Local Currency Guaranteed Development Bond SME Loan Program

For the Nigeria and Uganda pilots, $900,000 per deal (or $1.8MM) is needed, covering labor, travel and the two largest external costs, the ratings and legal work. We hope to win sufficient funding from this competition to launch these projects. If not, we will seek foundation or DFI funding.

The Rwanda project has the same transaction cost ($900,000) but requires investment capital as well, since the Rwandan government has fewer resources than the other two. Here we seek $25MM in investor capital. We doubt that such a large amount could be won in this competition, but it would be a powerful signal if we raised even a portion of it through this means. We are talking to some DFIs about this capital.

The three seed amounts of $900,000 would be most useful in grant form but a loan repaid through bond issuance would be a manageable option.

The moment the bonds are issued in our target countries, the programs become self-sustainable. Therefore, the time frame for self-sustainability is within 12 months of raising the $900,000 per deal seed capital, which we hope to raise through this contest. There is no ongoing dependence on public financing. In fact, the seed capital needed to launch the transactions could be treated as loans rather than grants and could be repaid over time, but this would simply add to the costs of the programs, which ultimately would increase debt service costs for the targeted SMEs – but we mention this to point out that in this context all that public funding does is kick-start a program that then runs entirely on its own.

“N/A” is probably the right answer here. The outcomes here are “digital” rather than “analog.” If we can raise the $900,000 needed to launch each deal, two of the three pilot transactions can and will launch. If we cannot, they will not launch. In the case of Rwanda, the same is true but there is an added burden of trying to find some donor capital to invest in the bonds. In this context, we are not a multi-funded entity that would have to consider how we replace a major funder. We either raise the funding and go forward or we don’t. And we intend to raise it!

Political turnover that upsets a kind of reigning consensus view on economic development is the most threatening such factor that we can think of. Compared to a few decades ago, political turnover in many developing nations is not only occurring peacefully but even when there are significant divisions within a country, there is still consistency in a lot of fundamental views, like the value of a capitalist model, encouragement of the private sector, continuation of sound macroeconomic and fiscal policies and the like. A violent or sudden political transition, or even a peaceful one, which led to a fundamental re-examination of the precepts of free enterprise and growth of commerce on which our program is founded could provide a serious threat to the stability and sustainability of our program.

A second, similar category of risk is any number of “black swan” events, things that in the wake of the recent developed world economic and credit crisis no longer seems as remote as it might have five years ago. Massive climate change, crop failures, deadly avian flu or other epidemics – all of these of course could have very deleterious impacts on our program.

We find it interesting that the non-financial issues we can come up with are generally remote-risk events. Maybe we are not thinking properly about the kinds of risks envisioned by the question, but our answers are in fact all in the category of pretty unlikely to occur. Our program is designed to be “commercial” and self-sustaining. It needs some seed capital but after launch it will support and sustain itself.

Here we discuss scaling first, with respect to the three countries where we have mandates and next with respect to the rest of the world.

1. Within the initial three target countries, we do not intend to scale up through a particular sector. There may be some lending intermediaries specializing in a given sector (we’ve had an inquiry, for example, from a group that would like to specialize in financing renewable energy projects) and we will support such efforts, but by and large the program performance will benefit from broad sectoral diversity. One of the worst mistakes made in programs like ours is to have a government or other important player decide it wants focus on a given sector. Lenders then concentrate their energies on that sector and good money ends up chasing bad loans. A multi-sector approach avoids that kind of lending mania; moreover, it creates a diversified risk pool for our bond investors, which improves repayment likelihood overall.

Scale is wired into our program. The bond issues will be for massive amounts of money, and there is clearly a deep need for more capital, so the question will be at what rate the funds will be lent out. Our research into programs with similar structures suggests that we should be patient with our intermediaries – requiring them to get some funds lent out within a year and probably all of their funds lent out within two and half to three years. If we rush them, they will make forced and poorer credit decisions. If we don’t apply some pressure, they will likely not lend out quickly enough. But in summary, the scaling up of the programs in our first three countries will be done according to a predetermined schedule, roughly on the order of what is described above.

2. We have resisted some invitations to begin to market the program in other regions, specifically Latin America where pension funds would be especially supportive of the proposal because they are so massively overinvested in low-yielding central government bonds. But we feel an obligation to Rwanda, Nigeria and Uganda to get the programs operating there before we spend time and attention taking it elsewhere. There are 80 low and middle income nations around the world with bond markets, pension funds and a need for SME finance. We have our eyes on Latin America, Asia and Central and Eastern Europe as well as many other African nations for eventual expansion, so the real scaling up of our program will occur in 12-24 months once we have launched our bond issues in our first three targets and we turn part of our attention to the rest of the world.