Nigeria - Development Bank of Nigeria PLC DBN - Project Summary Note

African development bank group nigeria development bank of nigeria plc dbn project summary note november 2014 p-ng-haa-004 project summary - development bank of nigeria plc dbn use of funds provision by the african development bank group afdb group of long -term financing, in a combination of sovereign loans to the federal republic of nigeria frn and equity into the development bank of nigeria plc dbn. the funds from the afdb group will support the dbn to engage in wholesale lending to participating financial institu tions pfis which will in turn on lend the borrowed funds to micro, small and medium -sized enterprises msmes and small and medium -sized corporates operating in various sectors of the nigerian economy 80 of the afdb group funding is earmarked for m smes though. the dbn is being established by the federal government of nigeria fgn in close partnership with international dfis, notably the afdb group and the world bank. development bank of nigeria recognizing the limitations of the existing dfis, the frn has decided to establish a new development finance institution dfi, which will be better regulated and more clearly aligned with development priorities. to ensure sustainable impact and scale, t he mandate, governance and operations of the dbn will be grounded in internationally recognized good practice principles. in fact, the structure and operational design of the dbn have been informed by global experience and the design of successful dfis fro m across the globe including brazil's banco nacional de desenvolvimento economico e social bndes and germany's kreditanstalt fur widerafbau kfw and have taken into account all the factors that led to the underperformance of the existing dfis in nig eria. financing plan the liabilities of the dbn are expected to initially comprise usd 250 million in equity contribution from the frn and the afdb usd 200 million from the frn and usd 50 million from the afdb and eventually around usd 1 billion of loans sourced from the federal ministry of finance fmof through loans provided by the world bank, the afdb group and other international institutional investors. equity will be provided by the frn via the fmof and it is envisaged that the afdb will contribute usd 50 million. it is envisaged that funds for on -lending will be provided through the f mof in parallel by the world bank and the afdb group in the amount of usd 500 and usd 450 million, respectively. other institutions that have expressed preliminary interest in supporting the dbn with debt finance include kfw usd 200 million and agence fr ancaise de developpement afd usd 130 million. the frn has initiated the process of soliciting potential international institutional investors to augment investment in the dbn in the medium term. the financing from the different mdbs the world bank, the afdb group, kfw and afd will be provided in parallel via separate but complementary projects and through a coordinated approach, but without co -mingling of funds.bank's role the role of the afdb is to provide long -term financing in a combination of sovereign loans and equity for a total amount of usd 500 million. in addition to providing financing, the afdb group, in close collaboration with the other development partners, suc h as the world bank, is already assisting the frn with the design of the dbn particularly its corporate governance structure. cognizant that governance failures contributed to thwarting the effectiveness of the existing dfis, the various stakeholders, incl uding the afdb, are fully committed to establishing a robust governance structure for the dbn. implementation arrangements the loan and equity agreements will explicitly govern the use of the funds from the afdb group to ensure that the funds are deployed for their designated purpose according to the project design as well as reflect the disbursement triggers, the reporting requirements and environmental and social compliance, among othe rs. market msmes are critical to the development of the nigerian economy as they possess great potential for employment generation, output diversification, development of indigenous entrepreneurship and forward integration with large -scale industries. msmes in nigeri a cover the entire range of economic activity; nevertheless, there has been gross underperformance of these enterprises and this has undermined their contribution to economic growth. the key issues affecting them can be grouped into the following: low acce ss to funding and credit, low market access, poor information flow, discriminatory legislation, poor access to land, weak linkage among different segments of the operations in the sector, weak operating capacities in terms of skills as well as a lack of in frastructure. among these issues, the shortage of finance, particularly investment finance, occupies a very central position. it is estimated that less than 10 of nigerian msmes had a loan or line of credit in 2011 and bank financing of working capital an d fixed assets was estimated to fill respectively only 3 and 2 of outstanding needs which are estimated at almost usd 114.8 billion. therefore, through the proposed dbn, the afdb will contribute to mobilizing long-term financing to an underserved sector with high development potential. justifications for the bank's involvement: strategic alignment the project aligns with the renewed strategy of the frn to revitalize the economy by developing its msme sector. it also aligns with the afdb's country assistance strategy to support private sector led growth in nigeria and the establishment of the dbn. furthermore, it is consistent with the afdb's strategy to support msmes through sound and reputable financial intermediaries. finally, it aligns with the afdb's new inclusive growth priority by supporting msmes operating in critical sectors of the nigerian economy.ivit will, at the end of this investment period, have the option to exit from the dbn through at the afdb's discretion either i the dbn's buy -back of the afdb's shares at a pre -determined fixed price acceptable to the afdb and backed by a sovereign guaran tee from the frn meaning that the latter would buy the afdb's shares in the event that the dbn cannot do so or ii the sale of its shares to interested third parties. additionally, if the dbn, at some point in time, undertakes an initial public offering ipo of its shares, the afdb will be able participate in the ipo and sell all or part of its shares. with regard to the dbn buy -back option, the pre -determined fixed price is currently under discussion and the buy -back option will require the approval of the dbn's board of directors while the frn sovereign guarantee of the dbn's buyback option will be subject to terms of a guarantee agreement between the afdb and the frn. development outcomes the proposed intervention will contribute to mobilizing significant financial resources for banks and non -bank financial intermediaries, ultimately increasing msmes' access to finance, increasing their productive capacity in the country and stimulating growth in various sectors of the economy. this will increase economic output, improve the country's competitiveness, generate government and export revenues and create employment opportunities. the proposed intervention will also underpin national poverty reduction efforts as well as facilitate national development. additionality and complementarity the afdb's financial additionality lies in the provision of risk capital equity which will contribute to enhancing the financial capacity of an institution whose aim will be to mobilize long -term financing to an underserved sector with high development p otential. additionality also stems from the role that it has played in the design of the dbn particularly its corporate governance structure to ensure that the dbn is insulated from political interference and capture despite being majority government -owned . furthermore, the participation of the afdb in the equity of the dbn will act as a catalyst for attracting other equity investors, particularly other multilateral and bilateral international financial institutions, so cial and development impact investors, pension funds and eventually private sector investors, as it would provide a degree of political and governance risk mitigation in line with the definition of political risk mitigation in paragraph 3.3.4. of t he 2008 adoa framework. the participation of o ther investors would in turn contribute to the diversification of the dbn's shareholding and thus strengthen its governance further. finally, the proposed intervention complements the efforts of frn to establish the dbn and to support msmes and small and m edium -sized corporates in nigeria.v

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