comprises about 75% of FR’s business, is rated investment grade by Moody’s (Baa2), S&P (BBB) and Fitch (BBB). As of June 30, 2004 FirstRand had about $68 billion in assets, over $33 billion in loans, and close to $4 billion in equity. The group held about 15% market share of the South African banking sector by asset size.

Trust beneficiaries are four BEE groups:

- Kagiso Trust,
- Mineworkers Investment Trust,
- WDB Trust, and
- FirstRand Empowerment Trust.

Based on the BEE experience in SA, the groups were selected so as to be broad based rather than represent a small number of black stakeholders, have integrity and good reputation, and share principles and common developmental objectives with FirstRand. The selected BEE groups satisfy the above criteria and represent a broad social development agenda in line with the spirit of the Financial Sector Charter.

Kagiso Trust (KT) was established in 1985 during the struggle against apartheid as a conduit for donor funding from the European Community''s special program for the victims of apartheid. During the first twelve years of operation, KT became the largest black-led development agency in South Africa. By the mid 1990s, KT was disbursing funds of approximately R300 million per annum. For many years the European Community remained the largest funder while the governments of Japan, France, the Rockefeller Foundation and the Swedish International Development Agency contributed sizeable amounts. Since 1986, KT has injected over R 1 billion of grant funds into various development projects in the fields of water and sanitation, training, health, education, small business development and agriculture across the country.

Mineworkers Investment Trust (MIT) was founded by the National Union of Mineworkers in July 1995 to make a direct contribution to elevate the economic and social development of mineworkers, ex-mineworkers, construction and energy sector workers and their dependents. Since 1997, MIT has disbursed R62 million to fund its social development projects and program that focus on poverty alleviation, local economic development, enterprise development, job creation and education.

WDB Trust was established in 1992 with the purpose of supporting and elevating the economic conditions of poor black women in rural South Africa. Its specific objectives are to provide poor women with access to finance through not for profit micro-credit, to educate women about developing their own businesses, to enhance their household livelihoods and to improve the position of women in society overall. WDB emphasizes a banking relationship based on mutual trust, credit discipline, collective responsibility, accountability and savings. Since its establishment, WDB has reached over 14 000 women in rural areas with its training and micro-credit programs. The micro-credit program has disbursed in excess of R25 million through the issuance of over 22 000 micro-loans for income generation activities. WDB also provides training in mother tongue functional literacy, computer literacy, business development skills and micro-credit delivery.

The FirstRand Empowerment Foundation (which may be renamed at a later stage) is an entity which will be created pursuant to the BEE transaction. The FirstRand Empowerment Foundation will be a BEE entity, with the majority of its trustees being black South Africans and its objective will be to economically uplift black South Africans. Its trustees will be drawn from amongst FirstRand’s non-executive directors, trustees of the BEE trusts, staff members and independent people with appropriate experience. Amongst its initial programs, the FirstRand Empowerment Foundation will focus on the educational and professional development of black South Africans for the industry and to support the growth of a future skills pool to underpin FirstRand’s transformation initiatives.

Each of the three trusts has also established investment companies, which manage portfolios of assets to generate a steady cash flow in support of social programs undertaken by the trusts.

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	33.92
Equity

Development Impact

The transfer of 6.50% of FirstRand’s share capital to the broad based black-owned groups is expected to have a high development impact through supporting one of South Africa’s largest financial services groups to broaden its ownership and operations to include previously disadvantaged groups. As one of the first such initiatives by South Africa’s top banks, it addresses a key objective of the South African Financial Sector Charter to open up banks’ ownership to blacks. Fully-aligned with the government’s BEE strategy, the transaction is part of a program adopted by FirstRand to transform its management, business practices, products and services to meet the challenge of bridging the racial economic gap in the country. BEE groups will participate at various decision making levels of FirstRand, including the Board of Directors of FirstRand and its subsidiaries, as well as in the various committees within the FirstRand group of companies. FirstRand views its partnership with the BEE groups as a means of tackling the country’s important agenda of supporting businesses and employment, promoting growth and reducing poverty. If successful, the transaction will set a benchmark for future transformation projects in South Africa’s financial sector.

IFC’s role in this project is tri-fold:

- Funding Role

Subordinated-funding from commercial institutions of the BEE transactions in South Africa is scarce as the process is still in its early stages. As such, the IFC will be providing much needed funding at a critical time frame when many of the key BEE initiatives that would shape the future of South Africa are just starting to unfold.

- Catalytic Role

IFC is a major mezzanine financier of the Transaction, whose participation is critical since a full subscription of the subordinated debt is a pre-requisite to mobilizing funding for the senior lenders and completion of the funding structure. IFC is expected to play a role in mobilizing additional subordinated financing.

- Strategic Role

By participating in this project IFC will have a lead role in lending credibility and support to the
BEE-led transformation in South Africa. The project, one of the first BEE transactions by a major
local banking institution, contributes to a more balanced distribution of wealth and ownership in
the South African financial sector.

Contacts

For Inquiries About the Project, Contact

James Formby
Corporate Finance, Rand Merchant Bank
PO Box 786273
Sandton
South Africa 2146
james.formby@rmb.co.za

This Summary of Project Information (SPI) is prepared and distributed to the public in advance of the IFC Board of Directors' consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC's activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only. The following SPI is disclosed in accordance with IFC's Disclosure of Information Policy that went into effect September 1998.

The map is for illustrative purposes and does not imply the expression of any opinion on the part of the World Bank, concerning the legal status of any country or territory or concerning the delimitation of frontiers or boundaries. Country borders or names do not necessarily reflect the World Bank Group's official position. In some cases, available project location information is limited to the country of the project's activities. Locations are approximate.

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