Bangladesh: Brac set to launch Tk 700cr farm bond

Sep 2007
Bangladesh, September, 26 2007 - Brac, one of the country's leading micro-finance institutions, is planning to launch a Tk 700 crore agricultural bond in an effort to increase much needed financing to the agricultural sector.

The agricultural bond, the first ever of its kind in Bangladesh, could be issued by the end of December or early in January next year. If successfully received by investors the amount may be increased to Tk 1000 crore.

It will also be the country's first 'zero coupon' bond, a financial instrument that pays no direct interest but is sold at a heavy discount to its face value. The government has made such bonds tax free in an effort to encourage the use of bond financing.

Citibank, N.A. Bangladesh will be the lead arranger of the bond. Local commercial banks and insurance companies have already responded positively to joining the bond financing.

Although there is strong demand for credit in the agricultural sector, commercial banks have struggled to extend their networks to small farmers. Only last week the central bank criticized commercial banks for lending less than 10 per cent of the targeted amount to agriculture in the first two months of this fiscal year.

The devastating floods of recent months have added fresh demand as farmers try and reconstruct their livelihoods.

Brac with its extensive microcredit network has much better access to the market, however it needs to find new ways to raise funds as it faces regulatory limitations in some of its existing sources.

The advantage of a 'no coupon' bond is that it allows Brac to raise money at a more competitive rate as investors will not have to pay tax on their returns.

The main target of the bond will be commercial banks, insurance companies other financial institutions. However Brac is also considering a public offering. The implicit interest rate is expected to be about 12 per cent.

Dr Mahbub Hossain, executive director of Brac said: "As the government and private commercial banking networks are inadequate to fully provide agricultural loans, and as the demand for agricultural loans is rising day by day Brac is considering fulfilling the demand by issuing the bond and disbursing the funds through its micro financing network."

Other structural changes in the sector had also created new demands. "We recently found that middle and large scale land owners are shifting their profession from farm activities to non farm activities by letting their land to barga farmers (tenant farmers). This creates a crisis in agri-financing across the country as banks are unable to lend to barga farmers due to their lack of collateral. This vacuum of financing can be filled by the proposed Brac Bond," Mahbub Hossain said. Mamun Rashid, Citibank, N.A Bangladesh Country Officer said they were working with an MFI and the regulators on such an initiative. "We are in discussion with the regulators to clarify certain important aspects of the transaction, however the primary response from the possible investors such as banks, non banks and insurance companies have been very encouraging and therefore the ultimate funds raised may be higher," he said.

S.N Kairy, Director Finance, said Brac would request of the government to keep the investment exempt from tax in the capital market.

"It may woo general investors to buy the bond in the capital market and to become interested customers for such kinds of innovative securities," Kairy added.

"Brac lending is at a comparatively low rate, 12.5 percent, therefore the interest rate of the bond cannot be beyond this. So it can be estimated that the cost of rate would be 12 percent."

"With the bond named as Brac Bond for agricultural funding, some of the people of the affluent class of the society may be interested to procure the bond from their social commitment," Kairy said.

Brac is currently managing its entire micro finance program through locally generated fund worth about Tk 4260 crore last year and the amount would rise to Tk 6500 crore this year.

Out of the total micro financing Brac disbursed around Tk 975 crore for agricultural purposes this year.

Source : The Daily Star

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