25935 - BRAC PCG

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Summary of Proposed Investment

Project Number

25935

Company Name

BANGLADESH RURAL ADVANCEMENT COMMITTEE

Date SPI Disclosed

May 17, 2007

Country

Bangladesh

Industry

Financial Markets

Projected Board Date

Jun 18, 2007

Status

Completed

Sector

Microfinance and Small Business - Non Commercial Banking

Department

Global Industry, Financial Markets

Environmental Category

Previous Events

Approved : Jul 18, 2007
Signed : Feb 10, 2008

Project Description

Bangladesh is considered the pioneer of microfinance and has the world’s largest microfinance sector. However, despite the prevalence of close to 1,200 NGOs with microcredit services operating in more than 40,000 villages in Bangladesh, Bangladesh continues to remain one of the world’s poorest nations. Poverty is pervasive in the country with almost half the population living below the poverty line on less than $1 per day.

BRAC is one of the largest microfinance institutions in Bangladesh, covering all 64 districts and a population of a 100 million (of the total population of 140 million) through its microfinance and development programs. It was started in 1972 by Mr. Abed to rehabilitate returning refugees after the liberation War in a remote area in a northeastern district of Bangladesh. As of December 31, 2006, BRAC had cumulative microfinance loan disbursements of $3.72 billion, with outstanding loans of $349.72 million to 4.55 million borrowers.

To finance the growth of its microfinance operations, BRAC needs local currency financing from domestic banks. Due to single client exposure limits and small size of such local banks, relative to the financing required, the local banks are not able to satisfy the funding needs of large institutions like BRAC.

To address such constraint, IFC is proposing an $18 million partial credit guarantee issued on a $22 million local currency loan extended by Citibank, Dhaka to BRAC (BRAC or the company). IFC’s partial credit guarantee would provide 81.82% coverage to Citibank’s local currency loan of US$22 million loan. The project would support BRAC’s expansion of its microfinance lending to reach out to the poor, which continues to be underserved by the financial sector in the country.

Sponsor / Cost / Location

Product Line	IFC Investment (million USD)
Risk Management
Guarantee	18.0
Loan
Equity

Development Impact

The project is expected to have a significant development impact:

- Expanding Sources of Local Currency Funds:

The project will be an example of a viable way for an MFI to access local currency funding on commercial basis and reduce reliance on aid and donor funding.

- Expand Access to Finance:

The additional loan amount enabled by the IFC PCG of about US$18 million would enable BRAC to finance nearly 103,000 new loans on annual basis. Assuming such loans have an average maturity of one year, then IFC’s PCG would finance nearly 515,000 loans over the life of the PCG (5 years).

- Demonstration Effect:

At the more strategic level, this project can have a strong demonstration effect by effectively showing that microfinance institutions, if well managed, can constitute very attractive investment propositions for commercially oriented investors. This, in turn, will support the emerging trend of private capital flows to microfinance institutions, an important source of capital for the long-term viability of this industry. The current guarantee structure would allow Citibank to extend local currency funds without breaching its single exposure limits.

- Significant direct contribution to poverty reduction:

Over the past two decades, leading microfinance operators have convincingly demonstrated that well-managed MFIs can make major contributions to poverty reduction and employment creation in developing countries. In recognition of this strong developmental impact, almost all multilateral and bilateral institutions and donor agencies are actively promoting microfinance, and increasingly focusing on supporting MFIs. Supporting productive small businesses will in turn stimulate growth, employment generation and poverty reduction. The proposed investment is expected to contribute to employment creation and poverty reduction in the target regions.

In this proposed investment, IFC’s role would be to:

- Enable Access to Local Currency Long Term Funds:

The single exposure limit for the banks in the country limits the amount of local currency funds that can be extended by the banks. The central bank has recently extended guidelines that state exposures guaranteed by multilaterals would not count towards the bank’s single exposure limit. The IFC guarantee would enable Citibank to extend long term local currency funds to BRAC, without exceeding its single exposure limits. Through this project, IFC would enable BRAC to access long term (5 year) local currency funds, thereby further reducing its dependence on grants to support its growth and outreach.

- Expand Financing to Underserved Groups:
Although BRAC is a key player with good outreach across the country, there is significant unmet demand from the poor in Bangladesh. Access to funding in local currency will enable BRAC to further expand its operations and increase the availability of financial services to this large, underserved group.

- Commercial Basis of Operations:

BRAC has made an effort to reduce its reliance from donor funds and run the microfinance operations on commercial basis. By enabling access to commercial funding from the domestic market at market rates, IFC would support BRAC’s efforts to grow its micro lending portfolio on a commercial basis.

This project involves IFC support for the business of microfinance and has been classified as a Category FI project according to IFC’s Environmental and Social Review Procedure. Considering the nature of activities supported, the project will be required to:

- Develop a procedure relevant to its business process, prior to disbursement, that is satisfactory to IFC, and that ensures that all its investments are screened and processed to avoid supporting activities on the IFC Microfinance exclusion list;
- Identify qualified persons to manage and implement the procedure;
- Demonstrate commitment and resources to implementing the procedure;
- Submit a periodic report to IFC as per a format to be provided by IFC.

Contacts

For Inquiries About the Project, Contact

Mr. S.N.Kairy, Director – Finance
BRAC Centre, 75 Mohakhali, Dhaka 1212
Bangladesh

Telephone: 8802 8823542
Fax: 8802 9881265

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This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors' consideration of the proposed transaction. It is not an offer of shares to the public and is intended solely to enhance the transparency of IFC’s activities. 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 Policy on Disclosure of Information that went into effect April 30, 2006.

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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