responsAbility has issued its second financial inclusion bond in partnership with the International Development Finance Corporation aimed at improving access to financial services for individuals and MSMEs in developing markets.
Zurich-based responsAbility has announced the issue of its second financial inclusion bond in partnership with the U.S. International Development Finance Corporation (DFC), who acted as a catalytic investor in the bond for an undisclosed sum.
The $123.5m (€113.7m) bond, which has been fully placed with additional commitments made by private investors, is aimed at individuals and micro, small and medium enterprises (MSMEs) in developing markets who currently lack access to traditional banking services. The bond invests primarily in Eastern Europe (50%) and Asia (30%) with a smaller exposure to Latin America (16%) and sub-Saharan Africa (4%).
Richard Rogers, head of marketing and communications for responsAbility, told Impact Investor the bond provided private credit to microfinance institutions, SME banks and SME leasing companies and had already allocated the full capital to 30 qualified financial institutions.
“The financing offered by the bond is aimed at addressing the problem low-income households and SMEs face in accessing much needed financial capital to build sustainable livelihoods. The bond therefore specifically targets financial institutions which demonstrate a track-record of working with such target groups,” he said.
responsAbility has been originating and managing financial inclusion assets for over two decades, Rogers added.
“Access to this impact issue has mostly been provided to investors in the form of investment funds. However, some types of investors might prefer capital market solutions, such as bonds,” he said.
In 2019, responsAbility launched its first financial inclusion bond raising $175m, which it used to finance financial institutions that the company said had supported over 30,000 small businesses and provided access to financing for more than 5.6 million microcredit borrowers, with women making up over 80% of the borrowers.
Blended finance approach
The bond offers investors a choice of senior, mezzanine and junior debt with the DFC supporting the bond in the senior tranche. Rogers said the DFC’s support had been key to catalysing risk capital from private sector investors and that blended finance more generally was key to closing the financing gap to achieve the UN’s Sustainable Development Goals.
“We are successfully partnering with development finance institutions that leverage public money, allowing us to collectively mobilise private sector capital to achieve the SDGs. This approach is essential for scaling impactful initiatives,” he added.
Measuring impact
He said the bond would measure and report impact by looking at a range of key performance indicators, including the number of end-borrowers reached, the share of female borrowers and borrowers in rural areas, the average loan size and a breakdown of lending towards microenterprises and SMEs.
“In addition, data will be gathered relating to the characteristics of the financial institutions, including the share of female employees and female management,” he said.
“Finally, all investments will be thoroughly screened and monitored to ensure that ESG risks are minimised. This will include looking at the financial institutions’ business practices and their own operations,” he added.
MSMEs in India
One of the lenders to receive financing from the bond is Kinara Capital, a non-bank lender in India which Rogers said had supported thousands of small business owners with financing for the purchase of machinery and working capital.
“Kinara is unique in a financing market that is characterised by collateral-backed lending. Kinara’s specialised underwriting capabilities have enabled it to extend financing access to borrowers who would otherwise be excluded from traditional financing sources because of their limited capacity to offer collateral,” explained Rogers, adding that Kinara had also developed a specialised programme to increase the share of collateral-free loans to women-owned MSMEs, and offered an average loan size of less than $10,000.
The bond’s portfolio companies received on average amount per loan of $4m.
