TSB Bank Agrisector Onlending

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	26663
Company name	Tojiksodirotbonk
Country	Tajikistan
Sector	Finance & Insurance
Environmental category	FI
Department	Global Financial Markets Group
Status	Pending Disbursement

Date SPI disclosed	May 27, 2008
Projected board date	June 30, 2008
Previous Events	Signed: June 30, 2008 Approved: June 30, 2008

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The proposed transaction is a loan package to Open Joint Stock Company Tojik Sodirot Bonk (TSB or the company), an IFC existing portfolio client, of up to $15.0 million. TSB is the third largest bank (after Oriyonbank and AgroInvest Bank) in terms of total assets and the second largest bank in terms of total capital in the Tajik banking system. TSB has a wide client base of private enterprises in the trade, services and industry sectors, and services its clients out of its headquarters in Dushanbe and its 10 branches across the country. TSB has successfully developed a small agricultural portfolio with exposure to cotton, fruit and vegetable crops, cotton ginning, and edible oil processing and will need more funding to continue to grow their agribusiness portfolio.

The proposed loan package will finance the project and consist of:

- a $10.0 million on-lending facility divided between the following purposes: US$6.0 million will be earmarked for agriculture-related purposes, and US$4.0 million will have to be used to grow TSB’s fledgling leasing operations; and
- a $5.0 million trade finance guarantee facility.

The $10.0 million on-lending facility will be lent to TSB, and IFC will take the company’s balance sheet/corporate risk. TSB will have to demonstrate to IFC through subsequent reporting requirements that they will have managed to grow their agro loan portfolio by a minimum of $6.0 million in a to-be defined period and maintain a minimum exposure level to this sector. Potential borrowers can include individual farmers, farming cooperatives and food processing companies. IFC will review TSB’s agro-lending underwriting standards, security-taking practices, loan structuring, etc. A similar approach will be used for the $4.0 million earmarked to finance the expansion of the lease portfolio.

IFC also proposes to provide a $5.0 million short-term trade finance guarantee facility under its Global Trade Finance Program (GTFP) approved by the board in November 2004. The company is expected to make use of the GTFP facility to facilitate import transactions of wheat, edible oils, and other food products and consumer staples for its SME clients, as well as to guarantee short-term pre-export advances from correspondent banks for outward shipments of processed cotton.

Project sponsor and major shareholders of project company

TSB was established in December 1990 as the Tajik branch of the Vnesheconombank of the USSR. After the collapse of the Soviet Union, the company was reorganized and re-registered from Soviet Bank into Joint Stock Commercial Bank for Foreign Economic Activity “Tajikvnesheconombank on March 11, 1992 by the Resolution of the Supreme Council for the Republic of Tajikistan and issued a General License for banking operations by the National Bank of Tajikistan (NBT), the country’s Central Bank. TSB remained state-controlled until June 1999, when the state’s share was gradually diluted and the company was reorganized and renamed into TSB.

Although TSB’s primary focus was initially to support foreign economic activities of the country, in particular export/import transactions, the company has gradually diversified and become a universal bank offering a broad range of banking products to a heterogeneous clientele. TSB has also obtained NBT licenses for conducting all types of banking operations, including taking deposits and foreign currency dealings. Primary business lines are corporate banking, MSME banking, including increased lending to the agro and food processing sector, trade finance, foreign exchange and remittance services. Core clients include leading Tajik trading companies (for cotton, bauxite, food products and other commodities), SME wholesalers, as well as Dushanbe based embassies and NGOs. The current strategy of the company is to expand its MSME portfolio so that it accounts for half of the total loan book with a view to increasing access to financial resources available from various funds which support microfinance.

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

The $10.0 million investment will be treated like a regular IFC A loan with a 5-year tenor. The split into the two targeted on-lending sectors will be done notionally, i.e. IFC will not book two separate loans. The distinction will be for TSB, as they will have to demonstrate to IFC that they were able to grow their leasing and agro-lending business at a minimum by $4.0 million and $6.0 million, respectively, over a defined period and then maintain that level. The $5.0 million trade finance guarantee facility will fall under IFC’s Global Trade Finance Program (GTFP) and will count as $2.5 million exposure.

Location of project and description of site

TSB is headquartered in Dushanbe, Tajikistan, and has 10 branches across the country.

Anticipated development impact of the project

Given the agriculture sector’s importance for Tajikistan’s economy, removing the prevailing constraints for farmers in the cotton sector and providing farmers with access to fair and market-based funding is key. Access to adequate funding and freedom to plant what farmers prefer will eventually result in higher crop diversification and higher productivity levels for the agro-sector.

One component of the proposed project will provide dedicated agro-funding to one of the country’s leading banks and will encourage TSB to become more active in agro-lending. The project will generate a range of social and economic benefits, including economic growth and higher productivity of the farming sector, as well as provide additional funding to TSB to support its growth and enhance banking penetration. As a large percentage of the project’s beneficiaries are farmers, the project will create a strong development impact for the country’s rural population.

IFC's expected development contribution

- Development of Financial Sector:

IFC supports the development of a holistic financial sector, with interventions at the macro, meso and micro levels. IFC's work in Tajikistan is an example of how the investment and advisory programs work together to build an enabling regulatory environment for leasing and to support best practice institution with the ability to demonstrate sustainable delivery of financial services to all segments of the market.

- Facilitating Trade:

Like other banks in frontier markets, TSB faces significant constraints and/or price discrimination on acceptance of its documentary credits on the international market. Clients are most often required to pre-pay or post cash collateral for standard import transactions. Access to a GTFP trade finance guarantee facility and to the program's extensive network of participating banks is expected to yield significant developmental impacts for TSB and its SME import and export clients, in terms of extending and bolstering the bank's correspondent relationships, reducing cash collateral requirements and similar liquidity benefits, and introducing more competitive pricing for the bank's import and export transactions.

- Supporting Access to Finance for Under-served Agribusiness Companies:

The agribusiness sector is typically poorly supported by the commercial lenders because of higher or perceived higher credit risk than other economic sectors. IFC’s agribusiness wholesaling strategy aims to improve access to finance for agribusiness companies that are too small to access IFC’s direct financing. In Tajikistan, the agribusiness sector has an even harder time to access formal financing sources because of major distortions in the cotton sector, the largest agricultural crop in the country. IFC has a key role to play promoting transparent, credit driven agribusiness lending.

- On-lending/Trade Finance Package:

IFC is one of the few sources of longer term funding for Tajik banks in general and for TSB in particular. The project will bring a package of trade finance and on-lending facilities to the company which could only be provided by another IFI, as the regular interbanking market would not offer this funding package to a Tajik bank, given the countries post-conflict nature. Moreover, few other institution would insist that a portion of the funding would be exclusively used for agro-lending purposes. Without IFC's involvement, TSB would not likely be able to get this funding package and clearly would not get funding earmarked for the agro-sector.

- Expanding Successful Farming Model:

IFC has successfully sponsored two projects of farmers’ ownership model (FOM) whereby joint stock companies owned by farmers purchases and delivers to the farmers a complete input bundle, arrange the processing of the crop, and help to sell and market final products. The proposed project would complement IFC’s previous initiatives by providing farmers with alternative sources of finance.

Environmental and social issues - Category FI

This project has been classified as a Category FI project according to IFC’s Environmental and Social Review Procedure.

During appraisal, IFC will analyze the fund’s portfolio and the activities proposed to be supported with IFC financing for types of transactions, size, tenor and industry sectors and determined the Applicable Performance Requirements based on an analysis of the potential Social and Environmental risks associated with the FI portfolio and considering IFC’s investment. The Applicable Requirements, if any, would include a combination of: The IFC FI Exclusion List; The applicable National Social and Environmental Laws and regulations; and The IFC Performance Standards. In particular, IFC will need to gain a full understanding of the on-lending relationship to third party farmers, especially in the cotton sector, where possible issues related to child labor and working conditions may exist.

As an existing client (project 25080), the bank has developed a social and environmental management system (SEMS) and appointed an SEMS officer to oversee the implementation of the SEMS. The bank received an ESRR score of 2 (Average) for its annual social and environmental performance reviewed last year. Based on the Applicable Performance Requirements and the SEMS and capacity review, the project will be required to: Upgrade, if necessary, any existing Social & Environmental Management System (SEMS), prior to disbursement to the satisfaction of IFC; Commit to implement the SEMS, to ensure that its investments/activities supported by IFC financing are in compliance with the Applicable Performance Standards; Submit a periodic report to IFC as per a format to be provided by IFC; and notify IFC if any identified subprojects might qualify as category A under IFC’s procedure for project categorization.

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