NGO securitizes microcredit

BRAC, the world’s largest national non-government organizations (NGOs) with over five million borrowers and 100,000 employees, has closed world’s first micro-credit securitization structured by RSA Capital, Citigroup, FMO and KfW.

This groundbreaking transaction, denominated in Bangladesh taka (BDT), will provide an aggregate of BDT 12.6 billion ($180 million) of financing for BRAC over a period of six years.

Under the program, BDT one billion ($15 million) will be disbursed every six months to BRAC, with a maturity of one year.

The transaction is a securitization of receivables arising from micro-credits extended to low-income individuals by BRAC, primarily in rural communities not reached by Bangladesh’s commercial banks.

The structure involves the creation of a special purpose trust which purchases the receivables from BRAC and issues certificates to investors representing beneficial interest in such receivables. The securitization will allow BRAC, to diversify its funding sources, reduce its on-balance assets and also disburse more funds to a larger number of micro entrepreneurs, reinforcing BRAC’s determination in helping in the development of the micro-credit sector.

"This transaction underlines BRAC’s commitment to be the leading provider of innovative financing solutions to micro entrepreneurs. We have brought the global financial markets to the doorsteps of nearly 1.2 million households in Bangladesh. As one of the largest financing efforts ever dedicated to advancing poverty focused microcredit, this is a landmark for the microfinance industry," Fazle Hasan Abed, chairperson of BRAC, said.

The transaction will also help in the development of Bangladesh’s local capital markets, as it marks the first such securitization in the market and also the first AAA-rated local certificates issue in Bangladesh, rated by the Credit Rating Agency of Bangladesh. The transaction was very well received by the local investors.

RSA Capital is the lead arranger and Citibank N.A. Bangladesh (Citigroup), FMO (Netherlands), and KfW (Germany) are the co-lead arrangers.

FMO will directly purchase one-third of the certificates. Citibank will purchase another one-third of the certificates, backed by a guarantee of FMO and counter guarantee of Kfw. Additionally, Citibank Bangladesh, with two other local banks, will purchase the remaining one third of the certificates.

BRAC will be the originator as well as the service provider for the transaction. The trustee for this transaction will be Eastern Bank Limited of Bangladesh. Citibank Bangladesh is the account bank for the trust. The transaction required the creation of a software to track a dynamic pool of receivables, which was created by MF Analytics. Clifford Chance, and Lee Khan and Partners are acting as legal advisors.