Kashf MFI

Summary of Proposed Investment

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. 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.

Project number	26509
Company name	Kashf Microfinance Bank
Country	Pakistan
Sector	Finance & Insurance
Environmental category	FI
Department	Global Financial Markets Group
Status	Active

Date SPI disclosed	November 27, 2007
Projected board date	January 4, 2008
Previous Events	Invested: September 12, 2008 Signed: June 26, 2008 Approved: June 17, 2008

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The project aims to help expand microfinance outreach in Pakistan through an investment and technical assistance package for Kashf Foundation (Kashf or the company), one of the largest and best performing microfinance institutions in Pakistan. IFC will provide Kashf with total investment of up to $22.5 million equivalent through two separate entities:

- $15 million loan/guarantee to Kashf Foundation, to help scale up its group lending product to reach half a million women clients within five years, and
- $2.5 million equity investment for a stake of up to 19%, and a standby loan of $5 million in the greenfield Kashf Microfinance Bank (KMB) that is being carved out of the Foundation by transforming its individual loan portfolio.

Kashf Microfinance Bank (KMB) is a greenfield microfinance bank to be established and regulated by the State Bank of Pakistan. Together, the equity and loan will help finance the establishment and portfolio growth of KMB, which aims to reach significant scale quickly by offering savings and deposit products, individual loans and other value-added services primarily to micro and small business owners, especially women. Within 5 years, KMB expects a loan portfolio of above $270 million equivalent to approximately 375,000 borrowers and over 1 million savers.

Project sponsor and major shareholders of project company

Kashf Foundation was established in 1996 as an NGO to reduce poverty and empower women in urban and semi-urban areas of Pakistan through the provision of specialized microfinance services and advocacy. In 2007, Kashf changed its status from an NGO to a not-for-profit, non-shareholding, private limited corporation, which enabled it to raise commercial funding. Kashf is the third largest microfinance provider in Pakistan with an outstanding portfolio of approximately $34 million to over 200,000 borrowers as of June 2007 served through a network of 125 branches.

The shareholding structure for KMB will include majority ownership by Kashf Holding Company (KHL) and the remainder being offered to a small number of international investors in microfinance institutions, in addition to IFC.

KHL is being established in Pakistan as a private limited company to be majority shareholder and key sponsor of KMB. KHL will be owned by a small number of like-minded shareholders, including the founder and president of Kashf Foundation, Ms. Roshaneh Zafar, Kashf Foundation, and a small number of other internationally-recognized social investors, including Acumen Fund. Over time, KHL is expected to participate in additional investments related to Kashf’s overall mission, such as potential subsidiaries focused on home loans and insurance for low-income populations.

Total project cost and amount and nature of IFC's investment

Total funding by IFC to Kashf and KMB is estimated at $22.5 million, which includes a $15.0 million loan (or guarantee) to Kashf.

KMB initially seeks to raise initial equity of 750 million Pakistani Rupees (equivalent to approximately $12.5 million), and IFC would acquire up to 19% for approximately $2.5 million in addition to a $5.0 million stand-by loan.

Location of project and description of site

Headquartered in Lahore, Pakistan, Kashf serves clients across 22 districts of Punjab including Lahore, Gujranwala, Sahiwal, Kasur, Sargodha, Sheikhupura, Okara, Khushab and Faisalabad and 1 district in Sindh. With additional funding, Kashf intends to expand beyond Punjab to eventually cover all of Pakistan with almost 500 branches, up from approximately 125.

In line with its national microfinance bank license, KMB intends to operate across the whole of Pakistan starting with branches in Punjab and Sindh, but expanding into Balochistan, Northwest Frontier Province and Azad Jammu & Kashmir within five years. A total of about 100 branches are expected to be established over this time period with the majority located in Punjab and Sindh.

Anticipated development impact of the project

IFC’s participation is expected to have a positive impact on the country’s economic development as both Kashf and KMB will provide financial services (including savings via KMB) primarily to women and small enterprises, which form a large, under-served, yet productive segment of the local economy. Greater access to financial services by populations currently excluded from the formal banking sector will help reduce poverty and expand economic opportunity for low-income populations throughout Pakistan, especially women.

Through provision of a loan to Kashf, IFC would help finance Kashf increased outreach and portfolio growth. If a guarantee is used, this would also improve the ability of Kashf to source local funds in the future which will reduce foreign exchange risk and borrowing costs.

By assisting in the establishment of a for-profit, national and fully-regulated microfinance bank, IFC would help demonstrate the profitability and sustainability of large-scale financial services to potential new or currently-limited microfinance providers. This is particularly important to encourage new entrants and greater overall penetration given the large unmet demand for financial services for the poor in Pakistan.

Through Kashf and KMB the project will contribute to the expansion of financial services to low income entrepreneurs and wage earners. By 2010 Kashf alone will have an outstanding loan balance of $480 million equivalent and over 1 million borrowers, the vast majority of which are expected to be women. Combined outreach of the two entities is expected to be reach 1.3 million borrowers and a portfolio of over $750 million. Importantly, KMB will be licensed to mobilize savings and expects to attract over 1 million new deposit clients, thus providing low-income populations with greater financial options, revenue-generating opportunities and safe-keeping for their assets. Overall, improved access to financial services should reduce income disparities and create additional jobs.

IFC's expected development contribution

IFC has a unique role and contribution stemming from its extensive experience investing in commercial microfinance institutions globally and in Pakistan, where IFC previously invested in Tameer Microfinance Bank and First Microfinance Bank of Pakistan. IFC’s knowledge of global best practice in microfinance, combined with its regional and in-country experience, would aid both Kashf’s and KMB’s rapid expansion while encouraging sound financial operations and prudent risk-taking.

Further, through its regional technical assistance facility, Private Enterprise Partnership – MENA (PEP-MENA), IFC has been providing assistance to Kashf to accelerate the planning and launch of KMB. Specifically, IFC provided assistance to develop the business plan for KMB and arranged a study tour for Kashf management to visit microfinance providers, including an IFC portfolio company that successfully transformed into a full-service microfinance bank. Such experience has been critical to helping Kashf management understand better the risks and opportunities of KMB, especially with regards to large-scale deposit-taking by a microfinance bank, which is new in the Pakistan market.

Through IFC’s relationships with local banks, donors and other microfinance investors, IFC is able to help KASHF and KMB raise funds and strengthen its shareholding structure. IFC’s PEP-MENA also has various programs that are unique in the region and may be used to improve corporate governance, introduce new products (e.g., micro-leasing) and improve risk management.

Environmental and social issues - Category FI

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, and take action to remedy any gaps in implementation on an ongoing basis;
- Submit a periodic report to IFC as per a format to be provided by IFC.

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