Xac Bank Equity

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	26348
Company name	XacBank Ltd.
Country	Mongolia
Sector	Finance & Insurance
Environmental category	FI
Department	Global Financial Markets Group
Status	Active

Date SPI disclosed	September 28, 2007
Projected board date	October 29, 2007
Previous Events	Invested: January 16, 2008 Signed: December 7, 2007 Approved: November 30, 2007

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The proposed investment (or the project) consists of a medium-term financing program of up to $15 million, to be made available in US$ and/or MNT. Such financing will be progressively committed over a three-year period in the form of equity, senior loans, partial credit guarantees (PCG), and/or syndicated loans to XAC-GE, the holding company of XacBank (the Bank), a leading microfinance institution in Mongolia. The purpose of the funding is to support the ongoing growth of XacBank’s micro and SME lending portfolio, expand the Bank’s reach to new geographical regions and develop new initiatives.

Project sponsor and major shareholders of project company

The project sponsor is XAC-GE. XAC-GE is the holding company of XacBank, Mongolia's first micro-credit company and the first non-bank financial institution (NBFI) licensed and supervised by the Bank of Mongolia (The Central bank). XacBank was registered as a commercial bank on December 27, 2001 after a merger between two NBFIs.

XacBank is a leading provider of development finance in Mongolia, delivering innovative products and inclusive services to all the regions of the country through a rural presence and extensive network of 67 branches. Its clientele represent not only the lower-income segment of the market but also a growing number of Small and Medium sized enterprises. Products include herder loans, household loans and financial leasing, as well as residential housing loans. With assets of $96.1 million as of June 30, 2007, it is the 7th largest bank in the country.

Major shareholders of XAC-GE are: Mercy Corps (18.44%), Triodos (15.06%), MicroVest (14.69%), Tuushin LLC (14.34%), ShoreCap International (12.22%), and EIT LLC (11.89%).

XacBank became the first commercial bank rated by Moody’s Investors Service in Mongolia. The ratings for XacBank include Bank Financial Strength rating of D, Ba1 for local currency deposits, B2 for foreign currency deposits, Ba1 for local currency issuer ratings and Ba2 for foreign currency issuer ratings. All ratings have a stable outlook. Also, Planet Rating, an agency specializing in rating of microfinance institutions, conducted its second rating of XacBank and assigned A rating with a stable trend.

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

It is proposed that IFC provides an investment package of up to $15 million to XAC-GE in the next 3 years. The first investment under the investment package is an equity investment of up to $3.0 million to XAC-GE to acquire up to 10% stake.

Location of project and description of site

XAC-GE is headquartered in Ulaanbaatar, the capital city of Mongolia. XacBank has 67 branches and extension units across Mongolia. The Bank makes loans and delivers other financial services through these branches and extension units.

Anticipated development impact of the project

The project will assist XacBank to strengthen its capital base and expand its operations in productive micro and rural finance, as well as SME businesses, including financial leasing. XacBank is focusing on microfinance with an average loan size of about MNT1.26 million ($1,087 equivalent). IFC’s proposed equity investment will enhance the Bank’s institutional capacity to expand its micro loan portfolio to reach clients who might otherwise be marginalized, thus supporting livelihoods, employment generation in the private sector, particularly in low income rural communities. It is expected that the institution's strong performance in terms of portfolio growth and profitability through better management methodology, control mechanisms and outreach in remote and geographically challenging areas will serve as "best practice" examples for other rural finance institutions.

IFC's expected development contribution

IFC will be providing necessary funding through equity, senior loan, partial guarantee, and/or syndicated loans to support the Bank’s lending operations to its micro and SME business clients and developing new initiatives in housing finance, leasing, trade finance, insurance and cross-boarder expansion. IFC will also play an important role by providing ongoing advice on the business plan and strategy implementation of the bank so as to help it become financially sustainable.

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. An appraisal conducted by IFC’s Environmental & Social team found that the Bank’s Social and Environmental Management System (SEMS) and management capacity to be satisfactory. Based on IFC's analysis of the potential social and environmental risks associated with the Bank's loan portfolio and considering IFC’s investment, the applicable requirements for XacBank are:

- the IFC Microfinance Exclusion List and
- the applicable Mongolian National Social and Environmental Laws and relevant regulations.

Based on the Applicable Requirements and SEMS and capacity review, XacBank will be required to:

- Commit to continue implementing its SEMS to ensure that its investments/activities are in compliance with the applicable requirements;
- Commit to take action to remedy any gaps in SEMS implementation on an ongoing basis; and
- Continue to submit a periodic report to IFC as per a format to be provided by IFC.

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