Document of The World Bank FOR OFFICIAL USE ONLY Report No: xxxxx-xx PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF US$ 4 MILLION FROM THE MIDDLE EAST AND NORTH AFRICA TRANSITION FUND TO THE ARAB REPUBLIC OF EGYPT FOR THE INCLUSIVE REGULATIONS FOR MICROFINANCE PROJECT May 17, 2022 Finance and Private Sector Development Group Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its
Transcript
Document ofThe World Bank
FOR OFFICIAL USE ONLY
Report No: xxxxx-xx
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED GRANTIN THE AMOUNT OF US$ 4 MILLION
FROM THE MIDDLE EAST AND NORTH AFRICA TRANSITION FUND
TO THE ARAB REPUBLIC OF EGYPT
FOR THE
INCLUSIVE REGULATIONS FOR MICROFINANCE PROJECT
May 6, 2023
Finance and Private Sector Development GroupMiddle East and North Africa RegionThis document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
THE ARAB REPUBLIC OF EGYPT
Currency and EquivalentUnit of Currency = Egyptian Pound (LE)
US$1 = LE 6.96 (As of February 12, 2014)
Fiscal YearJuly1st – June 30th
ABBREVIATIONS AND ACRONYMS
ABA Alexandria Businessmen Association IMF International Monetary FundAfDB African Development Bank ISDS Integrated Safeguard Data Sheet
AFESD Arab Fund for Economic and Social Development ISN Interim Strategy Note
BDS Business Development Services IT Information Technology
CAS Country Assistance Strategy JICA Japan International Cooperation AgencyCBE Central Bank of Egypt M&E Monitoring and Evaluation
CGAP Consultative Group to Assist the Poor MENA Middle East and North Africa
CPI Consumer Price Index MFI Microfinance Institutions
DA Designated Account MSEs Micro and Small Enterprises
DANIDA Danish International Development Agency MSMEs Micro, Small & Medium EnterprisesDFATD Department of Foreign Affairs, Trade, and Development NBFI Non-Bank Financial Institutions
DFID Department for International Development NGOs Non-Governmental Organizations
DPL Development Policy Loan NIF Neighborhood Investment Facility
EBI Egyptian Banking Institute OM Operational Manual
EBRD European Bank for Reconstruction and Development ORAF Operational Risk Assessment FrameworkEFSA Egyptian Financial Supervisory Authority PDO Project Development Objective
EIB European Investment Bank PIU Project Implementation Unit
ESMF Environmental and Social Management Framework PMU Project Management Unit
EU European Union PP Procurement Plan
FDI Foreign Direct Investment SECO The Swiss Secretariat of Economic AffairsFM Financial Management SFD Social Fund for Development
FMS Financial Management Specialist TA Technical Assistance
FS Financial Specialist TF Trust Fund
FY Fiscal Year USAID United States Agency for International Development
GDP Gross Domestic Product VC Venture Capital GIZ Gesellschaft für Internationale Zusammenarbeit GoE Government of Egypt
IBRD International Bank for Reconstruction and Development
Sector Director: Loic ChiquierSector Manager: Simon C. Bell
Task Team Leader: Sahar Nasr
THE ARAB REPUBLIC OF EGYPTINCLUSIVE REGULATIONS FOR MICROFINANCE PROJECT
TABLE OF CONTENTSPage
I. STRATEGIC CONTEXT........................................................................................................1A. Country Context....................................................................................................................2B. Sectoral and Institutional Context.........................................................................................3C. Alignment with Transition Fund Objective..........................................................................7D. Higher Level Objectives to which the Project Contributes...................................................7
II. PROJECT DEVELOPMENT OBJECTIVES......................................................................9A. Project Development Objectives...........................................................................................9B. Project Beneficiaries.............................................................................................................9C. PDO Level Results Indicators...............................................................................................9
III. PROJECT DESCRIPTION..................................................................................................9A Project Components...............................................................................................................9B. Project Cost and Financing.................................................................................................12C. Analytical Underpinnings and Lessons Learned and Reflected in the Project Design ......13D. Links with other Related World Bank Group and Development Partners'Activities.........14E. Collaboration with Other Partners.......................................................................................16F. Stakeholders' Consultation..................................................................................................16
IV. IMPLEMENTATION.........................................................................................................17A. Institutional and Implementation Arrangements.................................................................17B. Sustainability ......................................................................................................................18
V. KEY RISKS AND MITIGATION MEASURES................................................................18A. Risk Rating Summary.........................................................................................................18B. Overall Risk Rating Explanation.........................................................................................19
VI. APPRAISAL SUMMARY..................................................................................................19A. Economic and Financial Analyses......................................................................................19B. Technical Analysis..............................................................................................................20C. Financial Management........................................................................................................20D. Procurement........................................................................................................................21E. Social and Enviroment Safeguards......................................................................................22
1. With the third anniversary of the January 25th revolution, Egypt continues to undergo major political, economic and social transformations. A grassroots campaign led by the Tamarrod youth movement started to collect citizens' signatures in May 2013 to force President Mohamed Morsi to call for early elections. The campaign culminated in massive demonstrations on June 30, 2013, with calls for the President to step down. In the wake of these demonstrations, President Morsi was ousted and a new transition period was ushered in.
2. A new Cabinet was appointed in July 9, 2013, yet after several labor strikes that took place early in 2014, the government unexpectedly announced its resignation in February 2014. A new interim Cabinet was sworn in on March 1, 2014, headed by Ibrahim Mehleb, who was perceived as the “most active” minister in the previous government. The security situation since June 30, 2013 has been volatile, due to sporadic confrontations between security forces and supporters of the banned Muslim Brotherhood and its allies. A new Constitution has been put in place, as per a referendum conducted in mid-January 2014 with almost 39 percent turnout. Other transition milestones are expected soon with the Presidential elections scheduled in April 2014 to be followed by parliamentary elections towards the summer.
3. The Egyptian economy has been in a deteriorating tailspin since the January 25 th
revolution. Real GDP growth reached 2.1 percent in June 2013, which is a slight decline from the previous year’s growth of 2.2 percent. The first quarter of 2014 has also seen modest growth of one percent, due to the heightened political unrest. Real growth is expected to average around 2.7 percent to 2.9 percent for the whole fiscal year, provided that the government swiftly implements its two fiscal stimulus packages which amount jointly to a US$ 8.5 billion. The fiscal deficit has surged to 13.7 percent of GDP in June 2013, which increased from the previous year’s deficit of 10.6 percent in June 2012. The deficit declined during the first half of FY14 (June 2013–December 2013) to 4.4 percent of GDP in December 2013 compared to 5.2 percent of GDP during the same period last year. After decreasing sharply in 2012, inflation reached 11.7 percent in December 2013. This was mainly due to the weaker currency (which depreciated by around 15 percent during the first half of 2013) and food inflation that rose 12-15 percent during the first half of FY14.
4. Overall economic and political instability has adversely affected investment and the growth of the private sector. Domestic investment fell to 14.2 percent of GDP while foreign direct investment (FDI) has dropped to 1.1 percent of GDP in June 2013. The business environment and the security situation have also discouraged the establishment of new enterprises. Smaller enterprises were disproportionally affected by the deteriorating business climate and the security situation. Sluggish growth, the fiscal deficit, and the drop in investment have had a negative effect on the creation and growth of such enterprises.
5. The widening fiscal deficit has also led to the crowding out of private sector credit. Banks have opted for purchasing less risky, high-yield Government bonds and Treasury bills that represent 41 percent of the banking system assets, accounting for 58 percent of GDP, leaving very little loanable funds available. Claims on the government-to-total domestic credit has risen to reach 66 percent, while claims on private business sector credit dropped to 25 percent in January 2014, as opposed to 54 percent and 42 percent in June 2012, respectively (Figure 1).
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Figure 1: Credit to Government and Private Sector-to-Total Credit
Jan-
06
Sep-
06
May
-07
Jan-
08
Sep-
08
May
-09
Jan-
10
Sep-
10
May
-11
Jan-
12
Sep-
12
May
-13
Jan-
14
20%
30%
40%
50%
60%
70%Government Private Sector
Source: Central Bank of Egypt (2013).
6. All this has contributed to an increase in unemployment and poverty rates. Unemployment is on the rise, reaching 13.4 percent in Q4 2013, up from 8.9 percent in Q4 2010. Unemployment is especially striking among women and youth (aged 20-24 years old) where unemployment rates were 25 percent and 39 percent, respectively. The poverty rate also increased to 26.3 percent in June 2013 up from 25 percent in June 2011 and 21.6 percent in June 2009. Rural Upper Egypt continues to be the most vulnerable region with a poverty rate of 50 percent in June 2013. Not only has economic growth been well below its potential, it has failed to create sufficient job opportunities. Moreover, growth has not been inclusive, creating grievances and unrest among many segments of society.
7. Besides the anemic macroeconomic environment, governance and transparency remain pressing issues. Egypt is deteriorating in almost all governance indicators. According to the World Bank Worldwide Governance Indicators, government effectiveness, regulatory quality, and rule of law rankings have all declined in the past two years. Weak governance, privileged lending, lack of a level playing field, weak regulatory framework and unequal access to markets have contributed to limited economic opportunities, an underdeveloped private sector, and have ultimately hindered job creation. Strengthening governance will be crucial to support the transition and enhance the credibility of public institutions. Giving equal access to markets, and opportunities is essential for restoring citizens` confidence. It is critical to move towards a fairer and more competitive economy that utilizes market mechanisms to create economic opportunity and productive jobs.
8. In that context, the government announced an ambitious program that primarily targets sustainable growth and social equity, with an emphasis on the development and support of smaller enterprises. Included in a ten-pillar program announced on July 17, 2013 is the development of micro, small and medium enterprises (MSMEs) to create jobs, particularly for women and youth. This focus on MSMEs was made in response to the demand for for an inclusive system that promotes shared prosperity.
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Figure 2: Percentage of Enterprises with Bank Loans
Source: Nasr (2013).
B. Sectoral and Institutional Context
9. Limited access to finance is one of the main obstacles facing Egyptian entrepreneurs. Egypt’s rank in the 2014 Doing Business Report for ‘Getting Credit’ deteriorated from 82nd in 2013 to 86th in 2014. In Egypt micro and small enterprises (MSEs) account for more than 98 percent of enterprises, generate more than 85 percent of employment in the non-agriculture private sector, and 40 percent of total employment.
10. Microenterprises suffer disproportionately from low financial intermediation and are offered limited financial products. Only 11.1 percent of micro enterprises have bank loans, as opposed to 38.2 percent for large enterprises (Figure 2). On the supply side, banks are reluctant to lend to micro enterprises, especially young and new ones, due to the perceived associated risk. Furthermore, banks continue to lend based on collateral as opposed to cash-flow, narrowing the opportunities for these enterprises that often do not have sufficient collateral. Banks in Egypt effectively serve privileged large well established enterprises.
11. Access to financial services amongst micro businesses and households in Egypt is very low. According to Findex data, only 10 percent of adults have an account at a formal financial institution (Figure 3), and fewer than four percent of Egyptian adults took a loan from a financial institution in the past year. By way of comparison, on average 18 percent of adults in the Middle East and North Africa (MENA) region and 24 percent of adults in lower middle income countries have accounts at formal financial institutions. Only two percent of the working age population are active microcredit borrowers. In Egypt, financial intermediation is very low for micro enterprises.
12. Microenterprises are clustered in low productivity sectors in Egypt (Figure 4). More than half of micro enterprises (56 percent) are small trade businesses (retailers) and workshops. Manufacturing represents only 14 percent of micro enterprises. Low access to finance and the absence of a robust ecosystem to develop small firms is behind the concentration of these enterprises in low productivity sectors. Most of the microenterprises provide their products and services to local markets, and very few expand to national and international markets.
13. Most microenterprises are informal in Egypt, implying they do not often have a business license or tax card. Their employees generally lack health and social insurance. Some microenterprises keep regular books and claim
Figure 3: Account at a Formal Institution
Source: Global Findex (2012).
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to present them to the tax authority. However, most microenterprises do not comply with the necessary requirements for formal businesses, particularly with respect to business registration and payment of taxes. Costly and cumbersome procedures, as well as a lack of incentive to comply cause microenterprises to operate in a “grey zone” between formality and informality.
14. Gender disparities are also prevalent, with women facing more challenges in accessing finance than men. Traditions, in some cases, give women little control over their own assets, and in many cases they are unable to use them as collateral, being under the guardianship of a male member of the family. Amongst Egyptian women, only 2.7 percent report taking a loan from a formal financial institution, and two percent report taking a loan from a private lender in the past 12 months.1 In addition, banks request more strict collateral requirements when dealing with women investors, as they are perceived as more risky, particularly due to traditions that place them as the key family members responsible for taking care of the household, leaving them with little time for work. Moreover, cultural barriers and norms limit women’s mobility, constraining their entrepreneurship opportunities. In that context, microfinance is considered an important model for gender-inclusive development.
15. Although Egypt boasts the largest microfinance market in the Arab world in terms of client outreach, with approximately 1,100,000 borrowers, and LE 263 million (equivalent to US$ 36 million) in loans outstanding, the sector is estimated to reach only eight percent of its potential.2 Some non-government organizations–microfinance institutions (NGOs-MFIs) have in recent years had difficulty weathering the ongoing economic and political transition. This instability has exposed the operational weaknesses of some institutions, and caused a deterioration in portfolio quality. The total number of microfinance borrowers is down 18 percent in 2010 from 2008 (1,100,000 versus 1,300,000). However, there has been some recovery since 2011 when the total number of clients served by the industry reached 991,610. The NGOs-MFIs institutional capacity and managing stagnant growth and investment in the broader economy are impeding the sectors potentiality to expand.
16. At the provider level, a critical challenge for the Egyptian microfinance industry is how to expand product offerings and diversify target markets to promote financial inclusion for a broader section of the population. The country’s largest NGOs-MFIs, including the Alexandria Businessmen Association (ABA), are amongst the most sophisticated in the region. They generally offer a suite of non-financial services to their clients, including financial literacy and business development services (BDS). For example, ABA has expanded from traditional group lending to individual lending, micro insurance, livestock leasing, and is in the process of developing Sharia-compliant products. However, smaller NGOs-MFIs need technical assistance
1 Data from: Global Financial Inclusion Database (Global Findex): http://datatopics.worldbank.org/financialinclusion/home/ 2 Data from: Microfinance Information Exchange (MIX): www.themix.org/ and Sanabel – the MENA regionmicrofinance network.
Figure 4: Micro Enterprises Distribution Among Sectors
Women are viewed as key beneficiaries for NGOs-MFIs*. Approximately 55 percent of the microcredit borrowers in Egypt are women (Mix 2013). They are often responsible for the well-being of the family, and thus seen as a conduit for conferring income and consumption, smoothing benefits to the greatest number of people. Microfinance also supports female economic empowerment as it creates opportunities for business expansion and productive investment at the household level, bypassing many socio-economic barriers that prevent women from participating in the formal economy. Qualitative and quantitative studies have demonstrated that the access to microfinance services empowers women through an increased likelihood to own assets, greater control over household assets, and an ability to invest and grow in microbusinesses. Enhancing women’s access to finance and providing them with an equal opportunity is critical as funds should be allocated to their most productive uses with no discrimination by gender.
Figure 5: Informal Borrowing in Egypt
Source: World Bank Global Financial Inclusion Database (2012).*Globally 75 percent of more than 205 million customers served by NGOs-MFIs are women, including 82 percent of the 137.5 million poorest clients (Microcredit Campaign Report 2012).
to develop programs that diversify their products, improve operational efficiency and sustainability, and expand their geographic outreach. Frontier product areas, include developing venture capital schemes as clients are increasingly requiring long-term debt and equity for successful business growth, are nascent.
17. New providers are beginning to enter the market for financial services to the poor in Egypt. Egypt Post, under its new leadership, has reinvigorated its commitment to be the “bank for the poor” by providing important savings services, payments and insurance. It is also seeking to expand linkages with NGO MFIs for cash-in and cash-out functions for loan disbursement and collection at its more than 3,000 branches across the country. The two finance companies in Egypt serving the microfinance segment (Reefy and Tanmeyah) have continued to expand operations and have both indicated they are on a more financially sustainable footing than during the period directly after the revolution. Additionally, non-traditional actors have begun providing financial services to low-income segments. For example, Vodafone, after years of working with regulators to fulfill licensing requirements, has begun offering a virtual wallet product which
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allows for money transfers and payment services. Other mobile network operators are also active in this space, although outreach remains limited as these services are new to the market.
18. The overall legal and regulatory environment of the microfinance sector in Egypt suffers from various deficiencies that prevent further expansion. There is no clear supervisory responsibility or framework for the microfinance industry. Commercial banks, which have traditionally focused on serving large corporations and medium to high-income individuals, are supervised by the Central Bank of Egypt (CBE). Some of these commercial banks have begun to downscale and cater to micro enterprises but these are limited in number. The low-income are mostly served by NGO-MFIs for credit and are monitored by the Ministry of Social Solidarity. The two finance companies in the market (Reefy and Tanmeyah), currently providing microfinance, operate in a legal grey zone. As a result, the current system suffers from a fragmented set of rules, lack of level playing field, and an inadequate regulatory and supervisory framework. Growth of this sector is still constrained by the lack of an enabling microfinance regulatory and legal framework that is essential for strengthening the sector, encouraging its growth and allowing for further outreach.
19. In response to operational challenges faced by NGOs-MFIs, efforts have been made to improve the enabling environment for financial intermediation and to strengthen financial infrastructure. The payments system was modernized, in terms of operations, policies, and regulations, creating a more supportive institutional framework. CBE issued a Code of Corporate Governance, enhancing transparency and governance in the banking sector. The first private credit bureau, I- score, was established, improving significantly the information on clients’ credit worthiness. Significant investments have been made to operationalize I-score which has helped significantly in retrieving credit information and enhancing information sharing within the microfinance sector. All these efforts to strengthen the financial infrastructure aim at promoting financial inclusion.
20. Recently, the cabinet appointed in July, 2013, placed financial inclusion on their priority agenda. The CBE has formed a steering committee led by the Egyptian Banking Institute (EBI) with the participation of all key stakeholders mandated to develop the National Strategy for Financial Inclusion, aiming at identifying the policies and activities needed to help both private (financial service providers) and public (regulators) actors in playing a more active role in enhancing access and usage of formal financial services both internally and across market players. The newly appointed Chairman of the Egyptian Financial Supervisory Authority (EFSA), a key member of the steering committee, flagged that strengthening the regulatory and legal framework for the microfinance sector is on top of his reform agenda.
21. Recognizing the importance of its role as a financial regulator and supervisor, EFSA took the decision to develop the regulations of the microfinance sector. A draft Microfinance Law was prepared by EFSA in consultation with stakeholders to address key regulatory gaps, including allowing commercial companies to engage in microfinance, opening a window for NGO MFIs to establish and own shares in microfinance companies. This will increase the ability of MFIs to operate sustainably through greater leverage and a diversification of their funding base through both debt and equity, as well as, an improved framework for risk management, including corporate governance, internal controls and consumer protection. The World Bank has played a central role in facilitating the development of this law, including providing technical advice to the draft law, as well as closely collaborating, in partnership with EFSA, in stakeholder consultations with NGO MFIs, finance companies, the Egyptian Microfinance Network,
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microenterprises, CBE, and the Social Fund for Development (SFD). A key development was the Cabinet approval of the draft Microfinance Law on February 20, 2014. It has been transferred in early March 2014 to the Supreme Counsel to be submitted to the President for its issuance.
22. While the development of a sound regulatory framework has been progressing, additional investments are needed to ensure the sector is positioned for sustainable and responsible long-term development. While the Micro Finance Law has been approved by Cabinet, the Executive Regulations, which will address the regulatory and operational requirements required for the purposes of implementing and enforcing the Micro Finance Law (e.g. specific issues related to NGO- MFI transformation, capital adequacy ratios, liquidity management functions, and rules and standards for the conduct of microfinance business and complaints review systems), have yet to be developed. Similarly, supervisory functions within EFSA need to be established which requires recruitment and training of key staff in microfinance supervision. Extensive coordination between existing supervisory entities, including EFSA, CBE and the Ministry of Social Solidarity, is needed. At the provider level, technical assistance is needed to ensure compliance with the regulatory requirements outlined in the new Micro Finance Law, as well as, to assist the transformation process from NGO to finance company. Issues related to responsible growth of microfinance under the new regulatory framework, particularly surrounding consumer protection and sectoral stability, must be addressed.
23. With the objective of attaining a more inclusive financial system, this proposed “Inclusive Regulations for Microfinance Project” comes at a particularly opportune time. The proposed project aims at developing and implementing the legal, regulatory, and institutional framework necessary to promote the growth and expansion of the microfinance sector in Egypt. This proposed Transition Fund that will be supported by the World Bank Group–IFC and the Bank, in collaboration with the Saudi Fund for Development, will complement other efforts in scaling-up the microfinance sector in Egypt, and attaining broader outreach with better risk management.
C. Alignment with Transition Fund Objective
24. The proposed project is aligned with the overarching goals of the Transition Fund of strengthening governance and public institutions, fostering sustainable and inclusive growth by developing, and advancing country-owned programs through supporting transformational reforms. Specifically, it encompasses three of the four themes, namely: (i) investing in sustainable growth, which will be achieved by creating a more enabling and conducive business environment, through improving the legal, regulatory, and institutional, framework for microfinance , with the ultimate goal of enhancing access to finance; and spurring productive investment; (ii) enhancing economic governance, which will be achieved by providing support to EFSA in drafting and finalizing the executive regulations of the law, as well as, operationalizing these regulations and establishing the supervisory unit that will focus on fit and proper requirements, strong governance rules, transparency, disclosure, consumer protection and internal and external controls; and (iii) inclusive development and job creation, by addressing key challenges confronting microenterprises, and expanding the outreach of services to underserved segments (women and youth), as well as integrate lagging regions.
D. Higher Level Objectives to which the Project Contributes
25. Microfinance is critical to expanding private sector development and addressing economic challenges in Egypt. At the microeconomic level, access and use of appropriate
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financial services improves household welfare and spurs household enterprise activity, offering greater opportunity and choice to low-income households. Access to financial services can help informal home-based businesses grow into formal micro and small enterprises (MSEs).In that context, this project would contribute to ending extreme poverty.
26. The proposed project will contribute to transforming the underdeveloped microfinance sector to be more efficient, fair, and transparent, promoting a level playing field. It will enhance the accountability and governance of the Egyptian regulatory system, while improving their access to financial services and products, as well as strengthening consumer protection, with the ultimate objective of sustainable private sector-led growth. The multifaceted project will contribute to leveraging funding for microfinance, and will address critical deficiencies in micro financing in Egypt.
27. At the same time, the consumer protection and financial literacy initiatives under the project will ensure better and fairer access to information and accountability to financial clients, especially the marginalized and small clients who lack financial knowledge and expertise. In addition, strengthening the institutional framework for the implementation of the microfinance regulation will boost the sector’s performance, encouraging its growth and its outreach to underserved clients and Governorates.
28. Relationship to World Bank Group Strategy and Interim Strategy Note (ISN). The proposed project contributes to essential World Bank strategies at the global, regional, and national levels. The project is directly in line with the global initiative recently announced by the World Bank President Jim Kim to provide universal financial access around the world by 2020. Financial inclusion is an enabler and a catalyst for achieving the Bank Group's goals of ending extreme poverty by 2030 and boosting shared prosperity for the bottom 40 percent of the population in all developing countries. Financial inclusion was recently recognized as a vital development priority by the UN High-Level Panel on the Post-2015 Development Agenda.
29. On the regional front, the project contributes to the three essential pillars of the World Bank MENA Strategy specifically, ensuring economic and social inclusion, strengthening governance, and accelerating sustainable growth and job creation. With average unemployment at 10 percent and youth unemployment at 23 percent, MENA has the colossal task of creating four million jobs a year over the next decade to get on par with the global average unemployment rate. According to the IMF, raising access to finance in the MENA region to the world average could boost per capita GDP growth by between 0.3 percent and almost one percentage point annually.
30. The proposed project is also closely aligned with the 2012 Interim Strategy Note (ISN) for Egypt (2012−2014), discussed by the World Bank’s Board of Executive Directors on June 28, 2012. The ISN envisions attaining a level playing field and supporting marginalized and underserved enterprises, by strengthening the legal, regulatory and institutional environment for smaller marginalized firms, which the proposed operation aims to achieve. The project addresses the three pillars of the ISN, namely:
(i) Improving economic management through strengthening governance, enhancing transparency, and accountability of the financial system by improving EFSA’s governance structure, as well as its information dissemination mechanisms. Moreover, MFIs will be required to disclose and share credit information, which will ameliorate transparency and accountability.
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(ii) Creating jobs and unleashing entrepreneurial potential by improving the business environment, and enhancing access to finance so that the private sector can function efficiently, fostering economic opportunity, competition, innovation and entrepreneurship with the objective of achieving sustainable private sector-led growth. The importance of microenterprises for low-income households is critical for managing risks during difficult times, responding to shocks.
(iii) Fostering inclusion and ensuring broader financial access for disadvantaged segments of the population—women, and youth, as well as, lagging geographical regions. The project will promote economic inclusion through paying special attention to women and youth, and expanding the network of beneficiaries through reaching out to marginalized regions via promoting innovative mechanisms and tools in the microfinance domain.
31. The proposed project’s objective is also aligned with the World Bank and IFC Regional Framework and Strategy for MENA, which evolves in response to the events of the Arab Spring and focuses engagement on financial inclusion, and sustainable private sector-led growth.
32. The operation will contribute to helping Egypt meet the World Bank Group twin goals of ending extreme poverty and boosting shared prosperity. Extending finance to microenterprises is a key tool to combat poverty for poor households, as well as improving the standards of living of their families.
II. PROJECT DEVELOPMENT OBJECTIVE
A. Project Development Objectives
33. The project development objective (PDO) would be to strengthen the regulatory and institutional framework of the microfinance sector in Egypt.
B. Project Beneficiaries
34. The direct project beneficiary would primarily be EFSA in that the project will enable the financial authority to: (i) develop the legal and regulatory framework for financial inclusion; (ii) establish and operationalize the microfinance unit; and (iii) promote accountability, governance and consumer protection that can help enhance the financial infrastructure. The project will also benefit MFIs, which would be able to diversify their products and expand their outreach. Micro enterprises and households will benefit from greater supply of quality financial services, improved consumer protection mechanisms, and greater financial literacy resources.
C. PDO Level Results Indicators
35. Progress towards achieving the project’s objectives will be measured by a series of quantitative and qualitative indicators at the PDO, and at the intermediate level (Results Framework is outlined in Annex 1). Key results and indicators at the PDO level, are: (i) new regulatory framework effective for MFIs, including NGOs-MFI; (ii) number of MFIs licensed by EFSA under the law; (iii) number of NGOs engaged in microfinance activities (reported by the Microfinance NGOs Oversight Board); (iv) number of microfinance beneficiaries under the Microfinance Law; and (v) percentage of female MFI beneficiaries.
III. PROJECT DESCRIPTION A. Project Components
36. The proposed project comprises of three main components: (i) developing the legal and regulatory framework for microfinance; (ii) establishing and operationalizing the microfinance
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unit at EFSA; and (iii) promoting accountability, governance and consumer protection. The total cost of the project is US$ 4 million.
37. Component I: Developing the regulatory framework for microfinance (US$ 1.5 million). This component will support the establishment of a regulatory framework that is conducive to growth and stability of the non-bank financial institutions (NBFIs) in Egypt. Critical to the success of the draft Microfinance Law are the executive regulations that should be robust and comprehensive and provide clear guidelines for NGO MFIs, finance companies, and other market players to easily comply with the new supervisory framework. The new regulations will adopt light prudential requirements, with a focus on fit and proper requirements, strong governance rules, consumer protection (especially transparency, disclosure), and internal and external controls.
38. The NGO Microfinance Oversight Board, which will be established as stipulated by the microfinance Law, will play the role of a “sounding board” responsible for the effective supervision and regulation of NGO-MFIs through coordination and cooperation between EFSA (responsible for regulating and supervising microfinance companies licensed by EFSA) and the Ministry of Social Solidarity (responsible for supervising NGO-MFIs which do not have that status) to make sure the same rules and requirements are applied to both microfinance companies and NGO-MFIs, thus creating a level playing field for all service providers in the market. This would also allow microfinance companies to engage in other non-banking financial services in accordance with the EFSA Law No. 10 of 2009 after getting EFSA’s approval. This would not only be encouraging for the microfinance companies who will be able to engage in other financial services besides microcredit, but can also be an incentive to NGO-MFIs to transform to microfinance companies.
39. Specifically, this component will support EFSA through four main sub-components: (i) developing and finalizing the Executive regulations, and supervision manuals, stipulating the instructions needed to enforce and implement the law and developing the needed rules and standards to be enforced on NGO-MFIs in accordance with the Microfinance Law; (ii) drafting and finalizing the Directives of the NGO Microfinance Oversight Board3, (iii) conducting study tours on legal and regulatory framework for microfinance institutions ; and (iv) providing advisory services to strengthen the regulatory framework for non-bank financial institutions (NBFIs), aiming at enhancing overall financial inclusion in Egypt. This would include addressing in the regulatory challenges faced by EFSA to play an active role in financial inclusion, notably the securities markets, micro insurance, and leasing as well as microfinance. This would promote a more diversified financial system, enhancing competition and better quality services to the clients.
40. Component II: Establishing and operationalizing the Microfinance Unit at EFSA (US$ 1.5 million). The objective of this component is to ensure that the microfinance unit adopts international best practices and develops the capacity necessary to implement the law and associated executive regulations effectively as to support the growth of the overall microfinance sector in Egypt. It will support EFSA through the provision of technical assistance and advisory services in establishing and equipping the Microfinance Unit, which would be responsible for operationalizing the executive regulations and policy, enforcing rules, ensuring compliance, and supervising MFIs. This will help EFSA to establish appropriate on-site and off-site monitoring
3 The Oversight Board comprises representatives from the Ministry of Social Solidarity, CBE, EFSA, SFD, General Federation of NGOs, Egyptian Union for Microfinance (to be established), and financial experts especially in the field of microfinance.
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systems and procedures, advice on enforcement mechanisms and training on the operationalization of the Microfinance Law and its executive regulations. The IT system will also allow the compilation of sectoral data to monitor macro prudential indicators, which would allow adequate and timely monitoring of the performance and soundness of microfinance sector and NBFIs. The system will also help in identifying financial inclusion barriers created by some financial institutions (such as minimum balance amounts for opening a bank account).
41. This component comprises of three sub-components: (i) supporting the establishment of the microfinance unit that is specialized and responsible for licensing, monitoring, oversight, inspection and audit, financial reporting, and consumer protection, and complaints. This support will be provided through the provision of advisory services in relation to issues such as advice on the structure, staffing and reporting lines for the Unit, the development of terms of reference (TORs) for the relevant positions (which TOTs will define staff members’ roles, qualifications, responsibilities, accountabilities and performance criteria) and advice as to coordination and communication arrangements with other departments in EFSA and other government agencies; (ii) providing capacity building and training of relevant staff, to be equipped to undertake key operational procedures and strategic functions within the Unit. This include conducting training seminars and workshops and study tours to countries that have well developed systems for microfinance regulations and supervision and on the job training; (iii) strengthening the institutional infrastructure, with the required equipment and IT, both software and hardware, aiming at enhancing the data collection from the financial entities, information dissemination, allow for better monitoring and supervision and ensuring compliance, with the objective of improving transparency, disclosure and overall governance. Experts will be hired to support this. These three sub-components are aimed at ensuring the sustainability of the Micro Finance Unit through the provision of the required skills and capacity for effective implementation of the Microfinance Law.
42. Component III: Promoting accountability, governance and consumer protection (US$ 1 million). This component will support EFSA in enhancing accountability and governance, as well as developing a robust consumer protection capacity within the microfinance industry, and in developing financial literacy amongst target population groups. A separate division will be solely responsible for consumer protection.
43. This component comprises three sub-components: (i) enhancing consumer protection and financial literacy through (a) advice as to the consumer protection specific supervisory tools that are likely to be required (such as mystery shopping, monitoring of forms of disclosure and advertising materials, consumer forums etc.); (b) advice on content, and review, of manuals for processes and procedures for consumer protection supervision; (c) advisory inputs/services for the development of transparent, fair and accessible procedures for the complaint resolution function of the new Unit; (d) assistance in designing and implementing financial literacy training materials and programs relevant to customers of MFIs (the relevant programs might be provided by EFSA or the MFIs themselves); and (e) the design of a public awareness campaign about rights and responsibilities under the new Micro Finance Law and the supervisory role of EFSA; (ii) conducting study tours and on the job training in countries which have well developed systems for financial consumer protection; and (iii) building the capacity of the Microfinance NGOs Oversight Board through training seminars and workshops. Within this component particular attention will be placed on comprehensive transparency and disclosure requirements and further business conduct rules.
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44. Gender mainstreaming. An overarching goal of the project is to promote gender-inclusive development of the Egyptian microfinance sector. Under component I, a gender specialist will form part of the team drafting the Executive regulations to help ensure gender mainstreaming. For example, the published supervisory guidelines would be cognizant of the need to track and promote female microfinance clients. Similarly, NGOs specializing in female economic participation and entrepreneurship will form part of the Microfinance NGOs Oversight Board. This will help ensure the concerns and priorities of women are taken into account during the drafting of the Executive regulations and during the implementation of the Microfinance Law. This is particularly critical given the ongoing political and economic volatility in Egypt and the recent prioritization of citizenship feedback in Egyptian public policy.
45. Under component II, capacity building workshops on gender-inclusive financial inclusion and microfinance development will be delivered to EFSA staff, with particular reference to the role of regulatory agencies in the promotion of gender-inclusive development. This is a frontier area of financial sector development (particularly for the MENA region) and one that Egypt can take a leadership role in. Similarly, study tours to countries that have effectively promoted gender inclusive microfinance sectors will be organized under this component.
46. Under component III, consumer protection initiatives that specifically target women will be developed and implemented. These programs (centering on fair treatment, timely information, and effective recourse) will be structured and delivered in a manner in which women can successfully access and benefit from services provided. These programs will take into account socio-economic and cultural barriers (for example women ownership of assets) that cause women to be treated differently than men by financial institutions and regulators. Program modules will include topics on transparency (key terms, relevant charges), fees and charges, debt collection, consumer awareness, and sales and marketing practices. They will focus on using delivery channels tailored the needs of female clients.
47. Overall, enhancing financial consumer protection mechanism will ensure that female clients’ rights are protected and that discriminatory practices are eliminated. Furthermore, through promoting a supportive regulatory and institutional framework the project will facilitate women’s access to finance and encourage them to access the formal financial sector. Gender disaggregated data will be prioritized and tracked throughout project implementation, specifically the percentage of women beneficiaries, and the number of consumer protection initiatives targeted specifically to women.
B. Project Cost and Financing
48. The proposed project is an Investment Project Financing in the amount of US$ 4 million, which will be financed through the MENA Transition Fund. The project cost and financing are outlined in Table 1.
Table 1: Project Cost and Financing
Cost by Component Transition Fund(US$)
Funding %
Component 1: Developing the legal and regulatory Framework for financial inclusion
• Sub-component 1.1: Technical assistance to EFSA in
1,500,000
250,000
100
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finalizing the Microfinance Executive regulations and supervision manuals.
• Sub-component 1.2: Technical assistance in forming the NGO Oversight Board and drafting and finalizing its Directives
• Sub-component 1.3: Conducting study tours on legal and regulatory framework for Microfinance Institutions
• Sub-component 1.4: Advisory services to strengthen the regulatory framework for NBFIs, aiming at enhancing financial inclusion
250,000
250,000
750,000
Component 2: Establishing and operationalizing the Microfinance Unit at EFSA
• Sub-component 2.1: Establishing the Microfinance Unit, and capacity building and training of key staff
• Sub-component 2.2: Strengthening the institutional infrastructure, with the required equipment and IT, both software and hardware.
1, 500,000
900,000
600,000
100
Component 3: Promoting accountability, governance and consumer protection
• Sub-component 3.1: Enhancing Consumer protection, financial literacy, and public awareness campaigns
• Sub-component 3.2: Conducting study tours
• Sub-component 3.3: Training and capacity building of the Microfinance Oversight Board
1,000,000
400,000
100,000
500,000
100
Total Project Cost 4,000,000
C. Analytical Underpinnings and Lessons Learned and Reflected in the Project Design
49. The project design fully reflects lessons learnt from recent, ongoing, and completed World Bank Group activities, as well as, donor and development partner projects, and international best practice in the microfinance area. This includes, lessons learnt from similar operations in Jordan, India, and other developing and emerging economies.
50. The design of the project is underpinned by extensive analytical, advisory and diagnostic work undertaken over the past years. The project is informed by analytical documents including Financial Development and Inclusive Growth: Attaining Shared and Sustainable Prosperity in Egypt (2013), which flagged the challenges confronting the Egyptian microfinance sector, including the weak legal and regulatory framework. The project design also benefits from the findings of Egyptian Women Workers and Entrepreneurs: Maximizing Opportunities in the Economic Sphere (2010); and the Opening Doors: Gender Equality and Development in MENA (2013) in identifying the main economic and social obstacles facing women, and means of addressing them. The design of the project especially tapped on the findings of the impact evaluation of the Egyptian Women Leadership in MSEs Project, which was conducted on April,
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2013 to evaluate the impact of the project on gender empowerment, job creation, and poverty alleviation through enhancing finance for MSEs. This evaluation highlighted the need to expand the microfinance sector.4 The recent IFC Sub-national Doing Business (2014) flagged the importance to reaching out to the marginalized areas and Governorates, improving their access to finance, which a more developed and diversified financial system would be essential.
51. Key lessons learned from previous operations are summarized as follows:
52. Implementing entity’s accountability and ownership is essential for the successful execution of the project. The project’s main counterpart EFSA, is a prominent and credible institution with a competent Board, strong management capacity, market knowledge and a good governance structure, and as such, has been assigned a clear responsibility for project implementation. The new Chairman of EFSA is reform oriented and committed to the financial inclusion agenda. He has been appointed for a four year term promoting sustainability of reforms.
53. Effective donor coordination is a key requirement to ensure synergies in approach and guidelines and for the success of project implementation. This proposed project is done in partnership between the World Bank, IFC and the Saudi Fund for Development, and will be implemented in coordination with other donors active in microfinance development to take advantage of synergies between different donor-funded activities. During implementation, the team will continue to undertake consultations with donors and development partners active in MSME financing in Egypt to coordinate efforts and better identify the project's value added (AFESD, USAID, DFID, AfDB, EBRD, EIB, GIZ, and EU).
54. Adequate supervision of the project should include clearly defined and transparent indicators for monitoring the implementation progress and measuring the overall impact. Clear project indicators have been defined in the Results Framework. Monitoring and evaluations will be an important aspect of the project. The regular monitoring indicators will help serve as an early warning system indicating the potential need for any modifications. Most important it will push forward the legal and regulatory reforms, with the clear timeline and the prioritization of tasks.
D. Links with other World Bank Group Activities
55. The proposed project complements on-going World Bank Group activities, ranging from IBRD investment, to advisory services and technical assistance under the Regional World Bank-IFC MENA MSME Facility; IFC advisory services; and the Consultative Group to Assist the Poor (CGAP) technical assistance, as well as, the Gender Development Unit Programs, gender mainstreaming efforts. The Bank is ensuring complementarity between these diverse activities to ensure synergies and effective results on the ground.
56. Lending. The proposed project will complement the proposed World Bank’s US$ 300 million Promoting Innovation for Inclusive Financial Access Project for Egypt (P146244), which aims at expanding access to finance for MSE in Egypt, using innovative financing mechanisms,
4 The analysis relied on more than one methodology to ensure robust results for plausible and applicable policy recommendations to enhance finance to MSEs in Egypt. These methodologies are in-depth interviews with main stakeholders, data analysis of intermediaries (SFD, banks, MFIs and NGOs), and surveys covering more than 400 small and micro enterprises in different Governorates depending on the share of these governorates of the loan. Large Governorates, such as Cairo and Giza; Upper Egypt Governorates, such as Fayioum and Asyut, and Lower Egypt, such as Al-Sharqia, were included and covered in the sample.
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with a special focus on youth and women, as well as underserved regions. A key objective of this project is to expand the microfinance sector. This has been scaled up by a parallel line of credit from the Saudi Fund for Development (US$ 200 million) which is fully dedicated to supporting the microfinance sector. Both these investment loans provide lines of credit to financial intermediaries, including NGOS-MFIs. The proposed project will ensure effective implementation of the lines of credit through developing the legal, regulatory and institutional financial infrastructure to promote the expansion of the microfinance sector. It provides critical non-financial support to ensure the line of credit can be effectively used by MFIs in the sector.
57. World Bank-IFC MENA Regional MSME Technical Assistance Facility.5 The proposed operation will complement the joint World Bank-IFC MSME Facility, a multi-donor trust fund, which provides technical assistance and advisory services under three pillars, namely: (i) developing the enabling environment for MSMEs; (ii) providing advisory services to financial institutions that serve MSMEs; and (iii) building the capacity of MSMEs through entrepreneur networks, mentoring, and business incubator-type services. This will ensure that adequate capacity and resources are in place through adopting global best practices in microfinance and entrepreneurial skills development.
58. It is also worth noting that the remaining funds under the Egypt MSME Facility, Pillar I—developing the enabling environment, are not sufficient to finance the extent of legal and regulatory reforms called for under this operation. In addition, being a client-executed operation, this Transition Fund will further complement the Bank and IFC-executed MSME Facility. The Transition Fund will support the drafting of the Executive regulations, and the Directives of the Microfinance NGO Oversight committee, which the Bank and the IFC cannot contribute in drafting through the MSME Facility to avoid any issues of conflict of interest. The proposed Transition Fund will also support EFSA in getting resident advisors and experts to support the establishment of the Microfinance Unit, and the Consumer Protection Department—activities that cannot be financed under the MSME Facility. In addition this project will finance software and hardware that cannot be finance by the World Bank Group-executed trust funds. Moreover, a recipient-executed project supports the fostering of home-grown country-led reforms, which will ensure sustainability, ownership, as well as capacity building.
59. Overall, this operation should be seen as part of a package of parallel assistance that helps in strengthening the legal and regulatory framework and complements the lines of credit provided by the World Bank and the Saudi Fund for Development and other development partners. Such a design is in line with what has been done in other countries and is considered to be a technically-sound all-inclusive package of assistance to address microfinance sector development. The technical assistance provided will complement and not duplicate the activities supported by other donors.
E. Collaboration with Development Partners
60. This project is prepared in collaboration with the Arab and Islamic funds both in terms of financial and technical support, where Egypt is a priority country. The operation is also done in collaboration with other international financial institutions and bilateral donors active in the domain of the MSME sector development.
5 MENA MSME TA Facility is supported by UKAID (DFID), the Swiss State Secretariat for Economic Affairs (SECO), Foreign Affairs, Trade, and Development, Canada (DFATD), the Japanese International Cooperation Agency (JICA), the Danish International Development Agency (DANIDA).
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61. The World Bank’s line of credit has also been scaled up by several other Arab and Islamic funds. This includes the line of credit from the Saudi Fund for Development (US$ 200 million) targeted to the microfinance sector. The Arab Fund for Economic and Social Development (AFESD) is also providing a line of credit, amounting to US$ 50 million as part of the MSME Special Account, that was launched at the Arab Economic and Social Summit held in Kuwait in January 2009.6 In addition, in December 2013 the Khalifa Fund for Enterprise Development of the United Arab of Emirates (UAE) provided parallel financing, amounting to US$ 200 million for MSMEs. The Islamic Bank for Development is also providing a line of credit amounting to US$ 50 million, as well as technical assistance to financial intermediaries with a focus on Sharia’s compliance finance. The proposed Transition Fund would complement these lines of credit by creating an enabling environment for financial inclusion.
62. The project team has been coordinating and undertaking consultations with other donors and development partners active in Microfinance sector development in Egypt, including Agence Francaise de Development, GIZ, and UNIDO. The Bank has also been working closely with the USAID that is leading the drafting of the National MSME Strategy in Egypt. All this has been done in synergy with the Regional MSME Facility which is supported by DFID, SECO, DANIDA, JICA, and DFATD, which supports financial inclusion.
63. In response to the political transformations underway in MENA countries, the Deauville Partnership was launched at the G8 Summit in May 2011. The aim is to provide a coordination framework that would help transition countries implement reforms, where MSE development is a key component within the context of the governance pillars. In that context, an SME Policy, Entrepreneurship and Human Capital Development Committee was formed, dedicated to enhancing the role of MSEs in creating jobs, and preparing country-specific action plans, where Egypt was one of the key countries benefiting from such support.
F. Stakeholders’ Consultation
64. Consultations were undertaken with stakeholders, comprising the relevant government agencies, including the Ministry of Social Solidarity, Ministry of Trade and Industry and Investment, SFD, Ministry of Finance, CBE, NGO-MFI, microenterprises and other donors that are actively involved in the development of the microfinance sector. Throughout the project preparation phase, EFSA discussed with all relevant stakeholders, the design and details of the proposed project. The consultations with numerous stakeholders will continue throughout project implementation to ensure continued stakeholders buy-in and ownership.
I. IMPLEMENTATION
A. Institutional and Implementation Arrangements
65. The methodology to be adopted by this project will seek to integrate established evidence-based diagnostic work conducted by the World Bank Group—WB and IFC, with a robust stakeholder engagement, and effective coordination with development partners. The project would follow the World Bank guidelines related to procurement, financial management, and social and environmental safeguards.
6 This is an initiative led by H.E. Amir of Kuwait to provide US$ 2 billion to support MSMEs development in the Arab countries. The number of participating countries reached 17 by July 2013, where total contribution reached US$ 1.3 billion (with Saudi Arabia and Kuwait being the largest contributors, each US$ 500 million), of which US$ 940 million has been paid out of the total of pledged amount. Loans approved as of July 2013, amount to US$ 333 million through 13 financial intermediaries and apex institutions, known for their active operations in the MSME sector.
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66. EFSA is the implementing agency for the project and will be responsible for coordinating and managing the overall project. EFSA was selected as the implementing agency because it is by law the entity responsible for regulating and supervising the non-banking financial institutions (NBFIs) in Egypt. The proposed project will help accelerate its reform program. The project comes at an opportune time where the leadership of EFSA is pushing for transformational and regulatory reforms..
67. The Project Management Unit (PMU) at EFSA will oversee and manage this project. The PMU mandate will be to implement policies and procedures outlined in this document and will report directly to the Chairman. The PMU will be responsible for all steps regarding procurements procedures. EFSA has previous experience in World Bank rules and guidelines, having implemented a previous trust fund, an Institutional Development Fund (IDF).
68. EFSA has prepared an Operational Manual with guidance from the World Bank, which included financial management and procurement arrangements and described the roles and responsibilities for project implementation, the institutional and implementation arrangements, financial management, and safeguards, as well as disbursement and procurement procedures.
69. The World Bank will be responsible for the provision of implementation support to the project, in partnership with the Saudi Fund for Development, where joint missions will take place to ensure coordination and effective implementation of these activities with the objective of ensuring that the services provided are addressing all institutional and regulatory reforms needed to complement the line of credit to have an impact on the ground. Distribution of responsibilities is done based on expertise, comparative advantage, and previous engagement. However, team members and experts from each institution will contribute and provide support wherever necessary based on required knowledge and expertise. To ensure effective coordination and implementation on the ground, periodic joint supervision missions will be led by the Bank and the Saudi Fund for Development, with the active participation of IFC these would take place at least once every six months.
70. A robust system to monitor and evaluate (M&E) progress is crucial to the project success, and will be implemented based on the agreed results framework, monitoring arrangements and indicators. A strong M&E framework to track inputs, outputs, and outcomes in a systematic and timely fashion has been discussed, and agreed on with EFSA during the preparation phase. M&E will be based on clearly identified benchmarks and output indicators that feed into the project indicators (Annex 1).
B. World Bank—Saudi Fund for Development Partnership.
71. The project will be conducted in partnership with the Saudi Fund for Development. The technical assistance and advisory services that would be offered under this project is critical for the effective and successful implementation of the lines of credit provided by both the World Bank, and the Saudi Fund for Development. The World Bank, Promoting Innovation for Inclusive Financial Access Project (US$ 300 million) which will be presented to the Board on April 1, 2014 was scaled up by a US$ 200 line of credit from the Saudi Fund for Development that was approved in February 2014. In addition to ensuring effective execution of the lines of credit, the partnership will ensure synergies and consistency in terms of pushing the right policies and regulatory reforms by two major players in the microfinance sector in Egypt. The Saudi Fund for Development is solely targeting microenterprises, using the design, the eligibility criteria and the implementation arrangements of the Bank’s operation.
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72. This project would also strengthen further the strategic partnership between the Bank and the Saudi Fund for Development. The Saudi Fund for Development will bring in their extensive knowledge of the region, especially with regards to Islamic finance regulations. It has also been providing lines of credits to the Arab countries, and has experience in dealing with regulatory bodies, microfinance institutions and financial systems. The Saudi Fund for Development with its competent and experienced leadership has great credibility in Egypt, and is entrusted by the authorities to develop the microfinance sector. The World Bank will play a coordinator role, to ensure the most effective use of resources, prudent allocation of funds that are not distortive to the market, tapping on the comparative advantage and expertise of the different institutions and international best practices.
C. Sustainability
73. Key elements in the sustainability of the proposed project are the high quality of EFSA in carrying out the project, the Government’s strong commitment to sound financial policy and increasing access to finance reflected in making MSMEs development a priority in the reform program, and the commitment to reform and improve the legal and institutional capacity of the microfinance sector in Egypt.
74. Project sustainability will be facilitated by the strong partnership that has been established between the World Bank Group and the Egyptian authorities over the past years through an integrated work program, reflected in an effective policy dialogue, analytical work, technical assistance, and key operations. The World Bank Group and the Saudi Fund for Development have had a strong and professional policy dialogue with EFSA, where commitment to financial sector reform was evident. Moreover, the Bank and IFC will provide technical assistance to the EFSA through the MENA TA Facility leading to enhancing the outcome and the impact of the proposed project.
75. The operation could be confronted with various risks with regards to stakeholder
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involvement level, operating environment, implementation, and sustainability. These risks were carefully analyzed and mitigation measures were drafted. The overall project risk is rated as moderate, and will not have implications on the project achieving results, taking into account the mitigating measures, which are detailed in the Operational Risk Assessment Framework (ORAF) in Annex 4.
76. Project stakeholder risks include principal risks that could come from a delay or reversal of policy commitment. Implementing agency risks, include limited capacity to implement the project may cause delays. An important risk is the lack of sufficient funding to maintain the required human capacity once the grant closes. This will be mitigated through ensuring that EFSA will raise sufficient funds to cover its institutional and human capacity to establish and maintain s sustainability.
77. Project risks include risks associated with project design, such as the risk of lack of expertise on relevant technical subjects and time needed to digest new concepts, and reaching consensus of changes. These risks may delay the project implementation. These risks are mitigated through the limited number of components and the duration of the project (four years), which allows for sufficient time for effective and smooth implementation. There are no major social or environmental concerns because the proposed project activities are limited to advisory services and technical assistance. This project is a Category C Safeguards rating. Means of mitigating these risks are outlined in Annex 4.
III. APPRAISAL SUMMARY
A. Economic and Financial Analyses
78. Project Development Impact. The proposed operation will foster a more prudent legal, institutional and regulatory framework to lend to micro enterprises in Egypt. The project will provide necessary support to EFSA on the issuance, enforcement and implementation of the Microfinance Law and its Executive regulations based on international best practice. This will help ensure an adequate regulatory framework and help prepare the sector for expansion and further outreach to underserved communities across Egypt. As EFSA is not yet institutionally prepared for implementation of the Microfinance Law, technical assistance will also be provided to ensure effective implementation and enforcement of the law through establishing and providing capacity building and training to the EFSA staff to enable them to ensure compliance of the Law.
79. This project will also be assisting EFSA in providing support and capacity building to NGOs interested in transforming into microfinance companies under the new law, which requires, among other things, legal and accounting adjustments, in addition to building consensus and synergy among the various market players on the best approach to help the sector expand and grow. Consumer protection will ensure better and fairer access to information and accountability to financial clients, especially for poor and vulnerable clients who lack robust financial knowledge and expertise.
80. Overall, strengthening the regulatory and institutional framework for the microfinance sector will promote its expansion and its growth in a sustainable way. There will be substantial benefits for clients, providers, and public authorities to regulate and oversee all similar financial activities under a consistent rather than fragmented set of rules. For example, top-performing microcredit NGOs should typically be able to transform, as they grow and need to raise more capital. The new regulations will have a positive impact on the soundness of MFIs, and their
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ability to diversify and deepen their funding sources and on-lend to micro enterprises. This will also increase the numbers of MFIs and their client base, which will contribute in alleviating poverty and inequality, particularly in underdeveloped Governorates and amongst women and youth.
81. Value Added of Bank’s Support. The World Bank Group will bring forward its cross country experience and regional knowledge, as well as international best practices. There has been extensive work done in the area of MSME development, ranging from IBRD policy lending, to advisory services and technical assistance under the World Bank-IFC MENA MSME Facility, as well as the work done by the IFC technical support across a number of key priority areas to this project. IFC’s extensive experience in supporting reform initiatives and their links to a wide network of international practitioners is key in supporting EFSA as part of the collaboration on this initiative.
82. A major value added of this project is that it will complement the lines of credit for microfinance, and help leverage parallel financing from other development partners, especially from the GCC countries that provided significant financial support to Egypt during the transition period. The technical assistance provided through this project will tap on the bank`s international experience and bring industry-leading knowledge to EFSA and key project partners.
C. Technical Analysis
83. Setting the legal and regulatory framework that is conducive to growth and stability of the microfinance sector would also allow microfinance companies to engage in other non-banking financial services in accordance with the EFSA Law No. 10 of 2009 after getting EFSA’s approval. Establishing and operationalizing the Microfinance Unit at EFSA will ensure that the microfinance unit adopts international best practices and develops the capacity necessary to implement the law and associated executive regulations, supporting the growth of the microfinance sector in Egypt. It will strengthen the institutional infrastructure, which would enhance the information dissemination mechanisms internally and externally aiming at improving the governance structure and transparency. Support to EFSA in enhancing accountability and governance, and developing a robust consumer protection capacity within the industry, will center on fair treatment, transparency, and effective recourse.
D. Financial Management
84. The EFSA capacity was assessed and found satisfactory to conduct the FM aspects of the project including the accounting, reporting and project external audit arrangements. The PMU, will be located at EFSA, and will be mandated to follow up on project activities and within which a Project Manager will be assigned and an agreement reached with the EFSA to assign a Financial Management Specialist and an Accountant (from EFSA) as part of the PMU. The selected staffs will possess adequate experience to conduct the project activities.
85. EFSA has a previous experience in implementing the Bank’s project namely the “Enhancing Capital Market Authority Monitoring Capacity (P105337- TF90813)”. The project’s overall outcome performance was rated as satisfactory both for the Bank and recipient performance. The relevance, efficacy and outcome performance of the Grant as a whole were rated as Satisfactory.
86. A Financial Management Manual of procedures will define the controls and the flow of information, including the auditing arrangements under the project. Given the straightforward
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nature and the relatively small size of the Grant, the Project, through the PMU, will issue on a semi-annual basis, interim un-audited financial reports (IFRs). These reports will reflect the project sources and uses of funds, contract expenditures, and uses of funds by project component, and will be submitted to the Bank within 45 days following the end of each semester, starting from the semester where the first disbursement from the grant takes place. The Financial Management Specialist at the PMU will be responsible for the preparation of the IFRs and sending them on a timely basis to the World Bank.
87. To ensure that funds are readily available for Project implementation, a US Dollar Designated Account (DA) will be opened and operated by the EFSA. The account will be opened at bank acceptable to the Bank. An independent external auditor will be hired to audit, on an annual basis, the Project financial statements and payments made on SOE basis. To successfully implement the FM arrangements for the project, the FM Manual, which is a part of the Operation Manual of Procedures, must be finalized prior to effectiveness. This Manual will define the FM and Disbursement procedures under the project. An external auditor must be contracted within 3 months of Project effectiveness. The TORs for the auditor, as well as the selected auditor should be acceptable to the Bank.
E. Procurement
88. The Bank conducted a procurement assessment during project preparation and exchange of correspondence between the Bank and counterpart representatives of EFSA. The project will finance mainly TA activities through selection of consultants in accordance with the World Bank’s “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated January 2011, and some limited supply of goods and software under Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated January 2011; and the provisions stipulated in the Legal Agreement. For each contract to be financed by the project, the procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame are agreed between EFSA and the Bank project team in the Procurement Plan (PP). The PP will be updated at least annually, or as needed to reflect the actual project implementation needs and improvements in institutional capacity.
89. The financial department within EFSA is responsible for carrying out all procurement related activities to headquarter and all other branches. The financial department has five employees working on procurement; most are trained procurement officers with a minimum bachelor degree in administration/accounting/finance. The procurement staff of EFSA had previous experience with the UN and the World Bank, having had a previous IDF grant, and hence is familiar with the World Bank’s procurement and selection of consultants’ guidelines. Nevertheless, the Bank will provide training during appraisal and implementation to the staff.
90. Procurement activities. The project will finance the following consultancy services: (i) developing and finalizing the EFSA Executive regulations and the Directives of NGO Microfinance Oversight Board; (ii) capacity building and training; (v) support in establishing the Microfinance Unit; (vi) strengthening the institutional infrastructure with the required equipment and IT both hardware and software. The procurement method will be QCBS/other methods or through selection of individual consultants allowed under the bank’s guidelines and Bank’s procurement standard documents will be used. The project will finance relatively small quantities of goods, IT equipment and systems through ICB using Bank’s procurement standard documents, NCB or shopping procedures using bidding documents acceptable to the Bank. To ensure readiness for implementation the TORs for the TA contracts will be ready by project’s
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negotiation. Procurement packages planned during the first 18 months of project effectiveness are reflected in Annex 3.
D. Social and Environmental Safeguards
91. The proposed project is a Category C, as it is likely to have no adverse environmental impacts. The project will not finance any civil works. Thus, the Bank OP 4.01 on Environmental Assessment does not apply. If a need arises during implementation for the financing of goods or any civil works, the Bank may reassess the application of OP 4.01 and require further environmental assessment.
92. The Bank’s OP 4.12 policy on Involuntary Resettlement and Land Acquisition does not apply. The project will not entail any investments that will trigger the policy since the project components are focused on developing the legal and regulatory framework for financial inclusion; establishing and operationalizing the microfinance unit at EFSA; and promoting accountability, governance and consumer protection. The total cost of the project is US$ 4 million. This project does not include civil works, relocation of populations, impacts on livelihoods nor restriction of access to resources. However, social impacts are likely to be positive. Project activities of technical assistance, capacity building, and study tours will enhance individuals, and institutional reforms will support small private sector entities.
93. No environmental and social safeguards instruments other than the Integrated Safeguards Data Sheet (ISDS) need to be prepared for this project.
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ANNEX 1RESULTS FRAMEWORK AND MONITORING
PROJECT DEVELOPMENT OBJECTIVE: The project development objective (PDO) is to strengthen the regulatory and institutional framework of the microfinance sector in Egypt
PDO Level Results Indicators
Cor
e Unit of Measure Baseline
Cumulative Target Values Frequency
Data Source/Methodology
Responsibility for Data
CollectionYR 1 YR 2 YR 3 YR 4
New regulatory framework effective for MFIs, including NGOs-MFIs Yes/No No No Yes Yes Yes Annual EFSA EFSA
Number of MFIs licensed by EFSA under the law Number 0 2 4 6 10 Annual EFSA EFSA
Number of NGOs engaged in microfinance activities (reported by the Microfinance NGOs Oversight Board) Number 0 3 4 5 9 Annual EFSA EFSA
Number of microfinance beneficiaries under the Microfinance Law (% active clients) Percentage 0 0 10 30 50 Annual EFSA EFSA
Component I: Developing the Legal and Regulatory Framework for Microfinance
Issuance of the Microfinance Executive Regulations by EFSA Yes/No No Yes Yes Yes Yes Annual EFSA EFSA
Frequency of meetings of the Microfinance NGOs Oversight Board Number* 0 4 4 4 4 Annual EFSA EFSA
Component II: Establishing and Operationalizing the Microfinance Unit at EFSA
Microfinance Unit established and operational at EFSA Yes/No No No Yes Yes Yes Annual EFSA EFSA
Number of staff of MFIs trained for study tours Number 0 1 5 9 12 Annual EFSA EFSA
Microfinance sector reports disclosed by EFSA Number 0 4 4 4 4 Annual EFSA EFSA
Number of training programs for Microfinance unit Staff Number 0 3 5 7 10 Annual EFSA EFSA
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Component III: Promoting accountability, governance and consumer protection
Number of staff and clients trained—workshops, study tours, and capacity building events Number 0 1 2 3 5 Annual EFSA EFSA
Number of awareness and consumer protection initiatives launched and implemented by EFSA Number 0 1 2 4 5 Annual EFSA EFSA
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ANNEX 2DETAILED PROJECT DESCRIPTION
1. The proposed project comprises of three main components: (i) developing the legal and regulatory framework for microfinance; (ii) establishing and operationalizing the microfinance unit at EFSA; and (iii) promoting accountability, governance and consumer protection. The total cost of the project is US$ 4 million.
2. Component I: Developing the regulatory framework for microfinance (US$ 1.5 million). This component will support the establishment of a regulatory framework that is conducive to growth and stability of the non-bank financial institutions (NBFIs) in Egypt. Critical to the success of the draft Microfinance Law are the executive regulations that should be robust and comprehensive and provide clear guidelines for NGO MFIs, finance companies, and other market players to easily comply with the new supervisory framework. The new regulations will adopt light prudential requirements, with a focus on fit and proper requirements, strong governance rules, consumer protection (especially transparency, disclosure), and internal and external controls.
3. The NGO Microfinance Oversight Board, which will be established as stipulated by the microfinance Law, will play the role of a “sounding board” responsible for the effective supervision and regulation of NGO-MFIs through coordination and cooperation between EFSA (responsible for regulating and supervising microfinance companies licensed by EFSA) and the Ministry of Social Solidarity (responsible for supervising NGO-MFIs which do not have that status) to make sure the same rules and requirements are applied to both microfinance companies and NGO-MFIs, thus creating a level playing field for all service providers in the market. This would also allow microfinance companies to engage in other non-banking financial services in accordance with the EFSA Law No. 10 of 2009 after getting EFSA’s approval. This would not only be encouraging for the microfinance companies who will be able to engage in other financial services besides microcredit, but can also be an incentive to NGO-MFIs to transform to microfinance companies.
4. Specifically, this component will support EFSA through four main sub-components: (i) developing and finalizing the Executive regulations, and supervision manuals, stipulating the instructions needed to enforce and implement the law and developing the needed rules and standards to be enforced on NGO-MFIs in accordance with the Microfinance Law; (ii) drafting and finalizing the Directives of the NGO Microfinance Oversight Board7, (iii) conducting study tours on legal and regulatory framework for microfinance institutions ; and (iv) providing advisory services to strengthen the regulatory framework for non-bank financial institutions (NBFIs), aiming at enhancing overall financial inclusion in Egypt. This would include addressing in the regulatory challenges faced by EFSA to play an active role in financial inclusion, notably the securities markets, micro insurance, and leasing as well as microfinance. This would promote a more diversified financial system, enhancing competition and better quality services to the clients.
5. Component II: Establishing and operationalizing the Microfinance Unit at EFSA (US$ 1.5 million). The objective of this component is to ensure that the microfinance unit
7 The Oversight Board comprises representatives from the Ministry of Social Solidarity, CBE, EFSA, SFD, General Federation of NGOs, Egyptian Union for Microfinance (to be established), and financial experts especially in the field of microfinance.
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adopts international best practices and develops the capacity necessary to implement the law and associated executive regulations effectively as to support the growth of the overall microfinance sector in Egypt. It will support EFSA through the provision of technical assistance and advisory services in establishing and equipping the Microfinance Unit, which would be responsible for operationalizing the executive regulations and policy, enforcing rules, ensuring compliance, and supervising MFIs. This will help EFSA to establish appropriate on-site and off-site monitoring systems and procedures, advice on enforcement mechanisms and training on the operationalization of the Microfinance Law and its executive regulations. The IT system will also allow the compilation of sectoral data to monitor macro prudential indicators, which would allow adequate and timely monitoring of the performance and soundness of microfinance sector and NBFIs. The system will also help in identifying financial inclusion barriers created by some financial institutions (such as minimum balance amounts for opening a bank account).
6. This component comprises of three sub-components: (i) supporting the establishment of the microfinance unit that is specialized and responsible for licensing, monitoring, oversight, inspection and audit, financial reporting, and consumer protection, and complaints. This support will be provided through the provision of advisory services in relation to issues such as advice on the structure, staffing and reporting lines for the Unit, the development of terms of reference (TORs) for the relevant positions (which TOTs will define staff members’ roles, qualifications, responsibilities, accountabilities and performance criteria) and advice as to coordination and communication arrangements with other departments in EFSA and other government agencies; (ii) providing capacity building and training of relevant staff, to be equipped to undertake key operational procedures and strategic functions within the Unit. This include conducting training seminars and workshops and study tours to countries that have well developed systems for microfinance regulations and supervision and on the job training; (iii) strengthening the institutional infrastructure, with the required equipment and IT, both software and hardware, aiming at enhancing the data collection from the financial entities, information dissemination, allow for better monitoring and supervision and ensuring compliance, with the objective of improving transparency, disclosure and overall governance. Experts will be hired to support this. These three sub-components are aimed at ensuring the sustainability of the Micro Finance Unit through the provision of the required skills and capacity for effective implementation of the Microfinance Law.
7. Component III: Promoting accountability, governance and consumer protection (US$ 1 million). This component will support EFSA in enhancing accountability and governance, as well as developing a robust consumer protection capacity within the microfinance industry, and in developing financial literacy amongst target population groups. A separate division will be solely responsible for consumer protection.
8. This component comprises three sub-components: (i) enhancing consumer protection and financial literacy through (a) advice as to the consumer protection specific supervisory tools that are likely to be required (such as mystery shopping, monitoring of forms of disclosure and advertising materials, consumer forums etc.); (b) advice on content, and review, of manuals for processes and procedures for consumer protection supervision; (c) advisory inputs/services for the development of transparent, fair and accessible procedures for the complaint resolution function of the new Unit; (d) assistance in designing and implementing financial literacy training materials and programs relevant to customers of MFIs (the relevant programs might be provided by EFSA or the MFIs themselves); and (e) the design of a public awareness campaign about rights and responsibilities under the new Micro Finance Law and the supervisory role of
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EFSA; (ii) conducting study tours and on the job training in countries which have well developed systems for financial consumer protection; and (iii) building the capacity of the Microfinance NGOs Oversight Board through training seminars and workshops. Within this component particular attention will be placed on comprehensive transparency and disclosure requirements and further business conduct rules.
9. Gender mainstreaming. An overarching goal of the project is to promote gender-inclusive development of the Egyptian microfinance sector. Under component I, a gender specialist will form part of the team drafting the Executive regulations to help ensure gender mainstreaming. For example, the published supervisory guidelines would be cognizant of the need to track and promote female microfinance clients. Similarly, NGOs specializing in female economic participation and entrepreneurship will form part of the Microfinance NGOs Oversight Board. This will help ensure the concerns and priorities of women are taken into account during the drafting of the Executive regulations and during the implementation of the Microfinance Law. This is particularly critical given the ongoing political and economic volatility in Egypt and the recent prioritization of citizenship feedback in Egyptian public policy.
10. Under component II, capacity building workshops on gender-inclusive financial inclusion and microfinance development will be delivered to EFSA staff, with particular reference to the role of regulatory agencies in the promotion of gender-inclusive development. This is a frontier area of financial sector development (particularly for the MENA region) and one that Egypt can take a leadership role in. Similarly, study tours to countries that have effectively promoted gender inclusive microfinance sectors will be organized under this component.
11. Under component III, consumer protection initiatives that specifically target women will be developed and implemented. These programs (centering on fair treatment, timely information, and effective recourse) will be structured and delivered in a manner in which women can successfully access and benefit from services provided. These programs will take into account socio-economic and cultural barriers (for example women ownership of assets) that cause women to be treated differently than men by financial institutions and regulators. Program modules will include topics on transparency (key terms, relevant charges), fees and charges, debt collection, consumer awareness, and sales and marketing practices. They will focus on using delivery channels tailored the needs of female clients.
12. Overall, enhancing financial consumer protection mechanism will ensure that female clients’ rights are protected and that discriminatory practices are eliminated. Furthermore, through promoting a supportive regulatory and institutional framework the project will facilitate women’s access to finance and encourage them to access the formal financial sector. Gender disaggregated data will be prioritized and tracked throughout project implementation, specifically the percentage of women beneficiaries, and the number of consumer protection initiatives targeted specifically to women.
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ANNEX 3IMPLEMENTATION ARRANGEMENTS
A. IMPLEMENTING AGENCY 1. EFSA is the entity responsible for regulating the non-bank financial service industry in Egypt including, capital markets, derivative markets, commodities, insurance, mortgage finance, financial leasing, factoring and securitization. EFSA will be the main counterpart, responsible for coordinating and managing the overall project. The new constitution issued on January18, 2014, has made EFSA an independent regulatory and supervisory entity, reporting directly to the President.
2. EFSA is under the leadership of its reformist new chairman appointed in August 2013. To ensure his independence, the chairman was appointed for a four years term which will promote sustainability and continuity of the reforms. EFSA currently has a strong professional cadre at the EFSA Board, the senior management and officer levels that in turn has a good track record with the World Bank. EFSA was the main counterpart of a number of World Bank projects (three Financial Sector reform DPLs, amounting to US 1.5 billion). Any changes in key staff - and the impact this may have on the operational effectiveness of the prospective project - will need to be monitored throughout the upcoming project preparation process to ensure adequate mitigation is built into the project to sustain implementation performance.
3. Arrangements will be put in place to ensure adequate project supervision, covering fiduciary and safeguards aspects, with semi-annual supervision missions. The supervision team will draw on expertise from the Bank as well as, external experts, where necessary.
B. FINANCIAL MANAGEMENT 4. A financial management assessment of the implementing agency was conducted and it was found that the implementing agency has previous experience in managing World Bank funds; during the preparation and implementation of a previous project “Enhancing Capital Market Authority Monitoring Capacity (P105337- TF90813)” that is completed. The assessment concluded that the EFSA financial management arrangements satisfied the minimum requirements.
5. EFSA is a public Authority, having a legal status, established in accordance to law 10 of the year 2009. EFSA is responsible for supervising and regulating non-banking financial markets and instruments, including the Capital Market, the Stock Exchange, and all activities related to Insurance Services, Mortgage Finance, Financial Leasing, Factoring and Securitization. EFSA's role is to regulate the market and ensure its stability and competitiveness to attract more local and foreign investments “The mandate of the Authority also includes limiting inconsistency risks and addressing problems arising from applying different supervisory rules".
6. Also, EFSA is considered the concerned administrative body entitled to apply the Financial Leasing provisions promulgated by law no. 95 of 1995.
7. Risk Assessment and Mitigation:
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Inherent Risks
Risk Before MM
Mitigating Measures - The current staffing structure of
EFSA is not designed to accommodate the nature of the project activities and the Bank fiduciary requirements.
S
- Designate FM staff from within EFSA to the PMU, preferably with previous experience in donors financed activities, to be responsible for the TF recording and reporting.
M
Inherent Risk Before MMControl RisksBudgeting
- Budgeting capacity to plan, execute and monitor the grant funds.
S
- The PMU will prepare a comprehensive budget for all project activities. The projected disbursements will be revised on a Semi-annual basis and reported in the corresponding Semi-annual IFR.
M
Internal Control
- Adequacy of internal control structure to enable segregation of duties and efficient management of the grant funds.
S
- Separate filing will be made for the TF proceeds and expenditures supporting documents and all original supporting documents will be maintained in a traceable and organized manner by the TF accountant within the EFSA Finance Department.
- A financial manual will be prepared before effectiveness by the Financial and Administrative Manger depicting the controls that will be applied over the use of funds
M
Flow of funds
- Grant funds are not segregated resulting in lack of traceability of World Bank funds.
S
- The PMU will open a designated account in a bank acceptable to the World Bank for the sole purpose of managing the grant activities. Reconciliation between the Grant financial records and the designated account will be prepared on a monthly basis.
M
Accounting and Reporting
- Availability of timely and sufficiently detailed financial information with the current accounting system in place.
S
- All project-related transactions would be recorded in the ORACLE automated books of accounts and supporting documents will be kept at the PMU level (audit trail).
- Funds received would be identified separately and reflected in the project accounts, semi-annual IFR, and annual Financial Statements.
M
Audit
- The project annual reports will have to be audited in accordance with the World Bank policies.
S
- A private external auditor acceptable to the Bank will be hired by the EFSA to conduct review of the project’s semi-annual IFRs and audit of the project’s annual Financial Statements.
- Also the independent external auditor will be required to issue a Management Letter reporting on any significant internal control and/or accountability issues.
M
Control Risk Before MM
8. Staffing: The project will be managed by a Project Management Unit (PMU) which will be established within EFSA and has overall responsibility for the project’s financial management function for all components. The financial management and accounting of the project will be
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composed of two staff – a Financial Management Specialist (FMS) and an Accountant with clear responsibilities (both appointed from EFSA), as it will be described in the financial procedures manual which will be prepared by the PMU. The Financial Management Specialist will be responsible for reviewing the accountant recording of journal entries in the accounting system, coordination in regard to financial matters with Central Department for Financial and Administration Affairs in EFSA, and reviewing the Withdrawal Applications (WAs) in addition to reporting on the financial performance of the Project to the World Bank. The Accountant will be responsible for the day to day transactions including recording the journal entries in the accounting system. Also, the Accountant will be responsible for preparing the Withdrawal applications, submitted to the World Bank.
9. Accounting and Record Keeping: EFSA utilizes ORACLE system for recording and reporting purposes which is capable of generating the semiannual IFRs and annual Financial Statements which will be required under the Grant Agreement. Also, it permits segregation of duties among different users.
10. The format and content of the project reports was shared and agreed with EFSA. The IT department at EFSA will create a unique code on the ORACLE system for the sole purpose of recording and reporting the project’s financial activities. This system should allow the generation of the overall project financial reports on a timely basis.
11. The FM Team prepared and delivered to the proposed head of PMU and IT department an IFR Excel Template which includes sample i) Sources and Uses of Funds, ii) Disbursements by component, iii) Bank Reconciliations and iv) Cash Forecast. Also, it was agreed with the Financial Specialist that the semi-annual IFR package will include reporting on the commitments established by the PMU i.e. (i) Commitments Value, (ii) Disbursed Amount and (iii) committed not yet Paid Amount.
12. Flow of funds: A designated account (DA) will be opened in a bank acceptable to the World Bank where an advance will be made. The DA will be maintained by the assigned accountant within the PMU. Replenishments will be made through Withdrawal Applications (WAs) which will be signed by the authorized signatories communicated officially to the Bank.
13. Internal Controls and filing: Separate filing will be made for the TF proceeds and expenditures supporting documents and all original supporting documents will be maintained in a traceable and organized manner by the Grant FM Specialist.
14. The PMU shall develop Policies, Procedures and an Internal Controls manual which will include a Financial Management Chapter. This manual will aim at standardizing the project activities and assist PMU employees in consistently implementing control procedures. For fixed Assets to be purchased, the FM Specialist will establish a Fixed Asset Register that is intended to improve accuracy of the accounting records for fixed assets and improved control over each asset (location, custodian, etc.).
15. Reporting and Auditing: The EFSA will hire the project’s external auditor within three months after project effectiveness. The external auditor will conduct Semi-annual reviews on the project IFRs and audit of the project’s annual Financial Statements before submission to the Bank.
(i) Semi-annual IFRs. The format and content of the IFR, which will be produced 45 days from each semester closing date, were discussed to include the receipts and expenditures of the Grant funds by component and category as well as the coming 6 months disbursements
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forecast. Also, the IFRs will include a detailed reconciliation of the DA receipts and disbursements.
(ii) Audited FS. The audit of the grant will be conducted by independent private auditor and will cover the grant’s sources and uses of funds, reconciliation and use of the DA and will be submitted to the Bank within 6 months after the closing date of each fiscal year.
C. PROCUREMENT ARRANGEMENTS 16. The Procurement for this project will be carried out in accordance with the World Bank’s “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated January 2011, and “Guidelines: Procurement under IBRD Loans and IDA Credits” dated January 2011; and the provisions stipulated in the Legal Agreement. For each contract to be financed by the Loan, the procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan (PP). The PP will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. In addition procurement procedures for National Bidding Documents and sample bidding documents will be reviewed by the Bank during the appraisal mission to ensure being acceptable to the Bank
17. Summarized Procurement Plan. Below are the summarized procurement activities to be carried out during the first 18 months of project effectiveness and the prior review threshold.
18. Goods and Works and non-consulting services.
a. Procurement Method and Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as stated in Appendix 1 to the Guidelines for Procurement:
Goods >= 4 million and any direct contract regardless of value
Non-Consultant Services >= 4 million and any direct contract regardless of value
b. Summary of the Procurement Packages planned during the first 18 months after project effectiveness (including those that are subject to retroactive financing and advanced procurement)
1 2 3 4 6 7
Ref. No.Description Estimated
CostUS$
ProcurementMethod
Reviewby Bank
(Prior / Post)
Invitation to Bid Date
G.SH. several
Several IT equipment packages for establishing consumer department and Microfinance Unit
1.35 million Shopping post December 15, 2014
19. Selection of Consultants. Prior Review Threshold: Selection decisions subject to Prior Review by Bank as stated in Appendix 1 to the Guidelines Selection and Employment of
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Consultants:
Selection Method Prior Review Threshold Comments
1. Competitive Methods (Firms) 1 million
2. Single Source (Firms) All
3 Individual consultant 330,000
a. Short list comprising entirely of national consultants: Short list of consultants for services, estimated to cost less than US$300,000 equivalent per contract, may comprise entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. b. Any Other Special Selection Arrangements: a number of QCBS for selection of supervision and TA consultants will be financed under retroactive financing and advance procurement.
c. Consultancy Assignments with Selection Methods and Time Schedule
1 2 3 4 5 6
Ref. No. Description of Assignment Estimated
Cost US$SelectionMethod
Reviewby Bank(Prior / Post)
Issue RFP date
C.QCBS.2 Enhance consumer protection mechanism 0.35 million QCBS prior December
2014
C.IND.1
Supporting the development of the
institutional framework for microfinance
0.25 million Individual consultants Prior/post July 15, 2014
20. Procurement risks are in particular inherent to the following: (i) a clear legal framework regarding selection of consultants is lacking in Egypt; and (ii) standard bidding documentation for request for proposals not used by procurement practitioners.
21. Based on the overall assessment of EFSA to implement procurement and the information available on the procurement environment in Egypt, the overall procurement risk is judged to be Moderate. This rating therefore requires the assignment of dedicated and qualified procurement manager to handle the project, as well as the provision of formal and on–the-job training to the project team on procurement and project management both before and during project implementation.
22. Mitigating measure: The following measures, corresponding to the risks identified above, are expected to be implemented: (i) project design kept simple (ii) close supervision of the Bank staff, and (iii) Training at project launch workshop will be provided as well as on–the-job training to the project team on procurement and project management.
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ANNEX 4 -OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF)Inclusive Regulations for Microfinance
1. Project Stakeholder Risks
1.1. Stakeholder Risk Rating Moderate
Description:
EFSA- Principal risks come from a delay or reversal of policy commitment to develop the legal, regulatory and institutional financial infrastructure of Non-bank financial services due to turnover of leadership. Another risk is the lack of sufficient funding to maintain the required human capacity once the grant closes.
Risk Management:
Risk Management: EFSADeveloping the legal, regulatory and institutional financial infrastructure to promote the expansion of microfinance sector has been an important component of the government‘s agenda. EFSA is responsible for regulating the non-bank financial service industry in Egypt. The Bank has an extended and sustained program with EFSA and found it a reliable counterpart from technical and implementation stand point. Moreover, MSME development has remained a consistent priority for EFSA. Taking this into account, it’s not anticipated that the Government would reverse its support for the objectives and activities proposed above for the project.
Moreover, continued close consultation with key government stakeholders and coordination with private sector and other major donor partners active in this policy domain will enable the project team to maintain a ready awareness of any possible policy changes that might impact the government priorities during the project preparation phase.
To ensure sustainability of the Microfinance Unit, after the closing of the trust fund, EFSA will raise funds (through fees, charges, etc.) that would allow it to maintain its institutional capacity and staffing of the required skills.
Description: EFSA has the required capacity to implement the operation.
Risk Management: EFSA is the principal government body regulating and facilitating non-bank financial services in Egypt. EFSA currently has a strong professional cadre at the senior management and officer levels. EFSA has a good track record with the World Bank which showed
33
that it has adequate capacity to implement, coordinate and manage the operation. Moreover, the project will be providing capacity to the implementing entity, and developing a clear institutional framework for execution to streamline the process and ensure successful completion of tasks. In addition, the MENA TA Facility will be investing in the capacity building of EFSA to manage and implement projects.
Resp: Bank/ EFSA
Stage: Prep.
Recurrent: Due Date: March 25, 2014
Frequency:
Status: Completed
2.2. Governance Rating Moderate
Description: EFSA is financially and administratively independent, and operates under a mandate established under law. There is no significant governance risks associated with the key implementing partner (EFSA) as such.
Risk Management: Close attention will be paid to key governance factors in consultation with EFSA as the preparation work proceeds and ORAF will be updated accordingly.
Resp: EFSA/Bank
Stage: Prep.
Recurrent: Due Date: March 25, 2014
Frequency: Status: Ongoing
3. Project Risks
3.1. Design Rating Low
Description: Lack of expertise on relevant technical subjects may delay the project implementation.
Risk Management: Longer-term consultants and capacity building and training to EFSA staff to provide support from the onset and during project implementation will build sustainable capacity and minimize this risk.
Resp: EFSA /Bank
Stage: Impl. Recurrent: Due Date: March 31, 2014
Frequency: Status: Ongoing
3.2. Social and Environmental
Rating Low
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Description: Social and environmental risks are minimal due to this being a technical assistance project to improve regulatory framework
Risk Management: The proposed project is classified as a Category C, as it is likely to have minimal or no adverse environmental impacts. No environmental safeguards instruments other than the ISDS need to be prepared for this project.
Resp: Bank/EFSA Stage: Prep.
Recurrent: Due Date: March 31, 2014
Frequency: Status: Ongoing
3.3. Program and Donor Rating Moderate
Description: Inadequate technical assistance provided by donors and government entities.
Risk Management: The World Bank is working closely and liaising with donors active in the Microfinance sector, from the scoping stage onwards in an effort to harmonize and streamline the efforts of all institutions. No additional risk mitigation requirements anticipated.
Resp: Bank Stage: Prep. Recurrent: Due Date: March 31, 2014
Frequency: Status: Ongoing
3.4. Delivery Monitoring and Sustainability
Rating Moderate
Description: Ability to exercise adequate level of project supervision in view of the current uncertainties in the region.
Description: EFSA lack of technical and institutional capacity to maintain project initiatives (new functions on MFI regulation ) after project completion
Risk Management: Staff from the local country office are core team members involved in project preparation and will be involved in the project ongoing supervision. The country team also draws upon financial inclusion experts based in headquarters.
Risk Management: One of the main project components is providing training and capacity building to EFSA staff to ensure technical and institutional capacity.
Resp: Bank/EFSA
Stage: Prep. Recurrent: Due Date: March 31, 2014
Frequency: Status: Ongoing
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4. Overall Risk
Preparation Risk Rating: Moderate
Implementation Rating: Moderate
Comments: The overall preparation risk is moderate given that a Project Management Unit (PIU) will be established and fully staffed with caliber members.
Comments: The project is implemented in parallel with activities being financed by the MENA MSME TA Facility, which includes capacity building of EFSA. This is complementary to the Project.
Preparation Risk Rating: Moderate
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ANNEX 5
ONGOING DONOR COORDINATION MAPPING
Macro Level: Legislation, Regulation, and Supervision
ActivityImplementing
Agency/TA Provider
Description/Focus Beneficiaries Funding Source/Donor Status
TA to Egyptian Financial Supervisory Authority (EFSA)
World Bank Technical assistance in drafting the microfinance law EFSA IFC World Bank MSME
TA Facility Ongoing
TA to EFSA in developing new microfinance law
GIZFinanced consultant reviewing elements of new microfinance law
EFSA GIZ Completed
Micro Level: Support Services and Infrastructure
Support to Central Bank of Egypt (CBE) World Bank Developing a credit guarantee
facility for MSME financing CBE IFC World Bank MSME TA Facility Ongoing
TA to Social Fund for Development (SFD) World Bank
Establishment of M&E, Innovation, and Gender Units; Gender entrepreneurship work
SFD IFC World Bank MSME TA Facility Ongoing
TA to Egypt Post World Bank Product development, MFI partnership, risk management and Islamic financial services
Egypt Post IFC World Bank MSME TA Facility Ongoing
CGAP Market Building Workshops (periodic)
CGAP National financial inclusion strategies, data needs, regulatory frameworks; Supports institutional TA requirements.
Providers and government
CGAP Donor Funds / GIZ Cross Funding
Ongoing
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Development of Venture Capital and Early Stage Innovation Financing
World Bank in Conjunction with the University of California at Berkeley
Objective is to build the ecosystem necessary for early stage innovation financing
Market players (regulators, providers, donors)
IFC World Bank MSME TA Facility Completed
Micro Level: Financial Service Providers
Egyptian Banking Institute (EBI) to MSME banking departments
IFC
Design of new financial products, strengthening corporate governance, and improving credit information systems
Banque Misr, Alex Bank
IFC World Bank MSME TA Facility Ongoing
TA to NGO-MFIs
IFC in partnership with the Egyptian microfinance network
Focusing on governance, financial management, and better serving women/youth via product and delivery channel development
Dakahleya, Al-Tadamun, Lead Foundation
IFC World Bank MSME TA Facility Ongoing
TA on Islamic Finance Product Development
Egyptian Banking Institute
Islamic finance product development
World Bank MNSFP in conjunction with Islamic Development Bank
Ongoing
TA to Lead Foundation on Product Development
Women's World Banking
Gender-responsive credit products
Lead Foundation Core Funding Ongoing
Clients and Research
Entrepreneurship Training to Women
World Bank; SFD
Trainings focused on business planning, feasibility studies, access to finance, and linking startups to mentors and incubators
Women Groups in Alexandria and underserved governorates
IFC World Bank MSME TA Facility Ongoing
MSME Development SFD Line of credit to banks and MFIs to encourage
Financial Institutions,
World Bank investment lending loan
Ongoing (2010-
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Micro, Small, and Medium-Sized Enterprise Support Work (Financial and Non-Financial)
Project ($200 mn) downscaling MSMEs December 2015)
Promoting Innovation for Inclusive Financial Access
World Bank Supervises; SFD Implements
Line of credit to banks, MFIs, leasing companies, venture capital companies; new financial products for MSEs (financial leasing, factoring, venture capital);
Financial institutions, MSMEs through greater access to finance
World Bank investment lending loan
Preparation-board approval planned April 1 2014
MSME development project ($300 mn) SFD
Line of credit to banks and MFIs to encourage downscaling
Financial institutions, MSMEs
African Development Bank Ongoing
MSME development project ($50 mn)
Line of credit to banks and other financial institutions to encourage downscaling
Financial institutions, MSMEs
Arab Fund for Economic and Social Development (AFESD)
Ongoing
MSME development project ($50 mn)
Line of credit to banks and other financial institutions to encourage downscaling
Financial institutions, MSMEs
Khalifa Fund Planned
MSME development project ($50 mn)
Line of credit to banks and other financial institutions to encourage Islamic Finance development
Financial institutions, MSMEs
Islamic Development Bank
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ANNEX 6
IMPLEMENTATION SUPPORT PLAN
1. The World Bank will support the implementation of the project and provide the technical advice necessary to facilitate the achievement in the PDO.
2. The World Bank’s FM team will support EFSA to enhance their knowledge on FM Bank procedures and guidelines by providing workshops on FM and disbursement.
3. There will be a subsidiary agreement signed between the World Bank and EFSA whereby the Recipient makes the funds of the grant available to EFSA for implementation of the project.
4. Through the project duration the World Bank team will closely monitor the project on semi-annual supervision missions. During the supervision mission, the World Bank will ensure that the financial arrangements agreed on are respected and will assess if any additional training or support is needed. The World Bank team will review and clear the audit TOR, review the audit reforms and IFRs received and provide its feedback on a timely manner.
5. The main focus in terms of implementation during:
Time Focus Skills needed Resource estimate
First twelve months
Developing the regulatory and institutional framework for Microfinance institutions.
Financial Specialist, MSME specialist, Finance Operations Officer, Principal Operations Officer, Legal Advisor and Microfinance Expert, Procurement Specialist, Financial Management Specialist, Financial development analyst
1.5 million
12-45 months Enhancing the Microfinance unit and NGO microfinance Oversight Board
