The Development Bank of Rwanda (BRD) is setting a remarkable precedent in the world of sustainable finance with the launch of its Sustainability-Linked Bond (SLB). As global financial markets increasingly recognize the importance of sustainability, Rwanda, through its national development bank, is emerging as a key player in aligning capital markets with the objectives of sustainable development such as encouraging environmental emphasis in partner financial institutions, increasing women-led business loans, and financing affordable housing. The success of this inaugural bond issuance gives BRD the confidence to start relying on capital markets to raise financing for its growth agenda.
What is a Sustainability-Linked Bond?
A Sustainability-Linked Bond differs from traditional green bonds or social bonds in that it is not tied to a specific project but rather to the issuer’s overall sustainability performance. The bond’s financial characteristics, such as the coupon rate, are linked to predefined sustainability targets set by the issuer.
Development Bank of Rwanda SLB: How the Bond Works
The BRD’s SLB is structured to incentivize the achievement of the Bank’s sustainability goals. The bond includes specific Key Performance Indicators (KPIs). If BRD meets or exceeds these KPIs by the agreed-upon date, the bondholders will receive a fixed coupon rate. The bond has a step-down coupon feature. Depending on the number of targets BRD meets, the coupon payments will decrease on a sliding scale between 0 and 40 basis points. This structure aligns the interests of investors with Rwanda’s long-term sustainability objectives.
The Bank has achieved a notable oversubscription of FRW 33.17 billion from its Sustainability Linked Bond (SLB), achieving a remarkable subscription rate of 110.59% through a public offer made available FRW30 billion (USD 24.9 million) in its inaugural bond which is the first tranche of the bank’s FRW150 billion Medium Term Note (MTN) program.
This bond offer, which was launched on the 29th of September 2023 for a period of two weeks, with a minimum subscription threshold of FRW100,000 which comes with a seven-year maturity period at an annual coupon rate of 12.85%. The bulk of the bond subscriptions were made by banks and pension scheme funds, accounting for 64% of the issuance, with retail and other institutional investors covering the remaining portion.
The three key performance indicators (KPIs) underpinning the SLB structure included (i) Increasing the percentage of BRD’s Participating Financial Institutions (PFIs) implementing environmental and social management standards (ESMS) from 0 to 75%, (ii) increasing the share of loans to women-led SMEs from 15 to 30% of the bank’s SME portfolio, and (iii) financing 13,000 affordable housing units by 2028.
The SLB is partially secured by the World Bank’s lending operation to the Government of Rwanda through the Access to Finance for Economic Recovery and Resilience Project (AFIRR). The World Bank structured and funded the SLB through an innovative credit enhancement mechanism, which helped to mobilize private capital while freeing up IDA resources for other projects.
The bond also has a partial credit enhancement mechanism, which reduces credit risk. It also helped in minimising borrowing costs and supported lower on-lending interest rates from BRD. BRD reports that the combined impact of the credit enhancement mechanism, the reinvestment yield, and the coupon step-down meant that the institution could provide end borrowers with new lending at a rate that was half of what it would have been for a plain vanilla issuance.
BRD funded an escrow account ($10 million for the initial issuance) set up at the National Bank of Rwanda, to be used as collateral in the event of a default and invested into Government of Rwanda bonds. This collateralisation was financed by the World Bank’s International Development Association.
Development Bank of Rwanda SLB Impact: Driving Sustainable Development in Rwanda
The issuance of this bond is expected to have a profound impact on Rwanda’s economy and its ability to meet its sustainability targets. The proceeds from the bond will be channeled into projects that contribute to climate mitigation, adaptation, and social inclusion. These projects could range from expanding access to clean energy in rural areas to supporting small and medium-sized enterprises (SMEs) that are vital for job creation and economic diversification.
Furthermore, the SLB will enhance BRD’s reputation as a leader in sustainable finance, potentially attracting more international investors to Rwanda’s capital markets. This could pave the way for future issuances of similar instruments by other Rwandan entities, further integrating sustainability into the country’s financial ecosystem.
The Challenges: Navigating the Path to Success
While the BRD’s SLB is a groundbreaking initiative, it is not without challenges. The success of the bond will depend on the bank’s ability to accurately measure and report on its sustainability performance. This requires robust data collection, monitoring, and verification processes, as well as transparency in communication with investors. Additionally, the bank must ensure that the selected KPIs are both ambitious and achievable, striking the right balance between driving positive impact and maintaining financial viability.
Development Bank of Rwanda SLB: Rwanda as a Model for Sustainable Finance
The Development Bank of Rwanda’s Sustainability-Linked Bond is more than just a financial instrument; it is a testament to the country’s commitment to sustainable development. As Rwanda continues to position itself as a hub for innovation in finance and development, this bond could serve as a model for other emerging markets looking to align their financial strategies with global sustainability goals.
In conclusion, the BRD’s SLB is a bold step forward in the journey toward a sustainable future. By linking financial performance to sustainability outcomes, Rwanda is demonstrating that it is possible to attract capital while driving meaningful change. As the world watches, the success of this bond could inspire similar initiatives across Africa and beyond, contributing to a more sustainable and inclusive global economy.
Newswire:
The Development Bank of Rwanda inaugural bond oversubscribed
