BRAC PCG Project Bangladesh is considered the pioneer of microfinance and has the worlds largest microfinance sector. However, despite the prevalence of close to 1,200 NGOs with microcredit services operating in more than 40,000 villages in Bangladesh, Bangladesh continues to remain one of the worlds poorest nations. Poverty is pervasive in the country with almost half the population living below the poverty line on less than $1 per day.   BRAC is one of the largest microfinance institutions in Bangladesh, covering all 64 districts and a population of a 100 million (of the total population of 140 million) through its microfinance and development programs. It was started in 1972 by Mr. Abed to rehabilitate returning refugees after the liberation War in a remote area in a northeastern district of Bangladesh. As of December 31, 2006, BRAC had cumulative microfinance loan disbursements of $3.72 billion, with outstanding loans of $349.72 million to 4.55 million borrowers.   To finance the growth of its microfinance operations, BRAC needs local currency financing from domestic banks.  Due to single client exposure limits and small size of such local banks, relative to the financing required, the local banks are not able to satisfy the funding needs of large institutions like BRAC.   To address such constraint, IFC is proposing an $18 million partial credit guarantee issued on a $22 million local currency loan extended by Citibank, Dhaka to BRAC (BRAC or the company). IFCs partial credit guarantee would provide 81.82% coverage to Citibanks local currency loan of US$22 million loan. The project would support BRACs expansion of its microfinance lending to reach out to the poor, which continues to be underserved by the financial sector in the country. The project is expected to have a significant development impact:   - Expanding Sources of Local Currency Funds:  The project will be an example of a viable way for an MFI to access local currency funding on commercial basis and reduce reliance on aid and donor funding.   - Expand Access to Finance:   The additional loan amount enabled by the IFC PCG of about US$18 million would enable BRAC to finance nearly 103,000 new loans on annual basis. Assuming such loans have an average maturity of one year, then IFCs PCG would finance nearly 515,000 loans over the life of the PCG (5 years).    - Demonstration Effect:   At the more strategic level, this project can have a strong demonstration effect by effectively showing that microfinance institutions, if well managed, can constitute very attractive investment propositions for commercially oriented investors. This, in turn, will support the emerging trend of private capital flows to microfinance institutions, an important source of capital for the long-term viability of this industry. The current guarantee structure would allow Citibank to extend local currency funds without breaching its single exposure limits.    - Significant direct contribution to poverty reduction:  Over the past two decades, leading microfinance operators have convincingly demonstrated that well-managed MFIs can make major contributions to poverty reduction and employment creation in developing countries. In recognition of this strong developmental impact, almost all multilateral and bilateral institutions and donor agencies are actively promoting microfinance, and increasingly focusing on supporting MFIs. Supporting productive small businesses will in turn stimulate growth, employment generation and poverty reduction. The proposed investment is expected to contribute to employment creation and poverty reduction in the target regions.