Bank of Banks

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	26194
Company name	Bank Andara
Country	Indonesia
Sector	Finance & Insurance
Environmental category	FI
Department	Global Financial Markets Group
Status	Active

Date SPI disclosed	November 7, 2007
Projected board date	December 17, 2007
Previous Events	Invested: June 23, 2008 Signed: May 23, 2008 Approved: May 22, 2008

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The project involves establishing the first microfinance wholesale bank in Indonesia, Bank of Banks (BoB or the Bank), which will serve the vast and under-served Indonesian microfinance institutions (MFIs). The wholesale bank will provide full-fledged financial products and services, which are currently unavailable to thousands of qualified MFIs throughout the country. Subsequently, working in partnership with the wholesale bank, MFIs will be able to extend a range of innovative financial products to their clients, the micro enterprises, including remittances, micro-insurance and technology-enabled services including ATMs and E-banking.

The project involves an IFC’s equity investment of up to $5 million equivalent to participate in the purchase of the license of a small local commercial bank, PT Bank Sri Partha (BSP), and to provide seed capital to allow a start up operation of BoB.

Project sponsor and major shareholders of project company

Mercy Corps, one of the leading international non-governmental organizations in microfinance, will take the majority control in the Bank with up to 50.0% ownership and will play a leading role in managing the Bank. The proposed IFC’s equity investment would represent 19.9% ownership in the Bank and the current owner of BSP, Mr. I Wayan Gatha, will own 10.0%. Participation of other potential shareholders, in order to account for the remaining shareholder amount, is still under discussion.

The IFC’s investment component is expected to be accompanied by IFC Advisory Services’ support in the areas of governance as well as branding and marketing.

- Mercy Corps:

Mercy Corps was established in 1979 as an international non-governmental organization that provides:

- emergency relief services to assist people afflicted by conflict or disaster,
- sustainable economic development that integrates agriculture, health, housing, and infrastructure, economic development, education and environment, and local management, and
- civil society initiatives that promote citizen participation, accountability, conflict management, and the rule of law.

The organization has provided over $1 billion in assistance via offices and over 3,000 staff in 40 countries.

In Indonesia, Mercy Corps has been in existence since 1999, focusing on disasters relief and sustainable livelihood programs. Mercy Corps conducted the MFIs Rating and Commercial Linkage Pilot Project with IFC-PENSA, aimed at creating a rating tool for microfinance institutions, test the rating tool to MFIs in East Java and Greater Jakarta, and subsequently link the rated MFIs to commercial financial institutions to increase MFIs’ access to funding. Considering the promising results of the pilot project with IFC, Mercy Corps established MICRA Foundation to build the institutional strength and outreach of the Indonesian microfinance sector, and to promote innovations, transparency, outreach, and performance of the microfinance industry.

- Mr. I Wayan Gatha:

Mr. Gatha is the founder of BSP and currently owns 84.8% ownership in BSP. He is well-known for his dedication to the social development of the local micro and small businesses. His initiatives include creating and developing 5 BPRs, and advocating the creation of LPDs, a type of microfinance institution (MFI), that have been successful in servicing the low-end customers within a sub-village district in Bali. Mr. Gatha and his bank have also received several recognitions, including the most recent award of “Anugrah Bisnis Bali 2007” in mid of 2007, an award given by a regional newspaper to local companies in Bali for their consistency in corporate social responsibility.

- BSP’s Shareholder Structure

BSP’s shareholding structure is as follows:

- I Wayan Gatha: 84.8%
- I Wayan Amblon: 5.8%
- I Nyoman Pegug: 5.8%
- I Nyoman Moena (the late): 3.6%

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

The total investment cost to launch BoB is expected to be up to IDR130 billion (about $15 million). The proposed IFC’s equity investment includes an up to $5 million equity which represents 19.9% ownership in the Bank.

Location of project and description of site

BSP is headquartered in Bali, Indonesia. It has 20 branches in Bali, two branches in Lombok and one branch in Sembawa Besar, West Nusatenggara. After the acquisition of BSP and as BoB starts its operation, BoB will relocate the headquarters to Jakarta and will have one branch in Bali.

Anticipated development impact of the project

- Directly strengthening the microfinance sector:

Most MFIs depend primarily on limited client deposits for their source of funds and consistently cite the lack of access to affordable capital as their key constraints for growth. This project will significantly increase in MFI access to financial products and services. Ultimately this project will also increase access to financial services for low-income people and micro-entrepreneurs throughout Indonesia. In the first three years, BoB expects to reach 620 MFI clients through which around 3.2 million of micro-entrepreneurs and low-income people can obtain financing.

- Supporting banking and microfinance consolidation:

BoB establishment will provide a significant growth opportunity for small undercapitalized local bank. In the long run, the Bank is expected to be an important unique player in Indonesia. Indonesia’s Central Bank has specifically requested IFC’s assistance and support for its consolidation plans. Additionally, BoB will also support microfinance sector consolidation. BoB will attract and highlight the best performing MFIs as BoB clients to provide the rest of the market with a best-practice benchmark and offer incentives in the market to attain scale through transformation and or mergers and acquisitions.

- Creation of a model wholesale bank for MFI:

The Bank will serve as the first wholesale bank for the MFIs, which is currently nonexistent and seriously needed in Indonesia and many other countries. As the correspondent bank, the Bank will offer a range of products and services to MFI to allow for more predictable use cash flow and profitable use of their assets. If BoB turns out to be a successful venture in coming years, it would create a powerful demonstration effect whereby BoB can be replicated in other markets with large number of MFIs.

- Deepening the microfinance sector through technology:

The Bank will incorporate technology and international best practice in providing services to MFIs. And as a technology-enabled enterprise, the Bank has a distinct value proposition by delivering to its clients the value of scalable electronic banking products and shared IT services which help deepen the microfinance sector.

- Broadening MFI’s access to international investors:

The Bank would facilitate a broader access to international investors for Indonesian MFIs. This would also deepen the Indonesian financial sector.

IFC's expected development contribution

IFC provides significant assurance and comfort to Mercy Corps and other potential shareholders and donors to establish the first wholesale microfinance bank in Indonesia. Indonesia is one of the key target markets in Mercy Corp’s global strategies. Co-investment with IFC is viewed by the management of Mercy Corps as a condition to do this pioneering project.

IFC plays a key role in facilitating good relationships between Mercy Corps and the Central Bank of Indonesia. As a highly respected development institution in Indonesia, IFC has a close and good relationship with the Central Bank. In the future, IFC’s role in facilitating and forging good relationships between BoB and the Central Bank is expected to become increasingly important as BoB grows the scale of its operations in Indonesia and introduces new products and services to MFIs.

IFC contributes to the strengthening of the new wholesale bank by bringing in best practices in corporate governance, branding and marketing to be driven by Bob’s management team.

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 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;
- Commit to establish a similar screening process to avoid supporting activities on the IFC Microfinance Exclusion List in MFIs in which it will take a controlling stake;
- Submit a periodic report to IFC as per a format to be provided by IFC.

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