How is Tanzania fairing in the sustainable bond market?

 By Grace Mponeja

In my previous article, I defined Sustainable Finance and explained how sustainable bonds are positively impacting our societies and environment. For context, sustainable bonds in the article entailed the use of proceeds bonds (green, social, and sustainability bonds), sustainability-linked bonds and transition bonds. Key question that emerged at the end of the article was, “how is Tanzania doing in this sustainable bond market?” This article will unpack the current situation in the country and its future potential to tap into this market.

In February 2022, the Capital Markets and Securities Authority (CMSA) approved issuance of the NMB Jasiri Bond – the first social bond in the country and sub-Saharan Africa targeting to advance gender equality and economic empowerment for women. The bond was oversubscribed by 197 percent, attracting capital from both local and foreign investors. This has greatly elevated Tanzania to become among the few elite markets in the world to have a gender bond issued and listed.

The country continues to make good progress in this space as the Dar es Salaam Stock Exchange (DSE), in March 2022, released guidelines for issuance, listing, and reporting of sustainable bonds making it the fourth in Africa behind Kenya, South Africa and Nigeria to have national guidelines for these bonds.

Additionally, as the government embarks on its Alternative Project Financing (APF) strategy for the national Five-Year Development Plan (FYDP) III 2021-2026, we expect to see more of these sustainable bond issuances with a prospective one being the Tanga Urban Water Supply and Sanitation Authority (Tanga Uwasa) Green Municipal Bond that is expected to be issued later this year.

Other issuances that potential issuers in the country such as banks, corporates, state-owned enterprises (SOEs), and sub-nationals may consider include:

• Green bonds: to finance projects such as renewable energy (e.g., wind and solar power plants), waste-to-energy plants, wastewater treatment, green buildings, and climate-smart agriculture such as agroforestry.

• Blue bonds: to support the country’s blue economy in aquaculture projects such as fish farming, seaweed farming, and seashore tourism.

• Social bonds: for projects such as low-cost housing, micro and SME financing, expansion of health care infrastructure, and affordable higher education student loans.

As the growth of the sustainable bond market keeps gaining momentum globally, below are some recommendations that may ensure Tanzania continues to establish a solid foothold in this space.

Capacity building

A series of stakeholders’ trainings and workshops on Sustainable Finance that cut across issuers, investors, all capital markets advisors, and regulatory bodies are crucial for the development of the sustainable bond market in Tanzania. This will not only build capacity for the market players with regards to having the technical knowledge of issuing these bonds, but also allow them to understand wider climate and social risks and opportunities, and thus integrate ESG factors into their policies and business decisions. Readiness of all stakeholders in the bond market will ultimately lead to an increase in issuances of sustainable labelled bonds.

Reduction of capital charges on sustainable assets

The central bank may consider reducing credit risk weights on eligible green and social loans that are funded by proceeds from sustainable bonds. This will incentivize more banks to issue green, social and sustainability bonds and channel their proceeds to such assets so as to improve their capital adequacy ratios while tackling social and environmental issues.

Fiscal and monetary policy incentives

Monetary policy incentives such as Statutory Minimum Reserve (SMR) rate adjustment for sustainable bonds proceeds may sensitize more bond issuances as this will mean more liquidity for the issuer (bank) to finance environmental and social projects.

Moreover, fiscal incentives such as withholding tax (WHT) exemption on sustainable bonds will stimulate more investor demand and eventually more issuances.

Dedicated listing segment for sustainable bonds

The DSE may also consider having a dedicated segment to list sustainable bonds in the exchange. This will give the bonds enhanced visibility and allow investors to easily discover and invest in instruments addressing environmental and social issues.

In conclusion, sustainable finance will keep on playing a significant role in building more carbon-neutral, climate resilient and inclusive sustainable economies; driven by demands from regulatory and industry bodies, investors, shareholders, and, of course, clients. To remain relevant as well as competitive, corporates and financial institutions need to be engaged with sustainable finance. One way is through an active participation in the debt capital markets through issuances of and investments in sustainable fixed income instruments. More education and the right policy support from regulatory authorities will continue to put Tanzania on the global map of the sustainable bond market.

Grace Mponeja is a Senior Trader, Treasury Analytics & Capital Management at NMB Bank Plc. The views aexpressed are solely her own and do not necessarily represent those of NMB Bank Plc.

Disclaimer: The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of The Citizen.