Asian microfinance has seen its first syndication in Bangladesh, potentially transforming this sector into something much more structured, liquid and lucrative.
Last week, mid-sized Buro Bangladesh raised Tk1.5bn (US$22m) via a five-year syndicated loan. Led by Citigroup, the loan was syndicated to over 12 other Bangladesh banks including three state-owned commercial banks.
Buro is the fifth-largest microfinance institution (MFI) in Bangladesh and one of the top 50 MFIs globally. It is also one of the few that depends primarily on commercial funding rather than subsidised state loans or grants.
Currently Bangladesh’s 225 MFIs get funds from a government programme that provides three-year funding at about 7% per annum. They also rely on NGO-linked loans from commercial banks.
The Citigroup-led financing is unusual in that it’s long term and it sees Buro borrowing under its own name. Buro has to pay 13% per annum for the five-year loan but gets a 12-month moratorium on interest payments.
It on-lends these funds to its over 700,000 customers of which about 25% are small farmers and some 99% are women. The average size of these loans is US$150, where borrowers tend to be looking to invest in farms or small businesses that service the agricultural sector.
“It will open a new funding window for other MFIs,” said Mosharrof Hossain, a senior official at Buro. “Currently we are way behind the top-three MFIs in Bangladesh, which have about 7m clients.”
Buro charges its customers about 15% per annum for the small loans. Under the syndicated loan structure, the MFI has agreed to give out these micro-loans through a security agent to ensure any repayments can be used to repay the banks. There is an excess spread of about 2% per annum captured in the process, with delinquency comprising the main risk for lenders.
Historically lenders have stayed out of the microfinance sector precisely because of concerns about repayment of loans from a vast borrower base with whom they have little relationship or understanding. However, private equity is starting to develop an appetite for the sector, noting that the margins are high and that delinquency rate (of about 3%–4%) is low.
There have been increased instances of direct lending by international banks to MFIs like Buro. In August 2008 the bank got a US$3.65m short-term revolving loan from Standard Chartered. Now that even more banks are getting acquainted with the sector via the syndication process, the Buro deal should stimulate a much steadier funding flow to MFIs.
Citigroup lent the first loan to Buro in April 2008.
The syndicated loan was oversubscribed by 1.5 times. Citigroup and Sonali Bank lent Tk150m each, while Agrani Bank, Dutch-Bangla Bank, Janata Bank, Mutual Trust Bank, Prime Bank, Standard Bank and The City Bank came in with Tk100m apiece. Pubali Bank and United Commercial Bank lent Tk200m each while Eastern Bank and Southeast Bank committed Tk50m each.