Micro and Small Enterprise Financing Facility

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					Report and Recommendation of the President
to the Board of Directors

Project Number: 40932
September 2007

Proposed Loans and Guarantees
REG: Micro- and Small Enterprise Financing Facility

In accordance with ADB’s public communications policy (PCP, 2005), this abbreviated version of the
RRP excludes confidential information and ADB’s assessment of project or transaction risk as well as
other information referred to in paragraph 126 of the PCP.

       ADB              Asian Development Bank
       ALCO             asset liability committee
       AMD              Armenian dram
       BIS              Bank for International Settlements
       CBA              Central Bank of Armenia
       CEO              chief executive officer
       CEPC             Credit Enhancement and Pricing Committee
       CGAP         –    Consultative Group to Assist the Poor
       DMC              developing member country
       EBRD             European Bank for Reconstruction and Development
       EMS              environmental management system
       GAF              German-Armenian Fund
       GDP              gross domestic product
       IFC              International Finance Corporation
       IFI          –    international financial institution
       MDS              Microfinance Development Strategy
       MFI              microfinance institution
       NBFI             nonbank financial institution
       NBT              National Bank of Tajikistan
       NPL              nonperforming loan
       PCG              partial credit guarantee
       RMU              Risk Management Unit
       ROA              return on assets
       ROE              return on equity
       TMSEF            Tajik Micro and Small Enterprise Facility


                    In this report, “$” refers to US dollars.

Vice President     L. Jin, Operations Group 1
Director General   R. Bestani, Private Sector Operations Department (PSOD)
Director           W. Willms, Capital Markets and Financial Sectors Division, PSOD

Team leader        H. Ahmed, Senior Investment Specialist, PSOD
Team member        J. Klein, Investment Specialist, PSOD
                   A. Mohammed, Counsel, Office of the General Counsel


LOAN AND GUARANTEE SUMMARY                                                              i
I.     THE PROPOSAL                                                                    1
II.    BACKGROUND AND RATIONALE                                                        1
       A.   Background                                                                 1
       B.   Complementary ADB Initiatives and Consistency with the Country Strategy
            and Program                                                                4
       C.   Development Objectives                                                     5
       D.   Value Added by ADB                                                         6
       E.   Measuring Development Effectiveness                                        6
III.   THE PROJECT                                                                     7
       A.   Project Overview                                                           7
       B.   Loans                                                                      7
       C.   Credit Guarantees                                                          7
       D.   Transaction Processing                                                     7
IV.    THE BENEFICIARIES                                                               8
       A.   Bank Eskhata                                                               8
       B.   Inecobank                                                                  9
V.     ADB POLICIES, RISK FACTORS, AND EXPOSURE LIMITS                                 9
       A.   Social and Environmental Safeguard Policies                                9
       B.   Anticorruption Policy; Combating Money Laundering and
            the Financing of Terrorism                                                 9
V.     ASSURANCES                                                                     10
VII.   RECOMMENDATION                                                                 10


       1.    Design and Monitoring Framework                                          11
                                            I.       THE PROPOSAL

1.       I submit for your approval the following report and recommendation for proposed loans
and guarantees (the MFI Facility), in the aggregate not exceeding $20 million, to microfinance
institutions (MFIs) and small-business banks in Asian Development Bank (ADB) developing
member countries (DMCs). This approval includes provision of loans to Bank Eskhata and
Inecobank, with pricing to be determined based on the procedures applicable to ADB’s private
sector operations and such other terms and conditions as are substantially in accordance with
those set forth in this report, and as may be reported to the Board.

                                 II.      BACKGROUND AND RATIONALE

A.        Background

2.     Defining Micro and Small Enterprise Finance. Micro- and small enterprise finance
consists of a broad range of funding modalities and options. According to the Consultative
Group to Assist the Poor (CGAP), 1 an MFI is an organization that provides financial services to
a clientele poorer and more vulnerable than traditional bank clients; within this definition,
however, the diversity of organizations is immense. Ownership structures of MFIs include
government-owned institutions such as (i) the rural credit cooperatives in the People’s Republic
of China; (ii) member-owned organizations like the credit unions in West Africa; (iii) institutions
owned by socially minded shareholders, such as the many transformed nongovernment
organizations in Latin America; and (iv) institutions owned by profit-maximizing shareholders,
such as the microfinance banks in Eastern Europe.

3.       The focus of MFIs also varies; while the focus of some institutions is the provision of
financial services exclusively to the poor, others offer a wide range of financial services for
multiple markets. Some MFIs focus narrowly on traditional microcredit (i.e., microloans without
collateral, delivered through a range of group-based and individual methodologies) while other
MFIs offer a range of services including savings, insurance, and remittances. 2 Within this same
field of microfinance fall MFIs like the Grameen Bank, which serves poor women with tiny loans,
and the ProCredit banks, with a commercial approach to providing micro- and small businesses
with loans of thousands of dollars.

4.      When one expands the spectrum to encompass not only microfinancing but also small-
enterprise financing, the field of funding organizations grows larger still. Even the definition of a
small enterprise is open to debate, and most countries establish their own definitions. The
European Bank for Reconstruction and Development (EBRD), for example, defines microloans
offered through its small and medium enterprise facility for the European Union as loans of up to
a maximum of €30,000 (approximately $40,000), and a small loan as between €30,000 and
€125,000 (approximately $170,000). In their micro- and small-enterprise lending programs, a
microloan is a loan of up to $10,000 and a small loan can go up to $200,000. Sub-borrowers are
in turn defined in terms of size, either by number of employees, value of assets, or the
company’s turnover. The European Union small and medium enterprise definition delineates

    The CGAP is a consortium of 33 public and private development agencies (including ADB as a consortium member
    and donor) that work together to expand access to financial services for the poor in developing countries. CGAP
    was created by these agencies to help create permanent financial services for the poor on a large scale. CGAP is a
    resource center for the microfinance industry, where it incubates and supports new ideas, innovative products,
    cutting-edge technology, novel mechanisms for delivering financial services, and concrete solutions to the
    challenges of expanding microfinance. Available:

microenterprises as companies with up to nine employees, and small enterprises as having
10–49 employees. 3 The institutions that provide small-enterprise financing (which one can refer
to as small-business banks) are as varied in legal structure, mission, and lending methodology
as their microfinancing peers.

5.       Need for Funding in the Micro- and Small Enterprise Financing Sector. This
profusion of types of MFIs and small-business banks, however, has two things in common. The
first is, simply, a commitment to financing micro- and small enterprises, however those are
defined in any given country. The second is an often endemic difficulty in accessing financing
from commercial lenders. Equity funds investing in microfinance and small-business banks are
increasingly appearing on the landscape of micro- and small enterprise financing, and this is a
welcome development. However, although infusions of equity are beneficial for MFIs, CGAP
states that MFIs often already have high levels of equity capital relative to debt, and therefore
have greater interest in increasing liabilities rather than in raising new equity.

6.       Although this is the case for both MFIs and small-business banks, MFIs are often
particularly challenged in this regard. Unlike small banks, MFIs are often purely lending
institutions and either do not take deposits or do not take them until rather late in their
institutional lives, thus making access to debt financing crucial to growth. (Some MFIs, including
those registered as nongovernment organizations, do not have legal authorization to mobilize
deposits and as such are compelled to rely solely on debt financing to fund expansion.)

7.      The result of these issues in accessing debt financing is demonstrated by the fact that,
although most countries allow such institutions to maintain debt-equity ratios of 8x, 10x, or
higher, most regulated MFIs have lower (often much lower) levels of leverage.

8.      The MFIs seeking loans and partial credit guarantees (PCGs) through the MFI Facility
are, for the most part, highly constrained in this regard. This includes (as will be discussed
further) Bank Eskhata and Inecobank.

9.     Commercial Lenders Reluctant to Provide Debt Financing to MFIs and Small-
Business Banks. Commercial lenders are reluctant to provide loans to MFIs and small-
business banks for a variety of reasons. The following reasons apply to MFIs.

         (i)     Many institutions lack operational and accounting transparency, which are key to
                 encouraging large, sophisticated institutions to seriously consider lending.

         (ii)    Lenders often perceive risks—political, macroeconomic, contract, collateral,
                 supervision, management, competition, and currency—to be high in environments
                 (such as various frontier economies) where MFIs and small-business banks
                 operate, and foreign sources of capital may not be inclined to expend the money
                 and effort to discern the security of lending.

         (iii)   Existing laws and regulations can make it difficult for MFIs to borrow or transform
                 into other legal forms that can borrow more easily.

     Available: Micro, Small and Medium-Sized Enterprises
    Strategy, as approved by the EBRD Board of Directors at its meeting on 7 February 2006.

          (iv)    Certain donor practices work against enhancing the creditworthiness of MFIs,
                  making it harder for them to secure commercial financing. 4

10.    Small-business banks face a similar, although not identical, set of constraints to those
faced by MFIs in attracting debt in the form of loans from commercial lenders.

          (i)     Although frequently more transparent from the standpoint of operations and
                  transparency than MFIs, small-business banks are often equipped with
                  substandard information technology and management information systems, which
                  have difficulty producing the sophistication of reporting on issues like portfolio-at-
                  risk and liquidity management, which would give confidence to foreign investors.

          (ii)    Perceived risks are still substantial in many frontier countries, even when the
                  institution in question is a small bank rather than an MFI.

          (iii)   In many countries, particularly the more frontier DMCs, there is effectively no
                  interbank lending market, and banks (especially those operating in very small
                  banking systems) view one another as competitors rather than as reciprocal
                  providers of liquidity.

11.     ADB to Help Address the Debt Financing Gap to MFIs. Given this need for, and
constraint to, debt financing of MFIs and small-business banks, ADB has developed the concept
of a loan facility that will be flexible enough to serve multiple MFIs and small-business banks
with the relatively small amounts of debt that they require. This facility structure thus diversifies
risks across a sizeable portfolio of institutions and countries (described further below), to be
selected based on strict due-diligence criteria. Financing will be provided in the form of both
loans and PCGs, and may be extended in both hard and local currencies, based on the
requirements of the specific institution.

12.      Eligibility for ADB Financing. As noted above, there is a large field of possible
candidate MFIs and small-business banks that ADB could finance. The MFI Facility will be open
to working with the full range of MFIs and small-business banks described above. All candidate
institutions, however, must meet certain eligibility criteria, including the following: (i) they must
be commercial organizations that will use the ADB funding to expand their lending to micro- and
small enterprises; (ii) they must face a genuine constraint in accessing term loans from
commercial sources; (iii) they must work with recognized auditors; (iv) their shareholding
structures must be clear; (v) they must have, or be working to develop, acceptable risk-
management systems and other operational structures; and (vi) ideally they should have
investors or creditors that include international finance institutions (IFIs) that demand certain
levels of transparency and information disclosure (although this may not always be possible).
Point (ii), above, is of particular importance; international financial institutions (IFIs), including
ADB’s peers, have been cited repeatedly for their inclination to lend only to the latest and most
successful microfinance and small-business banking MFIs, while avoiding the needier next
generation. This creates market distortions as IFIs undercut commercial lenders, crowding them
out of the market. To avoid this, the MFI Facility will seek to provide loans to “next-generation”
MFIs and small-business banks that have not yet attracted significant commercial funding. 5
    For further information, see "Access to All: Building Inclusive Financial Systems" (CGAP, 2006), which states:
    “…IFIs, with their low-cost public money, should move away from the same regulated MFIs they have funded over
    the past several years and encourage them to develop their own links to domestic capital markets. This means
    focusing more on the next generation of strong institutions, offering seed capital and support for the development

B.        Complementary ADB Initiatives and Consistency with the Country Strategy and

13.     ADB has supported microfinance and micro- and small-enterprise initiatives for almost
two decades. Between 1988 and 1999, ADB approved 14 microfinance-specific projects, 13
projects with microfinance components, and 45 technical assistance projects (total operations of
about $380 million). In 2000, recognizing that the industry landscape has changed over the
years, ADB formulated and approved the Microfinance Development Strategy (MDS), which
provides a consistent and comprehensive framework and guides ADB’s microfinance
operations. 6

14.     The MDS aims to ensure permanent access to institutional financial services for a
majority of poor and low-income households and their microenterprises. The purpose is to
support the development of sustainable microfinance systems that can provide diverse, high-
quality services. The strategy focuses on (i) creating a policy environment conducive to
microfinance, (ii) developing financial infrastructure, (iii) building viable institutions, (iv)
supporting pro-poor innovations, and (v) supporting social intermediation. Indeed, the MDS
states that ADB will catalyze expanding the supply of microfinance by focusing on building
financial systems that can grow and provide financial services on a permanent basis to an
increasing proportion of the poor. The MDS encourages ADB to, among other things, support
development of viable MFIs that can set in motion a process of commercialization of
microfinance services. 7

15.     After the MDS strategy was adopted, ADB’s assistance shifted from providing support
for particular microcredit projects to building financial systems for the poor. From 2000 to 2004,
10 microfinance loan projects and 16 projects with microfinance components (total operations of
about $482 million) were funded. In 2004, ADB also made an equity investment in ShoreCap
International of $2.5 million. This was ADB’s first intervention in commercial microfinance, i.e., a
microfinance project offering financing in the absence of a sovereign guarantee.

    or transformation of this new crop of stars.” (Helms, Brigit. 2006. Access to All: Building Inclusive Financial
    Systems.    Washington,      DC:    Consultative   Group    to  Assist   the    Poor.                Available:
    As quoted in Role Reversal (MicroRate, 2007): "IFIs are concentrating their loans in the strongest MFIs, leaving
   private lenders to look for opportunities among smaller, riskier borrowers. Development institutions are “crowding”
   private lenders out of the best MFIs. IFIs publicly claim to take risks the private sector is unwilling to take. One
   would therefore have expected government-owned development institutions to shift their lending to more risky MFIs
   as soon as private lenders entered the field. The opposite is happening. Development agencies are today heavily
   concentrating their funding in the largest and most successful MFIs, exactly the target investment market of private
   investors. A MicroRate-commissioned study of funding patterns confirmed that IFIs are not complementing private
   lenders, they are crowding them out of the most attractive parts of the MFI market. IFIs nearly doubled (88%
   increase) their direct funding to top-rated MFIs in 2005. In the largest and most successful MFIs, IFIs are the
   dominant and growing foreign funding source. MIX data on over 160 MFIs confirm this trend. A number of the
   largest MFIs in the MIX database have received all of their foreign loans from IFIs. In some cases, private lenders
   wanted to provide funding to a MFI, but were unable to do so because they were unable to match terms offered by
   IFIs." (Abrams, Julie, and Damian von Stauffenberg. 2007. Role Reversal: Are Public Development Institutions
   Crowding     Out     Private    Investment    in   Microfinance?     Washington,     DC:    MicroRate.     Available: MIX data from
   ADB. 2004. Special Theme: The Changing Face of the Microfinance Industry – Building Financial Systems for the
   Poor. Annual Report 2004, Manila (pages 17–18).
  ADB. 2000. Finance for the Poor: Microfinance Development Strategy. Manila (pages 25–26).

16.     Developed over nearly 20 years, ADB's total ongoing microfinance portfolio as of 31 May
2007 was $2.1 billion. This amount includes $446 million of loans from ADB's concessional
window of funds and $1.6 billion from its commercial window. The portfolio also includes an
equity investment of $2.5 million, a grant of $16.0 million under the Asian Tsunami Fund, and a
$8.5 million grant from the Japan Fund for Poverty Reduction and Japan Fund for Information
and Communication Technology.

17.      As has been described, a clear theme of ADB’s microfinance strategy is a focus on
building viable institutions. The proposed MFI Facility is fully in line with this strategy; viable
institutions require multiple forms of financing, and in particular require commercial financing, to
ensure their long-term sustainability. The intervention builds on the precedent set by the
ShoreCap International equity investment by facilitating ADB’s direct interventions in
microfinance institutions in a more scalable manner. Importantly, this represents the first time
that ADB will lend directly to MFIs, as opposed to working through government agencies, apex
institutions, or funds managed by third parties (as was previously the case).

C.     Development Objectives

18.    ADB’s funding of the MFI Facility will promote development at several levels.

19.      Direct Support to MFIs. The MFI Facility’s loans will immediately allow the recipient
MFIs and small-business banks to scale up and expand their microloan portfolios, increasing
their ability to make more loans and provide more services in their communities. The MFI
Facility will also seek to provide institutions with longer tenor of funding, thus helping to address
asset and liability mismatches. Additionally, financial support from a well-regarded institution
such as ADB would help to increase depositor confidence in the selected recipient institutions
and in these relatively young banking markets overall.

20.    Support to MFI Borrowers. The loans from ADB to the MFIs and small banks will in
turn be used to lend to micro- and small-business owners, thereby granting access to loans for
more of these clients in the various countries. The loans are frequently used to expand the
operations of the micro- and small businesses, translating directly into job creation, often at the
lower end of the skill spectrum.

21.    Poverty Reduction. The combination of more small companies doing more business
and employing more people will contribute to rising incomes, higher gross domestic product
(GDP) rates, and ultimately, it is hoped, a lower incidence of poverty in the countries where
these MFIs and small-business banks operate. The loans will also help very small businesses to
grow and at some point enter the formal economy, thus beginning to pay taxes that the
governments can direct towards social services and infrastructure requirements.

22.     Assistance with Market Development. Increased financial resources will help the MFIs
and small-business banks to expand their operations, thus extending the reach of the
commercial microlending sector as a whole. Additionally, the capacity of the MFIs to repay their
loans on time and at appropriate commercial interest rates will signal to commercial lenders that
lending to MFIs is not only not as risky as they perceive, but is also profitable. This should
attract more lenders into the market and should begin to counter the reluctance of commercial
lenders to lend, as described in para. 9, thus encouraging them to begin lending.

D.        Value Added by ADB

23.      Catalytic and Demonstration Effect. Given the reluctance of lending institutions to
provide loans to MFIs, by its intervention ADB will demonstrate the capacity of MFIs to repay
loans in a timely fashion at commercial interest rates. This will serve to catalyze other lenders
(e.g., commercial banks) into the market of lending to MFIs. In general, the MFIs are unable to
source loans from local banks, and ADB’s added value comes in the form both of providing
direct financing to the institutions themselves, and also by providing PCGs that in effect link the
MFIs to the indigenous financial system.

24.    Better Matching of Assets and Liabilities. One key issue constraining the growth of
MFIs is frequently that of mismatches. In terms of tenor, for example, it is frequently difficult for
MFIs and small banks to attract long-term loans, and they thus end up in a situation where the
loans they provide are longer in tenor than the loans they receive, resulting in a mismatch of
shorter-term assets and longer-term liabilities. ADB’s ability to provide financing for longer
tenors allows the MFI to avoid this problem and to properly match assets and liabilities. ADB
may also seek to structure a local currency PCG in which ADB absorbs part or all of the foreign
exchange risk, which would also allow the institutions to better match assets and liabilities with
regard to currency; this component of the MFI Facility, however, is yet to be developed.

25.       Private-Sector Development. ADB’s establishment of this MFI Facility will make a
direct contribution to private sector development through encouraging such mechanisms as (i)
enhanced disclosure and accounting standards at MFIs, (ii) better matches of assets and
liabilities (as described above) at individual institutions, and (iii) an increased share of private-
sector financial institutions in the total assets of the financial sector. The MFI Facility will in this
manner help ADB’s DMCs to implement their respective country-specific private sector
development strategies.

E.        Measuring Development Effectiveness

26.      A design and monitoring framework has been developed (see Appendix 1). The MFIs
will be required to collect and periodically submit information that will facilitate this analysis, both
during project implementation and as part of a project completion report. Participating MFIs will
be required to submit their annual reports and audited financial statements, as well as summary
information regarding the subloans funded from ADB loans. 8

    Additionally, many of the MFI Facility’s loan recipients are registered on the MixMarket (, the
    global information exchange for the microfinance industry, which strives to facilitate exchange and investments
    flows, promote transparency, and improve reporting standards in the microfinance industry. For each of the MFIs
    registered on the website, the MixMarket collects information on the following: (i) number of personnel, (ii) number
    of active borrowers, (iii) average loan balance per borrower, (iv) percentage of loans below $300, (v) percentage of
    women borrowers, (vi) average loan balance per borrower divided by gross national income per capita, (vii) number
    of savers, (viii) average savings balance per saver, (ix) average savings balance per saver divided by gross
    national income per capita, (x) percentage of clients below the poverty line, (xi) percentage of clients in the bottom
    half of the population below the poverty line, (xii) clients in households earning less than $1 per day per household
    member, and (xiii) clients starting microenterprises for the first time. The MixMarket collects this information on a
    yearly basis, and the data will be of benefit to ADB in its efforts to collect information (both through continuous
    monitoring and at project completion stage) that substantiates development impact.

                                     III.    THE PROJECT

A.     Project Overview

27.    ADB proposes to provide loans and guarantees (MFI Facility), in the aggregate not
exceeding $20 million, to microfinance institutions and banks in ADB DMCs, including loans to
Bank Eskhata and Inecobank. Loans and guarantees under the MFI Facility may be provided by
ADB during a period of 3 years from the date of the approval of the MFI Facility by the Board of

B.     Loans

28.      A direct loan from ADB to an MFI or small-business bank would be appropriate for
institutions that desire longer-tenored foreign currency funding than that available in local
markets. In countries such as Armenia and Tajikistan, large fractions of the respective bank’s
loan portfolios are in US dollars, thus currency mismatch will not be a significant issue for these

29.    Loans to the beneficiaries will range in tenor between 3 and 7 years, and will be
denominated in US dollars in amounts of between $1 million and $5 million. The majority of the
loans will be in the 3–5 year range. Maturities of longer than 5 years will be considered only for
banks with well-established track records, which are building a longer-dated portfolio.

30.    Loan interest will be determined in accordance with ADB’s lending facility based on the
London interbank offered rate. Loan pricing and other terms will be benchmarked against, and
consistent with, observed market rates.

C.     Credit Guarantees

31.    In certain countries, where there is a need for long-term, local-currency funding, ADB will
seek to work with a local commercial bank that will provide local-currency financing to the MFI
or small-business bank, with the support of a PCG from ADB.

32.      This would be appropriate for MFIs that desire local-currency financing, and are unable
to secure this from local commercial lenders because of the small size of their capital base and
their lack of sufficient traditional collateral.

33.    ADB’s guarantee would be denominated either in US dollars or in local currency,
depending upon the circumstances of a particular transaction. On a case-by-case basis it will be
determined whether the transaction would be a dollar or a local-currency PCG, depending upon
the sharing of foreign exchange risks.

34.    Pricing for the PCG will be market-based.

D.     Transaction Processing

35.      Constructing the Portfolio. ADB will construct a portfolio of MFIs that meet certain
criteria, including (i) the need for financing and an inability to access sufficient financing from
commercial sources; (ii) dedication to, and competence in, microlending; and (iii) commercial
considerations as mentioned above (including using recognized auditors, having transparent
shareholder structures, and developing adequate risk management processes). In allocating the

MFI Facility, ADB will construct a portfolio of 6–10 institutions, each of which will receive
between $1 million and $5 million in financing. Risk will thus be spread across multiple
institutions in multiple countries, creating a highly diversified portfolio of MFIs and small-
business banks.

36.      Processing and Procedures. Each institution to be funded through the MFI Facility will
undergo the same process for assessment and approval of a loan or PCG. This process has
been followed for the two loans being approved in this report, and the process will be followed
for allocating the remainder of the MFI Facility. The process is as follows.

           (i)      Identify candidate institutions
           (ii)     Due diligence
           (iii)    Project proposal
           (iv)     Risk Management Unit assessment
           (v)      Loan or PCG pricing
           (vi)     Loan or PCG documentation and disbursal

37.     Geographical Diversification. The first two institutions to be served under the MFI
Facility will be located in Armenia and Tajikistan. The People’s Republic of China, India,
Kazakhstan, Malaysia, and Viet Nam are not considered as eligible for the MFI Facility due to (i)
ADB’s large private-sector presence in the financial sector in those countries, and (ii) the degree
of development of the financial sectors in those countries. Afghanistan is not considered eligible
for the MFI Facility due to the high degree of risk associated with the country. Further loans will
be contemplated to MFIs and small-business banks in ADB’s other DMCs.

38.     Selection Criteria and Portfolio Parameters. No more than 30% of the MFI Facility ($6
million) will be lent to institutions in any given country. No more than 20% ($4 million) will be lent
to any specific MFI.

                                          IV.      THE BENEFICIARIES

A.         Bank Eskhata

39.     ADB proposes to make a loan of $1.5 million to Bank Eskhata, denominated in US
dollars, at a rate to be determined in accordance with the market. Bank            Eskhata      was
incorporated as an open joint-stock company in Tajikistan in 1993, and was reregistered as an
open joint-stock company in 2002. Today it has a 6.6% market share by equity and a 3.5%
share by assets. 9 The bank is headquartered in Khujand, operates a network of 8 branches, 20
money transfer centers, and 3 ATMs, and employs 553 staff. Bank Eskhata’s primary business
consists of commercial activities, credit and debit cards, foreign currencies, and originating
loans and guarantees. The bank offers different types of corporate and consumer loans in
addition to account management, sight and term deposits, and trade-finance facilities. Bank
Eskhata’s vision is to become the leading bank of the Sogd region, providing diversified banking
services to retail and corporate clients, while best serving the interests of its shareholders.

    Although the National Bank of Tajikistan (NBT) does not disclose bank rankings, Bank Eskhata estimates that it is
    ranked approximately fourth or fifth by assets, deposits, and loans, with higher shares in the north of the country.

B.         Inecobank

40.      ADB proposes to make a loan of $3 million to Inecobank, denominated in US dollars, at
a rate to be determined in accordance with the market. Inecobank was established as a closed
joint-stock company in Armenia in 1996. Today, of the 21 banks currently operating in Armenia,
Inecobank is established as a medium-sized commercial bank, ranked 10th by total assets
(4.1% of the market), 10th by loan portfolio (4.0% of the market), and 11th by deposits (3.27%
of the market). Inecobank is headquartered in Yerevan, operates four branches throughout the
country, and has 244 employees. Inecobank offers a full range of interest- and noninterest-
related banking services, including different types of corporate and consumer loans in addition
to account management, sight and term deposits, debit and credit cards, and trade finance
facilities (letters of guarantees and of credit) (all offered in Armenian dram [AMD] and US dollars)
to both corporate and retail customers. Inecobank excels in automated consumer lending and
has readily adopted cash-flow microlending methodology.


A.         Social and Environmental Safeguard Policies

41.    Loans and guarantees the MFI Facility makes will be classified category FIs (financial
intermediaries) under ADB’s Environment Policy (2002). On a transaction-by-transaction basis,
ADB will determine whether a particular loan or PCG extended through the MFI Facility is likely
to result in environmental impacts, and will design an environmental management system as

42.    ADB’s loans and PCGs extended through the MFI Facility will be classified category C
under ADB’s Involuntary Resettlement Policy (1995) and no involuntary settlements are
foreseen in relation to any of the loans or PCGs extended.

43.    ADB’s loans and PCGs extended through the MFI Facility will be classified category C
under ADB’s Policy on Indigenous Peoples (1998) and no loans or PCGs extended are
expected to have any impact on indigenous peoples.

B.     Anticorruption Policy; Combating Money Laundering and the Financing of

44.     The borrowers were advised of ADB’s Anticorruption Policy (1998, as amended to date)
and policy relating to the Combating of Money Laundering and the Financing of Terrorism
(2003). 10 Consistent with its commitment to good governance, accountability, and transparency,
ADB will require each borrower to institute, maintain, and comply with internal procedures and
controls following international best practice standards for the purpose of preventing corruption
or money laundering activities or the financing of terrorism and covenant with ADB to refrain
from engaging in such activities. The loan and PCG documentation between ADB and the
borrowers will further allow ADB to investigate any violation or potential violation of these

     ADB. 2003. Manual on Countering Money Laundering and the Financing of Terrorism. Manila.

                                    V.     ASSURANCES

45.     Following the approval of the proposed MFI Facility by ADB’s Board of Directors, ADB
will enter into suitable loan documentation, PCG agreements, and other relevant legal
documents, and shall ensure that such documentation and other principal agreements relating
to each transaction shall be on terms and conditions acceptable to ADB and shall incorporate all
relevant ADB policies. No-objection letters will be obtained in each DMC as a condition to ADB
financing under the MFI Facility.

                                 VII.    RECOMMENDATION

46.    I am satisfied that the proposed loans and guarantees would comply with the Articles of
Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the
loans and guarantees to Bank Eskhata (Tajikistan) and Inecobank (Armenia), in an aggregate
amount not exceeding $20,000,000, for the Micro- and Small Enterprise Financing Facility from
ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s
London interbank offered rate-based lending facility, and such other terms and conditions as are
substantially in accordance with those set forth in this report, and as may be reported to the

                                                                  Haruhiko Kuroda

September 2007
                                                                                         Appendix 1     11

                             DESIGN AND MONITORING FRAMEWORK

Design                       Performance            Data Sources/Reporting            Assumptions
Summary                    Targets/Indicators            Mechanisms                    and Risks
Impact                                                                           Assumptions
                         • Income per capita        • DMCs’ central bank
The growth of micro-       rises by 10% over 5        statistics                 •   Increased access to
and small enterprises      years                                                     finance from banks will
contributes to rising    • GDP increases by                                          lead to more micro- and
incomes, higher GDPs,      10% over 2 years                                          small businesses
and a lower incidence    • Poverty (% of people                                      receiving loans and
of poverty in ADB’s        living on less than $2                                    expanding their role in
DMCs.                      per day) declines by                                      the economy
                           10% over 5 years                                      •   Stable or increased
                                                                                     economic development
                                                                                     in DMCs

Outcome                                                                          Assumptions
                         • Number of micro and      •   MFIs’ quarterly and
MFIs provide increased     small borrowers              annual financial         •   Demand exists for micro-
sustainable access to      increases at each            statements                   and small-business
finance for micro- and     MFI and small-           •   Reporting specifically       loans
small businesses in        business bank (by            requested by ADB         •   MFIs do not breach
ADB’s DMCs.                10% in next 24                                            domestic prudential or
                           months)                                                   central bank norms
                         • Credit quality is high                                •   No adverse economic
                           at the MFIs, with                                         developments in relevant
                           NPL level of less                                         DMC economies
                           than 5%                                               •   No regulatory changes
                         • Net incomes at the                                        for banking or
                           MFIs rise by 10%                                          microfinance industry
                           per year for the next                                 •   No other external factors
                           3 years                                                   have a negative impact
                         • MFIs’ CAR remains                                         on banking or
                           above central bank                                        microfinance
                           norms                                                     development

Outputs                                                                          Assumptions
                         • Within the               • MFIs’ quarterly and
1. MFIs use loan           timeframes specified       annual financial           • Prevailing market
proceeds                   in this report, the        statements                   conditions are stable
                           MFIs have received       • Reporting specifically     • All regulatory approvals in
                           their loan proceeds        requested by ADB             place for ADB
                         • Loan requests
                           received by the MFIs
                           increase by 10% per
                           annum from current
    12 Appendix 1

 Activities with Milestones                                                               Inputs

 1.1 Provide MFIs with loans (throughout 2007 and 2008).                                  •   ADB: $20 million
     • ADB and MFIs enter into loan agreements

 1.2 Utilization of loan proceeds by MFIs (ongoing).
     • Origination of (new) client opportunities
     • Due diligence on clients
     • Completion of loan agreements with clients
     • Disbursement of loans to clients

ADB = Asian Development Bank, CAR = capital adequacy ratio, DMC = developing member country, GDP = gross domestic
product, MFIs = microfinance institutions (used here to refer to microfinance institutions and small-business banks), NPL =
nonperforming loan.

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