When we think of Bonds, the first thing that comes to mind is the cut-throat business of Investment Banking. Where yields reign supreme and ratings determine fates. But what if the same bond was used to serve a cause and do some good in the society?
Much like countries, companies also issue bonds to raise debt. This debt is then used to run any and all operations that the company has and is eventually paid off after a stipulated time (maturity), along with a specific annual return (yield). How much a bond is worth in the market is dependent upon the company’s or the bond issuer’s credibility, also known as their rating.
In a significant development for social and economic empowerment of women, Kashf Foundation, Pakistan’s leading non-profit, with the facilitation of InfraZamin Pakistan (IZP) has carried out the issuance of a pioneering gender-based bond. The bond is aimed at expanding Kashf’s micro-loan portfolio and promoting gender equality in Pakistan. The bond issuance, classified as a ‘Gender Bond,’ will be the first of its kind in the country and follows the guidelines prescribed by the Securities and Exchange Commission of Pakistan (SECP). Arif Habib Limited, a leading brokerage house, is acting as Financial Advisor & Arranger for the said bond.
What purpose does the Bond serve?
Talking to Profit on the subject, the CEO of IZP, Maheen Rehman says that, “Fundamentally, it is like any other commercial bond. It is issued in the market, and has an annual rate of return, which is Karachi Interbank Offered Rate (KIBOR)+1.5%”.
“What is different in this bond,” she explains, ”Is that, compared to other commercial bonds, is that we have limited the scope of the capital raised as a result, in terms of how it can be spent. The funds raised will go towards strengthening Kashf’s Balance sheet, which in turn provides micro loans to women and women led businesses.”
The issue size of the bond is set at Rs. 2.5 billion, inclusive of a Rs. 500 million green-shoe option, with a tenor of three years, including a one-year grace period. The proceeds from the bond will be utilised by Kashf to provide micro-infrastructure finance loans exclusively to women-led businesses.
It is important to note here that the loans provided by Kashf foundation to female businesses are not subsidised or discounted, rather they have a commercial component. What the foundation does is that it facilitates the factions of the society that would otherwise not have access to these markets. Being set up under the Section 42 of the Companies Act 2017, Kashf can carry out commercial activity as long as the proceeds are used to serve the same objective, rather than making their way to a profiteer.
Ms. Rehman further expounds that, “We have identified areas in which the micro lending of the money raised through this bond happens. So rather than using this money on just working capital loans, Kashf will prioritise micro-infrastructure. To women who can then use the money to rebuild their flood-affected houses, or to expand educational facilities, or businesses.”
“The target audience of these loans is women from low-income households who may be supporting their families.”, says the CEO IZP.
According to Kashf Foundation, the bond issuance is expected to have far-reaching effects on gender equality and financial inclusion in Pakistan. Additionally, the bond’s success will set a precedent for similar transactions in the future, creating a local capital market dedicated to addressing pressing social issues such as gender inequality. Furthermore, it is projected that the Kashf Foundation’s provision of approximately 30,000 new micro-loans, with each loan generating 1-2 new jobs, will lead to an estimated 30,000 to 50,000 new job opportunities for women.
What does an IZP guarantee do?
InfraZamin Pakistan’s guarantee covers 100% of the principal amount and a 1x semi-annual interest instalment, ensuring an AAA credit rating for the bond, even though the entity rating for Kashf, as per PACRA. What this means is that it increases the confidence of the investors to invest in this bond with ease. Knowing that InfraZamin will cover the exposure, the bond becomes a much more attractive option than it already was.
This guarantee not only enhances the creditworthiness of the bond but also enables Kashf to tap into a diverse pool of investors through the capital markets, fostering financial inclusion and attracting potential investors such as mutual funds and NBFCs.
“IZP is a commercial guarantee company and we work for profit. It is a completely business arrangement and we are doing this solely because we think that it makes commercial sense for us to provide this guarantee and for creditors to invest in this bond.” clarifies Ms. Rehman.
Kashf, the recipient of the bond issuance, anticipates significant benefits as well. The gender bond opens doors to a wider investor base, reducing dependency on banks and diversifying its funding sources. By leveraging InfraZamin’s guarantee, Kashf achieves an enhanced credit rating of AAA, attracting non-banking financial companies (NBFCs) such as insurance companies and pension funds.
The Catch:
The KIBOR currently stands around 22%, annual yield on this bond therefore, in the current circumstances, adds up to close to 1/4th of the investment. While that is a guaranteed win for someone seeking to buy a safe money market instrument, it raises question marks on the resultantly provided micro-loans, which as mentioned earlier, are not free of cost (fi sabilillah).
Responding to a question about the high KIBOR rate and resultantly expensive micro-loans, Ms. Rehman clarifies that, “Kashf has a Non Performing Lending (NPL) ratio of 0.5% only. They have lent to almost 6.6 million women across 27 years. They have a strong due diligence on their people and around 70% of their debtors are repeat customers. This inspires confidence in Kashf’s ability to carry out this process and recover diligently.”
She also clarifies that, “Kashf has a 30 billion rupee balance sheet, with an 8 billion in equity. 2.5 billion is less than 10% of their balance sheet, which alleviates any dangers of a high yielding bond putting the foundation in a vulnerable position.”
Talking to Profit, the vice president of Investment Banking at Arif Habib Limited Mr. Ammad Tahir stated that, “We are delighted that InfraZamin Pakistan is taking the lead in promoting private sector infrastructure projects and is acting as a Guarantor providing complete risk protection to bondholders of Kashf Foundation. This Gender Bond will not only have social impact but will also play an important role in development of debt capital markets in Pakistan”
The introduction of this groundbreaking gender bond signals a new era in Pakistan’s capital market, where social issues are addressed through innovative financial instruments. This transformative initiative sets the stage for future developments that could likely improve the public-private collaboration on development and social responsibility.
Kashf Foundation issues first “Gender Bond” to empower women-led businesses
