Kenya Schools

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	25053
Company name	Kenya School Financing Facility
Country	Kenya
Sector	Education Services
Environmental category	FI-1
Department	Health and Education
Status	Pending Disbursement

Date SPI disclosed	September 27, 2006
Projected board date	October 27, 2006
Previous Events	Signed: December 7, 2006 Approved: November 16, 2006

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The proposed project is an initiative to provide local currency financing and technical assistance to private educational institutions in Kenya. It is the second such initiative in the education sector after IFC’s pilot school financing facility in Ghana, committed in June 2005. IFC would provide risk-sharing of up to 120 million Kenya Shillings ($1.7 million equivalent) to K-Rep Bank (K-Rep or the Bank) on loans extended to eligible private schools in Kenya. These loans will be used to finance construction, purchase of educational materials, and other capital expenditures. In parallel with the financing facility, a comprehensive technical assistance program is under preparation. The program will be designed to:

- strengthen schools’ financial, management, and educational capacities;
- improve the business environment for private education; and
- foster the development of an independent provider of educational services to private schools.

Technical assistance will also be provided to the Bank to build its capacity to conduct due diligence of educational institutions and monitor its education portfolio

Currently, few local banks are lending to private primary and secondary schools, and those that do, generally lend for less than two years. Thus, even if schools are able to secure bank financing, the tenor of that financing is generally not long enough to support expansion or modernization projects. Such projects thus proceed in a piecemeal fashion, resulting in a great deal of inefficiency and lost potential revenue. Further, expansion by such means cannot keep pace with the huge growth in demand for private schooling. IFC’s risk-sharing would be structured to encourage the Bank to extend maturities to 3-5 years, tenors more appropriate for financing capital investments.

Despite the impressive growth of private schools in Kenya over the past 15 years, most remain fundamentally weak in their financial and managerial capacities, as well as in their ability to develop more effective educational delivery mechanisms. The majority of schools has minimal financial expertise, weak information systems, if any, and limited opportunities for teacher training and curriculum development. The technical assistance program designed in conjunction with the financing facility is intended to address many of these shortcomings for participating schools, and, in addition, to strengthen the environment for private school operators.

Project sponsor and major shareholders of project company

Kenya Rural Enterprise Program (K-Rep) was established in 1984 as a 5-year micro enterprise development project funded by USAID and other donors to provide support and loans to NGOs involved in small and micro enterprise development. K-Rep eventually started making loans directly which led to the establishment of K-Rep Bank in 1999. Although K-Rep Bank specializes in microfinance, it also offers mainstream banking services.

K-Rep Bank is an existing equity portfolio client of IFC (holding 17%). The investment was made in 1999 when the Bank was formed out of the then NGO. K-Rep Bank's sponsor and principal shareholder (25%) is K-Rep Group Limited (KGL). Other shareholders include: The African Development Bank (15%), Triodos Doen (11%), ShoreCap International (8%), The Netherlands Development Finance Company (5%), and ICDC Investment Company (4%).

K-Rep Bank is a commercial microfinance bank operating 18 urban and rural branches and 9 outlets throughout Kenya. It offers full financial services to micro and small businesses and low-income individuals including: loans (group, retail, wholesale, and staff), savings accounts, overdrafts, rental of safe deposit boxes and foreign exchange. The Bank focuses primarily on micro loans distributed via groups but has been working on several newer products: loans to small businesses and wholesale loans to large cooperatives.

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

This transaction would be structured as a risk-sharing facility with K-Rep. IFC’s risk-sharing will cover 63.16% of the principal credit losses that are in excess of a 5% first loss threshold up to a maximum of KES 120 million (equivalent of $1.7 million) with respect to the credit performance of a pool of loans to schools originated by K-Rep. The portfolio is expected to reach a size of KES 200 million ($2.8 million) over the next 18 to 24 months. IFC’s 63.16% share of the second loss risk-sharing represents our maximum potential liability under this structure. IFC’s risk-sharing would be denominated in local currency.

Location of project and description of site

K-Rep Bank is headquartered in Kenya at: Naivasha Road, Riruta, Nairobi, Kenya. It has 18 additional branches located in Nairobi, Mombasa, Nakuru, Eldoret and other towns in Kenya. The participant private schools will be drawn from all over Kenya.

Anticipated development impact of the project

The proposed project will have a substantial impact on both the education and financial sectors in Kenya.

First, it will help improve the educational quality and financial and managerial capacity of private primary and secondary schools in Kenya. In doing so, the project will enable schools to obtain financing from the formal banking sector and widen access to much-needed quality education. The enormous demand for private schools is currently unmet, in large part because schools have little access to affordable, long- or medium-term financing, and little training in financial management. This project will address both shortcomings, and, with respect to the latter, demonstrate sound practices throughout the sector.

Second, the project’s technical assistance component will also help schools strengthen their educational management capacities, thus setting a standard for the private sector, and improving the business environment for private education.

Third, the project will introduce to the financial sector a means of delivering medium-term local currency financing to educational and other institutions. Finally, this project would further demonstrate the applicability of this risk-sharing model for reaching small education providers—which comprise the vast majority of private providers—throughout Africa (and other regions). IFC could thus continue to expand education financing to other African countries with similar markets and constraints.

IFC's expected development contribution

IFC’s risk-sharing will enable the Bank to develop a medium-term lending program for private schools, which are in critical need of such financing for development. Further, the use of a risk-sharing instrument will help improve options for local currency financing in Kenya. The accompanying technical assistance program will prepare schools to borrow from the formal sector and provide comfort to the Bank, which has limited experience in the education sector. It will also improve the business environment and the educational quality of schools, which, apart from the obvious social benefits, will make them less risky borrowers. Thus, this Project is helping to create the basic conditions for medium-term lending in the education sector.

Environmental and social issues - Category FI-1

This is a Category FI Type 1 project according to IFC's environmental and social review procedure. K-Rep Bank will be required to establish an environmental management system that will ensure that investments are consistent with applicable host country environmental laws and regulations; designate appropriate individuals who will have responsibility for the environment management system; and submit to IFC an environmental management plan and annual environmental performance reports.

IFC PROJECTS