This is the first tranche of a $500 million multitranche financing facility (MFF) to the Damu Entrepreneurship Development Fund (Damu), guaranteed by the Republic of Kazakhstan, for the Small and Medium Enterprise Investment Program. The MFF is proposed to help Damu--through participating financial institutions (PFIs)--address the unmet demand for longer-term, fixed-rate, local currency denominated credit by small and medium-sized enterprises (SMEs), and thereby address a key constraint to the development of SMEs.
The first tranche amounts to the local currency equivalent of $150 million.
|Project Rationale and Linkage to Country/Regional Strategy
Because of the poor health of the banking sector, it is difficult for ADB to provide traditional nonsovereign credit line and guarantee operations to support SMEs in Kazakhstan. ADB, however, remains committed to providing such support. For example, ADB's 2009 Countercyclical Support Program helped the government to fund post-crisis SME credit support operations. At the request of the government, ADB looked at a number of options to provide continued support over the medium term through its sovereign operations. The government requested flexibility in lending products as the health of the finance sector improves, and asked that these products help to mitigate currency, interest, and tenor mismatch issues. Damu also requested assistance in improving its efficiency and effectiveness to enable it to raise external financing over the longer term.
In response, ADB developed the investment program, which is consistent with ADB's overall strategy for Kazakhstan and reflects lessons learned. The investment program is designed as an MFF, under which a series of local currency loans and other financing products will be provided over the medium term. The MFF enables flexibility as it will allow ADB to provide different forms of support (direct loans or guarantees) to Damu to help it fund its lending to PFIs. The MFF also enables ADB to enter into a multiyear partnership with Damu (and possible cofinancing partners) while creating stability and credibility at the level of the financing plan. To reflect lessons learned, the investment program envisions a series of medium-term, fixed-rate, local currency loans to Damu that will be used to fund back-to-back subloans to PFIs for onlending to SMEs. By providing such loans, ADB will directly address currency, interest rate, and tenor mismatch risks. Experience has shown that these financial risks have been a significant cause of stress for SMEs and their banks.
For the tranche 1 loan, ADB raised local currency through cross-currency swaps with international bank counterparties. ADB has been able to leverage its relationships with international banks and utilize its AAA rating to extend the tenor and lower the pricing of cross-currency swaps. For subsequent tranches, ADB will work with MOE and Damu on the issuance of local currency bonds (LCBs) by ADB or, with an ADB guarantee, by Damu. Issuance of LCBs will help develop the local capital market by providing local investors with the opportunity to diversify their investment portfolios; introduce international best practice standards; help develop a local corporate bond yield curve and establish pricing benchmarks for other issuers; and advance the process of mobilizing and channeling domestic savings into longer-term investments.