The Bangladesh Rural Advancement Committee, known as BRAC, has announced plans to issue a Tk 700 crore (USD 90 million) zero coupon tax free bond, with which it will loan money to small and tenant farmers in the Bangladeshi countryside. BRAC plan to issue the bond, known as the ‘BRAC Bond for Agricultural Funding,’ in either December 2007 or January 2008, with Citibank, N.A. Bangladesh acting as lead arranger.
BRAC was founded as a non-profit, non-governmental organisation (NGO) in 1972, working mainly as a relief agency. It supports various education, health and legal and human rights programmes as well as microlending. According to the MixMarket, as at 31.12.06, it had total assets of USD 394 million, a debt / equity ratio of 238% and a return on assets of 6.9%.
Zero coupon bonds are bonds that do not pay interest during their lifetime. Instead, investors buy zero coupon bonds at a deep discount from their face value, which is the amount a bond will be worth when it matures. On maturity, the investor will receive one lump sum equal to the initial investment plus interest that has accrued. The implicit interest on the BRAC bond is expected to be around 12%.
In addition, the BRAC bond investors will also receive the lump sum on maturity tax-free, as the Bangladesh government has made zero coupon bonds tax-free in an effort to encourage the use of bond financing. BRAC is targeting the bond at commercial banks, insurance companies and other financial institutions, though it is also considering a public offering if successful, with the possibility of raising the limit of the bond to Tk 1000 crore (USD 140 million).
The fund has been raised in response to changes in the Bangladeshi agricultural sector, as many middle and large-scale landowners shift their profession from farm activities to non-farm activities by letting their land to barga (tenant) farmers. Banks are often unable to lend to barga farmers due to their lack of collateral, and because the banks themselves have not established networks covering the rural countryside.
Amy Rennison, MicroCapital writer
Additional Sources
Daily Star:
http://www.thedailystar.net/story.php?nid=5510
Microfinance Gateway:
http://www.microfinancegateway.org/content/article/detail/43643
Symbiotics:
http://www.symbiotics.ch/en/latest_news.asp?id=b655
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