The Bangladesh Rural Advancement Committee (Brac), FMO and a host of international partners have signed a groundbreaking investment to secure opportunities for a large number of Bangladesh’s micro-entrepreneurs. The local currency transaction worth US$180mn is the world’s first microfinance securitisation.
FMO’s CEO Arthur Arnolds states: “This investment extends the current economic limits for many of Bangladesh’s up and coming entrepreneurs. The deal is the first microfinance securitisation, and it is in local currency. FMO is keen to work with partners to introduce such tailored market innovations.”
Brac aims to alleviate poverty and create opportunities for many of these rural poor. It helps those at the lower end of the economic pyramid gain an economic foothold through microfinance. On the ground, Brac operates in all 64 of Bangladesh’s districts. With more than 100,000 employees and 5mn borrowers, Brac is one of the largest NGOs in the world.
The proceeds of the FMO-facilitated Tk12.6bn (US$180mn) securitisation enable Brac to serve a larger number of micro-entrepreneurs. By taking assets off the balance sheet, Brac is able to reduce its capital ratio and free-up resources for new loans.
This securitisation demonstrates that high-finance and economic development are not worlds apart. They have come together in Bangladesh’s microfinance sector. It involves the creation of a special purpose trust. This trust purchases Brac micro-credit receivables and issues certificates to investors, shifting these assets from Brac’s own balance sheet.
FMO will directly purchase one-third of the certificates.
Together with KfW, FMO is also guaranteeing another third bought by Citibank. The remaining certificates have been acquired by two other local banks and Citibank Bangladesh. By involving local commercial banks, FMO and partners are building a bridge to potential sources of additional finance in the future. RSA Capital is the deal’s lead arranger with FMO, Citigroup and KfW acting as co-lead arrangers.
All in all, FMO and co-investors are providing an aggregate of Tk12.6bn for Brac over a period of six years. Under the programme, Tk1bn will be disbursed every six months to Brac, with a maturity of one year.
Brac’s micro-credit receivables are in Bangladeshi taka (Tk). This securitisation is denominated in taka. A local currency transaction cuts out any currency mismatch and associated exchange risk to the local client.
Other risk mitigants have been put in place as well. Brac will replenish all non-performing loans in the trust and there is a 150% collateralisation of receivables.
The Netherlands Development Finance Company (FMO) is the international development bank of the Netherlands. FMO invests risk capital in companies and financial institutions in developing countries.
FMO’s investment portfolio is €2.4bn and FMO is one of the largest bilateral development banks worldwide. “Thanks in part to its relationship with the Dutch government, FMO is able to take risks which commercial financiers are not – or not yet – prepared to take,” says the agency.