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Faulu Kenya Issues KES 500 Million (US$7 Million) Bond to Assist Poor People: A Journey to the Capital Markets

Guest post by: United Nations Capital Development Fund

Article Overview: Over the last 20 years, microfinance institutions in Kenya have largely developed through concerted grant funding. This situation prevailed up to the late 1990s when key donors started pushing MFIs to start moving towards sustainability in their operations.

Faulu Kenya Issues KES 500 Million (US$7 Million) Bond to Assist Poor People: A Journey to the Capital Markets

By Gerald Macharia, Chief Executive Officer, Faulu Kenya Limited

Background

Over the last 20 years, microfinance institutions in Kenya have largely developed through concerted grant funding. This situation prevailed up to the late 1990s when key donors started pushing MFIs to start moving towards sustainability in their operations. Most MFIs in Kenya had started off as NGOs and had built significant supply side competencies. The push towards sustainability was therefore not going to be easy for institutions previously focused on free spending outreach drives, rather than sustainable operations. It was also difficult for those that had significantly grown and expanded operations on grant funding to suddenly have to look for alternative sources of capital as donor funds either dwindled or became inadequate to sustain the growth momentum.

During this period, many MFIs seized the moment and incorporated as private capital companies. Others, like K-Rep, chose the route to formal commercial banking with a multiplicity of ownership. By early 2000, the landscape for microfinance was changing, and changing for good. What eventually became clear was that donors were willing to provide funding for capacity building but not capital for lending purposes. This new shift heralded the beginning of an almost desperate search for capital from various sources, a case applicable to all MFIs.

The Faulu Kenya Story
Faulu Kenya initially started off in 1992 as a pilot micro-lending programme of Food for the Hungry International (FHI), an international NGO engaged in relief and development throughout the world. This pilot programme was expanded and upscaled in 1995 with significant funding from USAID and DFID and by 1998 had registered significant growth. FHI, not being a microfinance-oriented NGO sought to free Faulu Kenya and have it operate at arms length. Therefore, in 1999, Faulu Kenya Limited was incorporated as a private capital share company owned by FHI. It has operated profitably since its incorporation.


This allowed Faulu Kenya to start sourcing commercial funding towards its portfolio growth with an initial subsidized loan of US$145,000 from a local European Union supported programme in 2000. This was followed by another US$500,000 from the same programme in 2001, and two commercial banks provided credit lines worth US$4 million in 2002, leveraged against existing assets with some backing from one international guarantee. IN 2003, this was supplemented by an 18-month hard currency term loan from Blue Orchard's Dexia Micro finance Fund, amounting to US$450,000. This particular loan was a tentative step towards balance sheet based borrowing as it was based on a promissory note issued on the strength of Faulu Kenya's balance sheet.

These borrowing experiences spread over a four year period formed the learning curve for the institution to take a bold step towards leveraging its balance sheet for longer term borrowing at attractive pricing levels.

The Road to the Bond Issue
In late 2002, Faulu Kenya's Board made a landmark decision to shift portfolio funding from short term to long term capital in order to stabilize cash flows and match maturities.


After formal exploratory work, the Board made the decision to go directly to the capital markets with a five year bond supported by Agence Française de Dévéloppement (AfD), which offered to guarantee the bond up to 75%. A technical team was put together, led by Stanbic Bank Kenya Limited and its parent, the Standard Bank of South Africa to arrange a five year bond of Kenya Shillings 500 million (US$7 million). Commenting on this transaction, Philip Odera, Stanbic Bank Kenya's Managing Director, said: "This transaction is one of the most important ever undertaken by any bank in Africa. It addresses one of the major challenges facing Africa: how to direct credit at affordable pricing to enterprising people whom, up till now have been starved of credit. It is in line with both the United Nations Millennium Development Goal to halve global poverty by 2015, and with the Kenya Government's Poverty Reduction Strategy".

The team started work in September 2004 and the issue reached the market in March 2005. By March 31, the issue was oversubscribed by 111%. The entire Kenya Shillings 500 million was placed by April 4, and the secondary trading market opened on April 11 at the Nairobi Stock Exchange. A number of Pension Funds, two MFI wholesale institutions and two commercial banks were the main primary investors. The issue is now closed and trading will commence on the secondary market for the next five years of the tenor of the issue.

For Faulu Kenya, these funds will go towards expanding operations beyond the 35 districts that it currently works in Kenya and comes in at an advantageous pricing level. It also creates an opportunity for Faulu Kenya to seek more capital with an established track record.

Lessons for MFIs from this First Issue

This being a first issue for an MFI in Africa, it heralds the beginning of a relationship between the formal capital markets and the fight against poverty, towards achievement of the Millennium Development Goal of eliminating extreme poverty and hunger. Through such initiatives, High street capital can participate in microfinance without engaging in it directly.

It is now a proven fact that international development institutions can link up with local capital markets to leverage local and international resources to create access to capital for MFIs that under normal circumstances might not have this access. It is also an opportunity for international institutions to engage in high level capital leveraging without having to deal directly with MFIs.

This creates an opportunity and avenue for local capital to broaden its opportunities at market level returns and at the same time to actively deploy capital into the microenterprise sector, which is the base of economic development, especially in Africa.
Donors, who have been scratching their heads as to how to help MFIs leverage local resources, now have a classic example to draw from.

MFIs can now have a goal to work towards, in improving their structures in order to meet the rigors of a capital markets regulator, which in turn drastically improves MFI performance and compliance.

The complicated area of hard currency loans from western funds, which more often than not have to be buffered against exchange losses, can now become a thing of the past, as a bond like this one is carried out purely on a local currency basis.

For Faulu Kenya, this begins a five-year period under public scrutiny. It calls for unswerving commitment to making a good and viable business, adhering to strict capital markets reporting compliance, sustaining the profitability path and ensuring that both interest and capital commitments are met on a timely basis every quarter.

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Article Tags: 1990s, capacity building, capital share, chief executive officer, desperate search, dfid, donor funds, donors, faulu kenya, fhi, growth momentum, international ngo, multiplicity, ngos, outreach, private capital, share company, sustainability, sustainable operations, usaid



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