Fresh Ideas about Business in Emerging Markets Note 2 | April 2016 CASE STUDY: BAYPORT FINANCIAL SERVICES How Can Businesses Tap Local Capital Markets to Expand? Bond markets, though still underdeveloped in Africa, are beginning to emerge as a realistic financing option for private companies looking to invest or expand their operations on the continent. Multilateral development banks can play a critical role in that process by issuing bonds in local currencies and providing risk guarantees and anchor investments to companies looking to issue their own bonds. Less than one quarter of adults in Sub-Saharan Africa had an account at Capital markets are a traditional source of funds for an expansion of a formal financial institution in 2012, compared with about half of bank lending, yet debt and equity markets are underdeveloped and adults worldwide, according to IFC research. The absence of a financial illiquid in many African countries—if they exist at all. Domestic debt infrastructure that enables secure and efficient saving and money markets are typically dominated by government securities in Africa, and transfers, as well as access to credit and insurance, bars many Africans Zambia is no exception: As of 2014, there hadn’t been a Zambian from making productive investments in their families and businesses. kwacha (ZMW) corporate bond issuance in five years. Access to financial services and credit is slightly greater in Zambia, Cooperation with multilateral development banks enabled Bayport to where the banking sector is better developed than many African nations. end that dry spell and tap capital markets for the funds it needed to Still, a large portion of the Zambian populace, especially in rural areas, expand lending. IFC first developed a constructive dialogue with remains unbanked and vulnerable to unscrupulous or unregulated loan Zambian capital market regulators through a Zambezi bond issuance in activities, according to KPMG. Even in countries with fairly developed 2013. The development bank then used its extensive experience with financial sectors, services are often directed toward established capital markets transactions—both in Zambia and more broadly—to businesses and higher income households. And small firms are help Bayport plan an issuance that could be appropriately structured and particularly underserved: Only 16.4 percent in Sub-Saharan Africa have launched in a timely manner. a bank loan or line of credit, compared with 29.5 percent in developing countries across the globe. In Zambia it is only 5.2 percent. CATALYTIC INVESTMENTS IFC and African Local Currency Bond Fund, a unit of the German Bayport Financial Services Ltd., Zambia’s largest microfinance lender government owned development finance institution KfW, also made and its market leader in payroll based lending, wanted to expand funding commitments: IFC committed to purchase 35 percent of the lending to low and middle income borrowers and small businesses, Bayport issue as an anchor investment and ALCB Fund promised to unlocking the credit market for ordinary Zambian citizens while tapping buy 13 percent. Those investments were catalytic, enhancing the a large new customer base. issuer’s profile and creating a comfort level for other investors, and attracted pension funds and insurance companies to the transaction. Investor interest in the issue was robust enough that Bayport increased Of course Bayport’s successful bond issuance needs to be viewed in the offering by ZMW 21 million, from the initial 150 million planned. context. The firm possessed a strong business model and a sound loan In the end, the company was able to issue its first medium-term note, portfolio and its cofounders were experienced executives with a wealth raising ZMW 172 million, or about $26.5 million. Not only did the of domestic experience and relationships in banking, government, and issue break a long dry spell for the market, it was the largest corporate information technology. They had worked closely with IFC prior to bond issuance in Zambian history. founding Bayport. Additionally, IFC’s Zambezi experience provided valuable insights and relationships that helped Bayport navigate the Bayport used the proceeds to expand credit access to many more low issuance process. and middle-income workers as well as small businesses, which will lead to investments in new business ventures, small scale agriculture, These factors highlight the level of risk-aversion toward shallow, education and home improvement. Those investments in turn will underdeveloped capital markets and the strong credentials that are generate economic growth and new sources of profits for other private required—and can be provided by development banks—to succeed in enterprises. such settings.  In addition to expanding Bayport’s lending base, raising its profit potential, and encouraging the firm’s efforts to strengthen responsible Lin Shi, Strategy Analyst (Lshi1@ifc.org), Office of the Chief finance practices, the Bayport bond project helped deepen Zambia’s Economist – Thought Leadership. domestic capital market, a critical ingredient to financing the country’s economy. It also had a positive impact on the private sector by establishing strong financial practices and demonstrating the possibilities for tapping capital markets to fund new business ventures in Africa. Bayport’s example is expected to spur other enterprises in the region to issue bonds to broaden their investor base and lower their funding costs.