ENVIRONMENTAL AND SOCIAL MANAGEMENT FRAMEWORK

FOR THE

ACCESS TO FINANCE PROJECT

ISLAMIC REPUBLIC OF AFGHANISTAN

E4309

Abbreviations and acronyms ABADE Assistance in Building Afghanistan by Developing EnterprisesACGFAREDP

Afghanistan Credit Guarantee FoundationAfghanistan Rural Enterprise Development Program

ARTF Afghanistan Reconstruction Trust FundBMZ The German Ministry of DevelopmentCITES Convention on International Trade in Endangered Species of Wild Fauna and FloraCSPI Community Based Savings and Promotion InstitutionsDAB Da Afghanistan BankDEG DEG- Deutsche Investitions- und Entwicklungsgesellschaft mbHDMFI Deposit taking Microfinance InstitutionEAEDFI

Environmental AssessmentEuropean Development Finance Institutions

EIA Environmental Impact AssessmentEMPESMS

Environmental Management PlanEnvironmental and Social Management Systems

ESMF Environmental and Social Management FrameworkFAIDA Financial Access for Investing in the Development of AfghanistanFI Financial IntermediaryGoA Government of AfghanistanIBES Integrated Business Enterprise SurveyIDA International Development AssociationIFC International Finance CorporationMFP Microfinance PartnersMIS Management Information SystemsMISFA Microfinance Investment Support Facility for AfghanistanMFIMFPs

Microfinance InstitutionsMicrofinance Partners

NEPANSP

National Environmental Protection AgencyNational Solidarity Program

PAP Project Affected PeoplePCB Polychlorinated biphenylsPFI Participating Financial InstitutionsSMETATOR

Small and Medium-sized EnterprisesTechnical AssistanceTerms of Reference

TUP Targeting the Ultra Poor

Table of content

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sAbbreviations and acronyms..................................................................................................................2

Executive Summary.................................................................................................................................41. General Profile of Afghanistan MSME sector..................................................................................5

2. Project background.............................................................................................................................63. Need for the ESMF: Principles and objectives of the ESMF...........................................................7

4. Environmental and social regulatory framework.............................................................................84.1. Afghan laws and regulations........................................................................................................8

4.2. World Bank policies and Process for Implementation of Environment Safeguards..............94.2.1. Microfinance (loans for microenterprises)....................................................................10

4.2.2. SME finance.....................................................................................................................11a) The Afghan Credit Guarantee Foundation (ACGF)........................................................11

b) Environmental management framework for SME finance..............................................12Basic framework.................................................................................................................12

Institutional arrangements within ACGF..........................................................................14Tasks and responsibilities.............................................................................................15

Project Screening and Project Appraisal....................................................................15Training and Capacity Building...................................................................................16

Project Monitoring.........................................................................................................17Reporting........................................................................................................................17

4.3. Social issues.................................................................................................................................17Social Safeguards.........................................................................................................................18

4.4. Complaints and Grievances.......................................................................................................184.5. Timing and Cost of ESMF.........................................................................................................18

Annex 1 - Ineligible Activity Lists........................................................................................................19Annex 2a –Environmental Assessment Categories.............................................................................21

Annex 2b –Environmental Screening Form........................................................................................22Annex 3 – Environmental Management Plan.....................................................................................24

Annex 4- Terms of Reference to hire an individual consultant to assist ACGF to introduce the ESMS.......................................................................................................................................................26

Annex 5- Terms of Reference for focal points for ACGF and PFIs..................................................28Annex 6 – Detailed Project Description...............................................................................................30

Annex 7- Afghan Credit Guarantee Facility: Example of existing DEG-clauses............................32

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Executive Summary

Note:The Afghanistan Access to Finance project is in its preparation phase.The tentative date for the World Bank approval is November 2013.

The overarching Development Objective of the proposed Access to Finance project for the Islamic Republic of Afghanistan is to build institutional capacity to improve access to credit of micro, small and medium enterprises. The program is divided into two key components which aim at improving access to financial services for micro and small enterprises in the first component and for small and medium enterprises in the second component.

The Environmental and Social Management Framework (ESMF) was prepared to define the management procedures that allow the proposed Access to Finance project to “avoid, mitigate, or minimize adverse environmental and social impacts” of supported activities and enterprises. The ESMF was prepared in accordance with definitions provided in the World Bank Operational Manual and relating to the triggered operational policy on Environmental Assessment (OP 4.01). The other operational policies included in the World Bank safeguards procedures were not triggered by the project. The Project is indeed not expected to have any significant negative environment impact and is in fact expected to generate considerable positive social impact through provision of financial services to under-served groups (MSMEs), with a focus on the poorer section of the population (including ultra-poor households through the TUP Program), women and youth. The project is not expected to trigger any of the World Bank social safeguards policies. The proposed interventions of the program place the overall categorization of the Access to Finance project in category “FI”.

MISFA, Afghan Credit Guarantee Foundation (ACGF) and the partner institutions will assume overall responsibility for compliance with pertinent Afghan laws and regulations on environmental protection and with the requirements of the World Bank. Commitment to ensuring environmental soundness would be included in the cooperation agreements between MISFA and its partner institutions, as well as between ACGF and its partner institutions (participating financial institutions PFIs). The Project also builds on the mechanisms established by MISFA under the previous IDA-funded project to ensure that the MSMEs supported by both MISFA and ACGF do not have significant harmful impacts on the environment. Environmental focal points in all institutions and partner institutions/PFIs are or will be established. The main tool to be used by PFIs is the activity exclusion list developed for the previous project to guide credit officers in their loan decisions. In addition, for SME loans only two types of subprojects that do not need environmental impact assessment will be considered for support (i) Subprojects that do not require full environmental Assessment; and (ii) Subprojects that only need filling out of environmental registration and screening forms. The ESMF provides all institutional procedures and mechanisms to ensure identification of environmental and social risks, mitigate, monitor and reporting on implementation and capacity building plans for MISFA and ACGF.

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1. General Profile of Afghanistan MSME sector

The 2009 Integrated Business Enterprise Survey (IBES)1 is one of the first studies about the state of business in Afghanistan.2

IBES 2009 surveyed over 402,000 establishments in Afghanistan and revealed that small firms dominate the private sector with 91 percent of establishments surveyed employing 5 workers or less (nearly 40 percent had only one worker and only 0.2 percent had more than 50 workers).

Firms are relatively young (about 50 percent have operated for 4 years or less) and operate with limited physical presence (with roughly 33 percent in temporary structures and about 1.6 percent in no structure at all - mobile or street vendors).

The survey covered 32 of Afghanistan’s 34 provinces3 and highlighted that most establishments are in rural areas (70 percent).

IBES 2009 revealed that, among 12 non-agricultural activities surveyed, 4 the three most dominant activities in Afghanistan are trade and repair with nearly 117,000 establishments (29 percent), manufacturing (22 percent) and accommodation and food services (10 percent) (see table 1). Together they account for 61 percent of total establishments and 38 percent of gross value added.

Table 1 - Sectoral distribution of MSMEs – Source IBES 2009

Sector in %Mining and quarrying 0.1Transport and storage 0.3Education 0.3Real estate activities 0.4Information and communication 1Construction 1.2Electricity, gas and water supply 3.3Health and social work 4.9Accommodation and food service 10.4Manufacturing 22Other services 27Trade and repair 29.2TOTAL 100

1 Afghanistan. Central Statistics Organization and Asian Development Bank, (2009), “Integrated Business Enterprise Survey”.2 The majority of establishments surveyed were privately owned with only a little more than 11 percent government or public sector establishments. 83 percent had a single-owner, nearly 4 percent partnerships, and about 2 percent either limited companies or cooperatives or trusts.3 Though because of difficult field conditions, the rural areas of several districts were excluded. Ultimately eight provinces were only partially covered and two provinces were outside coverage.4 The survey included all non-agricultural establishments involved in mining and quarrying; manufacturing; electricity, gas and water supply; construction; trade and repair; transport and storage; accommodation and food service; information and communication; real estate; education; health and social work; and other services.

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In 2008, 38 percent of firms had annual receipts between AFN 101,000- AFN 500,000 (USD$ 1,900 – USD$ 9,600) and only 7 percent of establishments had annual receipts of more than AFN1 million (about USD$19,000). About 25.2 percent of total gross value added of all industries went to trade and repair in 2008 and 12.6 percent to manufacturing.

The vast majority of the establishments (82 percent) revealed that they face various and multiple problems ranging from frequent power cuts, lack of infrastructure, labor problems, security issues and so forth.

Though the survey did not specifically investigate the state of access to finance of the micro, small and medium enterprises (MSMEs) surveyed, during the 3 years preceding the survey, more than half (53 percent) of the establishments received government assistance in the form of loans, subsidies, or others, with a majority (52 percent) receiving more than one type of assistance.

2. Project background

The overarching Development Objective of the proposed Access to Finance project for the Islamic Republic of Afghanistan is to build institutional capacity to improve access to credit of micro, small and medium enterprises.

The key results indicators will track the following: Outstanding microfinance loan portfolio of MISFA’s partner institutions Outstanding SME loan portfolio of partner institutions of the Afghanistan Credit

Guarantee Facility Graduation rate of TUP beneficiaries

The Access to Finance project is divided into two components which aim at improving access to financial services for micro and small enterprises in the first component and for small and medium enterprises (SMEs) in the second component (see box 1 below and details in annex 6).

Box 1. Access to Finance project - summary of componentsComponent 1 : Improving access to financial services for micro and small enterprises [$32m]Sub-component 1.1: Strengthening of the microfinance sector through MISFA [$13m]Sub-component 1.2.: Targeting the Ultra Poor (TUP) Program [$15m]Sub-component 1.3: Strengthening of MISFA [$4m]Component 2: Improving access to financial services for small and medium enterprises [$18m]Sub component 2.1: Supporting the expansion of the Afghan Credit Guarantee Foundation[$13m]Sub component 2.2: Providing technical assistance to Afghan Credit Guarantee Foundation and its partner financial institutions (commercial banks and MFIs) [$5m]

The IDA funds will be channeled from the Government of Afghanistan (GoA) under each component to (i) Microfinance Investment Support Facility for Afghanistan (MISFA), as an implementing entity and (ii) Afghan Credit Guarantee Foundation (ACGF), as an implementing partner (see more details on the ACGF in section 4.2).

The IDA grant funds (US$ 50 million) provided to the GoA will be used to - provide continuing support to the microfinance sector through MISFA, as well as, supporting MISFA to take on a broader role as a catalyst for innovations to increase access to financial services to the lower end of the market (notably micro and small enterprises) as per its new strategic plan (component 1).

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- increase lending to SMEs provided by (i) financial institutions through the expansion of the Credit Guarantee Facility implemented by ACGF (which has supported SME lending in Afghanistan since 2006 and has a strong track record) and technical assistance to ACGF and the partner financial institutions to strengthen their SME lending capacity (also referred as “downscaling”) (ii) microfinance institutions, by supporting the Credit Guarantee Facility’s coverage to microfinance institutions (MFIs) lending to SMEs and technical assistance to ACGF and the MFIs (also referred as “upscaling”) (component 2).

3. Need for the ESMF: Principles and objectives of the ESMF

The Environment and Social Management Framework (ESMF) was prepared to define the management procedures that allow the proposed Access to Finance project to “avoid, mitigate, or minimize adverse environmental and social impacts”5 of supported activities and enterprises. The ESMF provides an environmental and social screening process and other tools to assess and mitigate potential environmental and social impacts of proposed activities where needed. The overall purpose of the ESMF is to ensure that all activities and sub projects within the Access to Finance project are not harmful to the local communities and the environment, and are in compliance with the requirements of relevant Afghan laws and Legislations as well as World Bank environmental policies.

The World Bank has been involved in the Afghanistan financial sector for over ten years with notably two projects respectively financed by the International Development Association (IDA) and by Afghanistan Reconstruction Trust Fund (ARTF). Both projects were implemented by MISFA. For the implementation of the IDA microfinance project, the environmental assessment framework was prepared in accordance with the World Bank OP4.01 environmental assessment and the Afghan laws and regulations to ensure that the microcredit subprojects were environmentally sound. MISFA also provided several training and awareness raising events on social and environmental safeguards to Microfinance Partners (MFPs).

In terms of the safeguards instrument of this proposed Access to Finance project, the existing Environment and Social Management Framework (ESMF) prepared by MISFA under the ARTF funded project (Microfinance Support for Poverty Reduction Project) and the IDA funded project (Expanding Microfinance Outreach and Improving Sustainability Project) will be upgraded in order to include :

a description of components and activities to be financed under the proposed project; a summary of key environment and social issues likely to be encountered under the project; procedures for screening of environmental and social risks, including compliance with the

Environmental Act 2007 and relevant policies and administrative arrangements of Afghanistan; Institutional procedures and mechanisms to ensure identification of environmental and social

risks, mitigate, monitor and reporting on implementation and capacity building plans for MISFA and ACGF.

The objectives of the ESMF are therefore: to provide tools and guidelines for screening of potential environmental and social impacts of

activities (and subprojects), including compliance with the Environmental, Health and Safety laws of Afghanistan;

to make provision for mitigation measures which will effectively address identified negative impacts;

to specify appropriate roles and responsibilities, and outline the necessary reporting procedures for managing and monitoring environmental and social concerns related to sub-projects;

5 World Bank Operational Manual: OP 4.00 – Piloting the use of Borrower Systems to address Environmental and Social Safeguards.

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to determine the training and technical assistance needed to successfully implement the provisions of the ESMF; and

to establish the program funding required to implement the ESMF requirements.

The ESMF is prepared in accordance with World Bank EA OP4.01 and pertinent to the Afghan laws and regulations.

4. Environmental and social regulatory framework

All activities of the proposed project (components 1 and 2) will comply with relevant Afghan laws and regulations on environmental protection and with World Bank requirements.

4.1. Afghan laws and regulations

The agency in charge of environmental protection at the central GoA is the National Environmental Protection Agency (NEPA). Environmental laws and regulations in Afghanistan are still evolving and not yet adequate, but NEPA has developed few laws and regulations to ensure environmental soundness of the rehabilitation and development activities and projects in the country. The current Afghan laws and regulations on environmental protection mainly deal with construction projects and manufacturing industries. The supplementary local regulations also cover services and trade, with direct applicability to MSME loans (also referred as “subprojects”) supported by the Access to Finance project.

The Environmental Law, effective 2006 and ratified by the Afghan Parliament in January 2007, is considered relevant to the proposed Access to Finance project. Article 14 on environmental preliminary assessment states that: “A person proposing to undertake a project, plan, policy or activity shall submit to the National Environmental Protection Agency (NEPA) accurate information to allow the National Environmental Protection Agency to determine the potential adverse effects and positive impacts of the project, plan, policy or activity.” In addition, Articles 15, 16, 17, 19, 21 and 23 of Environmental Law (2006) require that: (i) a full environmental assessment should be conducted and an Environmental Impact Assessment (EIA) report should be prepared for a project with potential significant environmental impacts;(ii) an analysis or a specific assessment should be conducted and an EIA report-table should be prepared for a project which may have light environmental impacts;(iii) an environmental registration form should be filled out for a project which may have minor environmental impacts and an EIA is not needed.It is considered that most of the subprojects under the proposed Access to Finance project will have only minor environmental impacts.

As in the Afghanistan Rural Enterprise Development Program (AREDP), another World Bank financed project in Afghanistan, a proponent of any project, plan, policy or activity that is likely to have a significant adverse impact on the environment shall apply international best environmental impact assessment practices in regard to such activities, in coordination with the National Environment Protection Agency (NEPA).

The Guidelines for Land & Asset Acquisition, Entitlement & Compensation is also considered relevant to the proposed Access to Finance project.While the proposed Access to Finance project will not trigger the World Bank’s operational policy on Involuntary Resettlement-OP 4.12 (Involuntary Resettlement), it is deemed appropriate to emphasize that the program checklist will specify that all land transfer be suitably documented and witnessed as per customary deeds (check of title deeds). It is the responsibility of any buyer to ensure that the seller truly has title and right to sell the land: the transfer of the land then becomes a transaction between willing

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buyer and willing seller. In exceptional cases, minor voluntary land donation may occur in certain sub-projects, but only provided that there are no structures or assets on the land, that the livelihood impact of the donation will be insignificant and the owner is part of the SME to which the land is donated. The voluntary nature of the donation should be fully documented and independently verified.

A negative list also excludes any activity which will damage non-replicable cultural property, and in case of chance finds the procedures to be followed are defined in the Law on the Preservation of Afghanistan's Historical and Cultural Heritages (Official Gazette no. 828, 1383/02/3l) specifying the authorities and responsibilities of cultural heritage agencies if sites or materials are discovered in the course of project implementation. This law establishes that all moveable and immovable historical and cultural artifacts are state property.

4.2. World Bank policies and Process for Implementation of Environment Safeguards

This section will differentiate between loans for microenterprises (also referred as microfinance) and SME loans, because the potential harmful impact on the environment of SMEs is higher than micro-enterprises (mostly due to their size).

According to World Bank policies, the proposed project has assigned Environmental Category FI.OP/BP 4.01, (Environmental Assessment -EA) is triggered.

The overall ESMF is prepared, following World Bank policies on consultation and disclosure, in advance of project appraisal. The draft ESMF will be disclosed in a timely manner, before appraisal formally begins, in an accessible place and in a form and language understandable to key stakeholders (in English, Dari and Pashto). After which it will be disclosed on World Bank InfoShop. At the same time consultations of all relevant stakeholders, NGOs; potential Project Affected People (PAP) will take place. All comments and questions raised in the public consultation will be addressed, then summarized and will be attached to the ESMF as annex.

The World Bank operations policies (OP 4.01) state that: “For a financial intermediary (FI) operation, the Bank requires that each FI screen proposed subprojects and ensure that sub borrowers carry out appropriate EA for each subproject.” The Bank policies also mention that “In appraising a proposed FI operation, the Bank reviews the adequacy of country environmental requirements relevant to the project and the proposed EA arrangements for subprojects.”

It should be noted that this requirement was not designed for microfinance projects with hundreds of thousands of micro loans at the household economy level. For SME loans only the following two types of subprojects that do not need environmental impact assessment will be considered for support:- Subprojects that do not require full environmental Assessment;- Subprojects that only need filling out of environmental registration and screening forms.

4.2.1. Microfinance (loans for microenterprises)

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Loans for microenterprises are supported under component 1 of the project which is implemented by MISFA.6 Micro loans support household level income generating activities. As such income generating activities have no or little environmental impacts and therefore need no formal Environment Assessment.

MISFA has a long track record of microfinance and a strong engagement with the Afghan microfinance sector. MISFA implemented the IDA financed Expanding Microfinance Outreach and Improving Sustainability Project (P104301), which closed on June 30, 2012. MISFA developed and implemented an Environment and Social Management Framework under this Project and the same framework and implementation arrangements will apply for the present project, as described below. 7

MISFA will assume overall responsibility for compliance with pertinent Afghan laws and regulations on environmental protection and with the World Bank requirements. For this purpose, MISFA will take necessary steps to encourage environmental due diligence during project implementation. Commitment to ensuring environmental soundness should be included in the cooperation agreements between MISFA and the Participating Financial Institutions (PFIs). In order to do this, MISFA will include in its contracts with PFIs requirements related to environmental procedures that will be agreed between MISFA and the World Bank. The following basic environmental requirements form the core of this framework: PFIs will conduct their activities with due regard to environmental factors and the principles of

environmentally sound and sustainable development. PFIs operations will comply with the World Bank Group’s FI Environmental Exclusion List. Activities supported by PFIs shall comply with the applicable health, safety and environmental

regulations and standards. PFIs will provide periodic environmental reports to MISFA.

In consideration of the fact that the environmental issues involved in the project are generally clear and insignificant, the environmental management of the project is relatively simple and a totally separate environmental management system is not necessary. An environmental management system embedded in the project management system has been established under the previous IDA financed project and will continue to be used.

Under the previous IDA financed project, MISFA appointed one member of its Technical Services Department as an Environmental Focal Person to be responsible for the implementation of the agreed ESMF. At the PFI level, focal points have also been designated to be responsible for environmental protection. MISFA has ensured that the PFIs have access to professional environment and/or social advice in case there is a need for this.

Environmental laws and regulations in Afghanistan are evolving and are not yet adequate. The National Environmental Protection Agency (NEPA) has developed a few laws and regulations to ensure environmental soundness of the rehabilitation and development activities and projects in the country. Expertise can be sought from this source if necessary.

6 Unlike previous MISFA projects, this component does not provide a line of credit. Microloans provided by PFIs can, however, be involved through the testing and piloting of new financial products supported by the proposed innovation fund (subcomponent 1.1).7 No environmental issues were indeed reported or investigated during the project and no significant social issues were reported. The implementation completion and results (ICR) report of the project only reported two issues which were raised during one supervision mission. One was related to employment of children in some microfinance funded enterprises (e.g. bakery, handicraft, etc.), and the other to what seemed to be inadequate ventilation and health hygiene in some of the family run enterprises. In this regard, MISFA was encouraged to develop a policy on child labor, in line with Afghan laws, as well as to initiate measures related to occupational health safety via training of credit officers and potential study capturing these issues and devising appropriate standards in line with the local context.

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MISFA will continue to ensure that PFIs put in place environmentally sound policies and procedures to enable credit officers and other staff to adhere to the relevant Afghan laws and regulations governing environmental screening, assessment and reporting in the process of credit appraisal and administration. The main tool to be used by PFIs is the activity exclusion list developed for the previous project to guide credit officers in their loan decisions.

4.2.2. SME finance

a) The Afghan Credit Guarantee Foundation (ACGF)

DEG - Deutsche Investitions - und Entwicklungsgesellschaft mbH (DEG),8 BMZ (the German Ministry of Development) and the Afghanistan Ministry of Finance have agreed to establish the Afghanistan Credit Guarantee Foundation (ACGF) in 4. quarter 2013 which “institutionalizes” the existing Afghanistan Credit Guarantee Facility, implemented and managed by DEG as trustee.

The general program objectives of the SME - Credit Guarantee Facility for Afghanistan are (i) contribution to strengthening of the financial sector and the development of private enterprises and (ii) support the creation and retention of jobs and income. The specific program objectives are (i) improved access to finance for SMEs, provided by private financial institutions and (ii) sustainable and efficient use of the guarantee scheme by partner banks.In brief, the objective of this program is to facilitate Afghan SMEs’ “access to finance”, provided by Afghan financial institutions on commercial terms. Thus, creating and retaining jobs. To this end, Afghan financial institutions benefit from individual guarantees issued by DEG, sharing their credit risk with regard to the SME loans, and benefit from the comprehensive technical assistance package provided.

The CGF for Afghanistan has been operational since 2006 and was set-up with initial funding by USAID – United States Agency for International Development, and the BMZ - German Federal Ministry for Economic Cooperation and Development. As such currently DEG and in future ACGF are already applying European Development Finance Institutions (EDFI)-typical safeguard procedures for guarantees funded by USAID and for guarantees funded by BMZ. This includes articles in legal contracts with partner institutions on environmental, social & health compliance, EDFI exclusion list, environmental rating based on A (high), B (medium), or C-(low) scoring integrated in due diligence as well as Anti Money Laundering/FATF/Prevention of Terrorism Finance clauses. Target group for SME loans are small and medium-sized enterprises (SME) operating in Afghanistan; and in compliance with environmental, health and safety and labor provisions under the relevant laws and regulations of the government of Afghanistan as well as World Bank/IFC respective policies and guidelines. On the end-client side, SMEs have to comply with the IFC Exclusion List, and Anti-Money Laundering and Anti-Terrorism Financing Guidelines. Operational procedures to ensure environment compliance are already in place and credit analysts check subproject against environmental risks and corresponding exclusion lists during guarantee appraisal.

SMEs are defined according to World Bank/IFC classification and are entities that request a loan volume of up to USD$1m and/or have up to 500 employees and/or make up to USD$15m in assets/sales. SME loans of the CGF are defined as loans between USD$ 5,0009 to USD$ 1,000,000 (or AFN equivalent).

8 DEG is a member of KfW Group, one of the largest European development finance institutions. For more than 50 years, DEG has been financing and structuring the investments of private companies in developing and transition countries. DEG’s aim is to establish and expand private enterprise structures in developing and transition countries and thus create the basis for sustainable economic growth and a lasting improvement in the living conditions of the local population.9 Current legal agreements define the lower end of SME clients at USD 5,000 loan volume; this limit is under review.

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The average loan in ACGF´s guarantee portfolio runs at about USD 30,000. SMEs can be sole proprietorship companies, family companies, partnerships or incorporated companies.

As of March 2013, ACGF (DEG) guarantees are mainly directed to the trade sector (71 percent) as described in table 2. All guarantees granted by ACGF (DEG) as of the same date can be classified as bearing low or no environmental or social risks. The proposed activities under the project will be across Afghanistan.

Table 2 - Sectoral distribution of guaranteed loans by ACGF

Sector in %Agriculture 0.3Education 0.9Transportation 1.8Health 3.9Construction (trade of materials) 4.0Production 8.8Services 9.3Trade 71.1TOTAL 100

b) Environmental management framework for SME finance

Both components of the projects aim to encourage loans to SMEs: the first component focuses on the lower end of the market, i.e. small enterprises, while the second component focuses on the higher end of the market (loans up to US$1 million). For SME loans, MISFA and ACGF will have to apply the framework proposed below.

Basic framework

The analysis of SME loans guaranteed by the Credit Guarantee Facility show that all “subprojects” have low or no environment risks or social risks (71.1 percent of loans guaranteed are in the trade sector and 9.3 percent are in the service sector, while 8.8 percent are in the production sector and 0.3 percent in the agriculture sector, the latter two sectors can involve higher environment risks - see previous section).

As mentioned previously, the proposed project does not envision to support those “subprojects” which need preparation of a new full Environment Impact Assessment (EIA) report or a new EIA report-table (Category A or B projects). Therefore only the following two types of subprojects that do not need new environmental impact assessment will be considered for support:- Subprojects that do not require full environmental Assessment;- Subprojects that only need filling out of environmental registration and screening forms;- In exceptional cases, subprojects of category B with EIA report will be screenedAnnex 2a and annex 2b provide the Environmental screening form and assessment categories.

MISFA and ACGF and the partner institutions will assume overall responsibility for compliance with pertinent Afghan laws and regulations on environmental protection and with the requirements of the World Bank. For this purpose, MISFA and ACGF will take the necessary steps described below, to encourage environmental due diligence during project implementation. Commitment to ensuring

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environmental soundness should be included in the cooperation agreements between MISFA and the PFIs and/or between ACGF and the PFIs (based on already existing clauses in credit guarantee fund agreements; see annex 7 of existing DEG-clauses). In order to do this, MISFA and ACGF will include, in its contracts with PFIs, requirements that ensure environmental and social protection and that will be agreed between MISFA, ACGF and the World Bank.10 More specifically, as required for microfinance loans, the following basic environmental requirements form the core of this framework:

PFIs will conduct their activities with due regard to environmental factors and the principles of environmentally sound and sustainable development.

PFIs operations will comply with the World Bank Group’s IFC Environmental Exclusion List. Activities supported by PFIs shall comply with the applicable environmental, health, safety and

labor provisions under the pertinent laws and regulations of Afghanistan as well as World bank/IFC policies and guidelines;

PFIs will provide periodic environmental reports to MISFA and/or ACGF.

In consideration of the fact that the environmental issues involved in the project are generally clear and insignificant, the environmental management of the project is relatively simple. The environmental management system described below, which is embedded in the project management system and makes full use of existing project management resources, is to be established within ACGF (the system is already established within MISFA, see below for ACGF).

ACGF will appoint one member of their Technical Departments as an Environmental Focal Person to be responsible for the implementation of the agreed ESMF. At the PFI level (commercial banks), a person will also be designated to be responsible for environmental protection if category B projects occur. If only category C projects occur, the PFI will not be required to designate a person responsible for environmental protection; category A projects will be excluded anyway. MISFA and ACGF will ensure that the PFIs have access to professional environment and social assessment advice in case there is a need for this.

MISFA and ACGF will take necessary steps to ensure that PFIs put in place environmentally sound policies and procedures to enable credit officers and other staff to adhere to the pertinent Afghan laws and regulations governing environmental screening, assessment and reporting in the process of credit appraisal and administration. The main tool to be used by PFIs is an activity exclusion list that will be reviewed to guide credit officers in their loan decisions.

Institutional arrangements within ACGF

As mentioned above, for SME loans only the following two types of subprojects that do not need environmental impact assessment will be considered for support:- Subprojects that do not require full environmental Assessment;- Subprojects that only need filling out of environmental registration and screening forms;- In exceptional cases, subprojects of category B with EIA report will be screened.

10 As mentioned in the section presenting ACGF, the legal contracts negotiated between ACGF and PFI, called “Credit Guarantee Fund Agreements”, include clauses on Environmental and Social Management Systems (ESMS). For instance Article 16 of this agreement contractually binds the borrowers and PFIs to comply with the environmental, social and health and labor provisions under the pertinent laws and regulations of Afghanistan as well as World bank/IFC policies and guidelines. PFIs are also legally committed to observe the agreed strict exclusion list of ACGF (which is the harmonized European Development Finance Institutions (EDFI) exclusion list based on World Bank / IFC performance standards.

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(see annex 2a and annex 2b for the Environmental screening form and assessment categories)

ACGF will take necessary steps to ensure that PFIs will improve environmentally sound policies and procedures to enable credit officers and other staff to adhere to the pertinent Afghan laws and regulations governing environmental screening, assessment and reporting in the process of guarantee appraisal and administration. A suggestion for improvement of the existing environmental and social screening procedure is detailed below.

ACGF will appoint one member of their Technical Departments as Environmental and Social Management officer (ESM) to be the focal officer in charge of social and environmental issues related to the project. In addition, ACGF will hire environmental specialists in case there is a need for this, in order to support the supervision and monitoring of the PFI’s compliance with environmental guidelines and preparing annual environmental reporting for ACGF.

Each PFI is required to appoint one person responsible for environmental and social issues (in case category B projects occur). The appointed person is responsible for ensuring compliance with relevant environmental laws and will regularly report to ACGF (DEG). Furthermore, the appointed person will act as a training coordinator in charge of ensuring that all relevant staff is trained in environmental and social prescreening. He or she is required to seek external professional consultation as necessary.

In order to introduce this system, at the beginning of the first year of the project, ACGF will hire the services of a consultant. This consultant should be familiar with SME finance, with a good knowledge of environment issues affecting SMEs (annex 4 provides the Terms of Reference (TOR) for this consultant). The consultant will:

Finalize the proposed terms of reference for the focal points in annex 5 in collaboration with ACGF and the PFIs;

Define training and awareness building activities to be undertaken. Generally two types of training are needed:o Awareness programs: sessions for managerial grades of PFIs and ACGFo Competence development training: to cover the field experience, sharing the technical

capacity needs, hence mainly targeting the field offices of PFIs(Further details on capacity development is provided in the section below)

Establish the user requirements for the reporting related to this ESMF. The implementation will be carried out by the Management Information Systems (MIS) developers / service providers;

Finalize the negative lists (and conditional list) and the proposed environmental and registration screening form (annex 2a and annex 2b) after reviewing the activities undertaken by SMEs receiving support from the project and taking into account the applicability of Afghan laws, as well as develop systems for the introduction and use of the negative lists;

The World Bank supervision team will review progress during the first full supervision mission for this project.

Tasks and responsibilities

Environmental and Social Management officer (ESM)

The main responsibilities of the focal officer or ESM are to ensure adequate capacity of the PFI for environmental and social evaluation in the guarantee process through clear accountability, training and proactive coordination with local NEPA offices. Additional responsibilities include:1) Organizing environmental and social screening training for credit officers both at PFI and at ACGF;

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2) Provision of technical guidance and assistance of environmental and social issues for guarantee committee members and credit officers: integration of the ESM into the decision making process; 3) Conducting regular environmental and social supervision and monitoring of environmental and social screening and management of subprojects;4) Preparing environmental and social reports to ACGF and the World Bank;5) Other related tasks (see proposed TOR in annex 5).

Project Screening and Project Appraisal

The procedures of environmental and social screening for subprojects will take place at the same time as the guarantee appraisal and decision.

As mentioned previously, the proposed Access to finance project does not envision to support those subprojects which need preparation of a new full EIA report or a new EIA report-table (Category A or B projects). Therefore only the following two types of subprojects that do not need new environmental impact assessment will be considered for the guarantee:1) Subprojects that do not require full environmental Assessment;2) Subprojects that only need filling out of environmental registration and screening forms.3) In exceptional cases, subprojects of category B with EIA report will be screened.

The initial environmental assessment (EA) screening will be carried out by PFI credit officers. The PFI credit officers will receive the required training and will be monitored by ACGF’s ESM to undertake the screening (see section on Training and Capacity building). They will exclude ineligible applications that fall into the Exclusion Lists (see annex 1) containing a “Subprojects Exclusion List” and a “List of Environmentally Sensitive Zones”, check whether the subproject has obtained the environmental approval (if applicable), and make sure the sub borrowers fill out the environmental registration form (if applicable). The following will apply for each category of subproject (see annex 2a and annex 2b for the Environmental screening form and assessment categories)- Category A subprojects (which have high social and environmental impacts) and all activities on the exclusions lists (see annex 1). These subprojects will be excluded.- Category B subprojects (which have moderate social and environmental impacts). The ESM officer will be in charge of assessing the subproject according to its environmental and social impacts. These subprojects will be excluded. Nonetheless, if the subproject belongs to the conditional list of subprojects, the ESM will decide if the subproject can be supported based on defined mitigation measures compiled in a simplified environmental and management plan (EMP). ACGF will hire environmental and social specialists in case there is a need for this, in order to prepare the mitigation plan and monitoring plan. The EMP will be prepared at design stage and will be approved and reviewed by the ESM and by ACGF. The World Bank will undertake annual post review of operations, including the EMP of category B projects (see section on Project monitoring). A suggested template for the simplified EMP is provided in annex 3. - Category C subprojects (which have low or no social and environmental impacts). These subprojects will be supported without restriction; however, they need to fit the Afghan legal framework and exclusion list. Note that as of March 2013, all existing guarantees provided by DEG (newly called ACGF for operations in Afghanistan) are classified in Category C.

The exclusion lists and conditional list will be detailed in the Operations Manual and the World Bank reserves the right to adjust these lists after an assessment of the ESMF and after having informed ACGF (DEG). This assessment will take place one year after project’s effectiveness (see subsection on environmental monitoring).

Training and Capacity Building

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Proposed environmental management training programs for ACGF and PFIs will cover the following main topics:

Development and Industry Industry and Environment interactions International and local experiences in Industry Environment interaction Sustainable development International treaties and conventions on Environment and national commitments Environmental legislation in Afghanistan Environmental issues directly relevant to Afghanistan Productivity and Green Productivity approaches Green productivity approach in development including;

o Cleaner Production;o Waste Management strategieso International Environmental Management Systems (EMS)

Green accounting and Environmental Economics Energy and Environmental management in industry Environmental indicators Energy and Environmental auditing Clean Development Mechanisms

In addition, in order to ensure effective implementation of the ESMF and to realize the environmental and social protection objectives during project implementation, the following EA screening and environmental and social management trainings are to be carried out:

Training by ACGF for PFIs (safeguard members or environmental managers)The ESM officer will be in charge of training the relevant departments of the participating financial institutions (PFI) on EA and social assessment, with a special focus on the following topics:a. The EA Framework;b. Environmental protection and environmental assessment;c. Environmental review (EA procedures completed);d. Environmental screening of subprojects;e. Preparation of environmental report.

If the application for a guarantee comes from a PFI that has undergone training with the ESM, the compliance of the subproject with the environmental and social laws and regulations and the results of the initial environmental screening done by the PFIs, will not be re-evaluated by the ESM (except for category B projects). ACGF (DEG) will endorse the screening and undertake post review.

Training by ESM for ACGFThe ESM officer will also be in charge of training within ACGF, with a special focus on the following topics:a. Environmental and Social Assessment, subproject classification according to risk level, b. Afghan regulations and World Bank Environmental and Social Safeguards policies.

Training by ACGF for their managers and credit officerswith a special focus on the following topicsa. Environmental and social screening of subprojects;b. Subprojects exclusion list, EA category list

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Project Monitoring

Environmental and social supervision and monitoring for the Access to Finance project is to be carried out at the following levels:1) At the level of PFIs: the environmental focal officer (if applicable or otherwise ACGF’s ESM) is to be responsible for regular inspection, monitoring, and supervision of the credit officers on their EA screening work and periodically reporting to ACGF (DEG);2) At the level of ACGF (DEG): the ESM is responsible for regular monitoring, supervising and inspecting the implementation of the EA Framework by PFIs and periodically reporting to the stakeholders;3) At the level of the World Bank: the World Bank will assess the ESMF and review a sample of operations – in particular any category B subprojects if there are any- one year after project effectiveness. The World Bank reserves the right to adjust the exclusion lists and the conditional list on the basis of this review and after having informed ACGF. The World Bank will also undertake an annual post review of a sample of operations (in particular those that are risky) as external monitoring.

Reporting

ACGF requires PFIs to submit annual reports on the environmental performance of the loans that benefited from the guarantee. Such reports should be brief and focus on the following:1) Environmental management: policy and procedures, applicable local laws and regulations, training received by PFI staff during the reporting period;2) The nature of outstanding guarantees (amount, activity);3) Any material environment-related accidents, litigation, complaints, or fines for non- compliance with environmental or health and safety and labor provisions under the pertinent laws and regulations of Afghanistan as well as World bank/IFC policies and guidelines brought to the PFI’s attention or otherwise known to the PFI;4) Difficulties and/or constraints related to the implementation of the environmental and social procedures;5) To help the PFI prepare such reports, ACGF will provide the PFI with an appropriate report template and will support the drafting of the reports (e.g. with information derived from ACGF’s MIS).11

4.3. Social issues

The Project is not expected to have any negative social impact – on the contrary, it is expected to generate considerable positive social impact through provision of financial services to under-served groups (MSMEs), with a focus on the poorer section of the population (including ultra-poor households through the TUP Program), women and youth. These financial services include the provision of guarantees on loans to MSMEs including to women-headed MSMEs, who otherwise have extremely limited access to credit.

Social Safeguards.

The project is not expected to trigger any of the World Bank social safeguards policies.

Involuntary land acquisition and any activity on land or affecting land which has disputed ownership, tenure or user rights are deemed ineligible. Permissible land transactions will be based on willing buyer - willing seller principle only.

11 Note that under ACGF EDFI safeguard procedures described previously, PFIs are already required to provide a general portfolio reporting to ACGF on an annual basis.

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As mentioned previously, a negative list also excludes any activity which will damage non-replicable cultural property, and in case of chance finds the procedures to be followed are defined in the Law on the Preservation of Afghanistan’s Historical and Cultural Heritages (Official Gazette no. 828, 1383/02/31) (see section 4.1.1).

In addition, ACGF and MISFA are operating at a national level and thus do not exclude any region/ethnic group - although security concerns may temporarily prevent project activities in certain districts. ACGF and MISFA do not target beneficiaries on the basis of ethnic/religious etc. characteristics.

Gender. ACGF is committed to increase the number of women entrepreneurs. The project will monitor what the SME (and/or guaranteed) loans are invested in and the female clientele (including women borrowers and women working for the SMEs).. However, ACGF will not be able to monitor and evaluate how the households' economic situation as well as the impact on the (female) borrower’s position in the family in terms of influence (decision making), expanding economic activities/income and mobility will be affected due to the guaranteed loan.

4.4. Complaints and Grievances All complaints about implementation of the agreements recorded in the ESMF or any alleged irregularity may be submitted to the relevant implementing agency (MISFA) or in the case of ACGF, to the partner financial institution, which will be contractually obligated to forward such complaints/irregularity to ACGF, for a decision. This interim stage for ACGF is necessary, in order to avoid becoming visible to the final borrowers. Generally guarantees are hidden from the final borrowers to avoid moral hazard.

4.5. Timing and Cost of ESMFThe ESMF activities for ACGF will commence within one month of the start of the component 2:

- Appoint ACGF ESM: within 2 months- Appoint responsible person at PFI: within 3 months (if applicable)- Contract ESMF Consultant as per Annex 4: within 2 months- Finalization of ESMF Consultant’s mission: within 4 months- Implementation of MIS adaptations: within 5 months- Implementation of training activities for ACGF and PFIs: within 6 months

The budget for the ESMF has been estimated with USD 100,000, to be financed by the Technical Assistance (TA) budget for component 2.

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Annex 1 - Ineligible Activity Lists.

The following activities will be deemed ineligible – activities which: Involves the significant conversion or degradation of critical natural habitats. Including, but not

limited to, any activity within:o Ab-i-Estada Waterfowl Sanctuary;o Ajar Valley (Proposed) Wildlife Reserve;o Dashte-Nawar Waterfowl Sanctuary;o Pamir-Buzurg (Proposed) Wildlife Sanctuary;o Bande Amir National Park;o Kole Hashmat Khan (Proposed) Waterfowl Sanctuary.

Will significantly damage non-replicable cultural property, including but not limited to any activities that affect the following sites:o Monuments of Herat (including the Friday Mosque, ceramic tile workshop, Musallah

complex, Fifth Minaret, Gawhar Shah mausoleum, mausoleum of Ali Sher Navaii, and the Shah Zadehah mausoleum complex);

o Monuments of Bamiyan Valley (including Fuladi, Kakrak, Shar-I Ghulghular and Shahri Zuhak);

o Archaeological site of Ai Khanum;o Site and monuments of Ghazni;o Minaret of Jam;o Mosque of Haji Piyada/Nu Gunbad, Balkh province;o Stupa and monastery of Guldarra;o Site and monuments of Lashkar-i Bazar, Bost;o Archaeological site of Surkh Kotal.

Requires:o Chainsaws;o Motorized extraction of groundwater;o Political campaign materials or donations in any form;o Weapons including (but not limited to), mines, guns and ammunition;o Pesticides, herbicides and other chemicals; [to be further discussed]o Investments detrimental to the environment;o Involuntary land acquisition under any conditions;o Any activity on land that is considered dangerous due to security hazards or the presence of

unexploded mines or bombs;o Any activity on land or affecting land that has disputed ownership, tenure or user rights.o Any activity that will support drug crop production or processing of such crops.

In addition to the above general list, the following negative list is added from the IFC exclusion list:o Production or trade in any product or activity deemed illegal under host country laws or

regulations or international conventions and agreements;o Production or trade in alcoholic beverages;o Gambling, casinos and equivalent enterprises;o Trade in wildlife or wildlife products regulated under CITES (Convention on International

Trade in Endangered Species of Wild Fauna and Flora);o Production or trade in radioactive materials;o Production or trade in or use of unbounded asbestos fibers;o Purchase of logging equipment for use in cutting forest;

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o Production or trade in pharmaceuticals subject to international phase outs or bans;o Production or trade in pesticides/herbicides subject to international phase outs or bans;o Fishing in the marine environment using electric shocks and explosive materials;o Production or activities involving harmful or exploitative forms of forced labor / harmful

child labor.o Commercial logging operations for use in primary tropical moist forest;o Production or trade in products containing PCBs (polychlorinated biphenyls);o Production or trade in ozone depleting substances subject to international phase out;o Production or trade in wood or other forestry products from unmanaged forests;o Production, trade, storage, or transport of significant volumes of hazardous chemicals, or

commercial scale usage of hazardous chemicals;o Production or trade in any product or activity deemed illegal under host country laws or

regulations or international conventions and agreements;o Production or trade in alcoholic beverages;o Gambling, casinos and equivalent enterprises;o Anti democratic activities like e.g. Nazi propaganda

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Annex 2a –Environmental Assessment Categories C

ateg

ory

Loan purpose Necessary activities

Una

ccep

tabl

e Projets on the exclusion lists (see annex 1)Projects on the list of projects of category A for which an environmental impact assessment is required by Afghan law

The application is not further processedDocumentation is returned to the client

B

Projects which have moderate social and environmental impacts but which are not included in the conditional list of projects

The application is not further processedDocumentation is returned to the client

B

Projects which have moderate social and environmental impacts and which are included in the conditional list of projects

It is necessary to prepare a simplified environmental management plan (EMP) with mitigation and monitoring plan (see annex 3) and an EIA report table.

C

Financing the investments in working capital (does not include purchase of hazardous materials e.g. pesticides)Projects that have low or no environmental impact

Beside fulfilling the Environmental Screening Form and questionnaire – determining the project category, additional activities relating to the environmental protection are not necessary

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Annex 2b –Environmental Screening Form Environmental Information Memo

1. Enterprise

2. Loan Information

Credit Amount: 0

Description of investment plan / project

3. Environmental risk category

A, B, C

See classification of the loan portfolio by environmental risk of the main economic activity

4. Environmental Information Review

(e.g. environmental permits, state or local environmental review, warranty or representation from borrower)

5. Social Information Review(e.g., existence of land transfer and involuntary resettlement) questions to be developed in cooperation with ESMF consultant at the beginning of the project

6. Key Environmental Issues

What are the key environmental risks and liabilities associated with the enterprise? (Waste disposal, soil contamination, water pollution, air pollution / gas emissions, noise, others.) Are opportunities for environmental improvements? Is the client committed to undertake any remedial action in regard to the current situation? Is there any known public or citizen opposition to the operation?

7. Key Environmental Regulatory Compliance

Does the enterprise comply with national

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regulations and standards relating to health, safety and the environment? Has the borrower obtained the necessary permits? When do they expire? Has the client received a visit from the health and safety authorities / municipality / other authorities? Has the

8. Suggested Environmental Covenants, Supervision, and Monitoring Requirements

List any measures to be taken to address environmental issues (if any), such as environmental covenants to be included in the loan agreement, including provision of monitoring information.

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Annex 3 – Environmental Management Plan

A project's environmental management plan (EMP) consists of the set of mitigation, monitoring, and institutional measures to be taken during implementation and operation to eliminate adverse environmental and social impacts, offset them, or reduce them to acceptable levels. The plan also includes the actions needed to implement these measures.

1. Management plans are essential elements of EA reports for Category A projects. The proposed project does not support category A subprojects. For category B projects, the EA may result in a management plan only. To prepare a management plan, the ACGF and ESM (a) identify the set of responses to potentially adverse impacts; (b) determine requirements for ensuring that those responses are made effectively and in a timely manner; and (c) describe the means for meeting those requirements. The EMP, if required, will be drafted by or under the supervision of ACGF’s ESM; s/he will avail the expertise of external experts if and when required.

More specifically, the EMP includes the following components.

Mitigation2. The EMP identifies feasible and cost-effective measures that may reduce potentially significant adverse environmental impacts to acceptable levels. The plan includes compensatory measures if mitigation measures are not feasible, cost-effective, or sufficient. Specifically, the EMP;(a) identifies and summarizes all anticipated significant adverse environmental ;(b) describes with technical details each mitigation measure, including the type of impact to which it relates and the conditions under which it is required (e.g., continuously or in the event of contingencies), together with designs, equipment descriptions, and operating procedures, as appropriate;(c) estimates any potential environmental impacts of these measures; and(d) provides linkage with any other mitigation plans required for the project.

Monitoring3. Environmental monitoring during project implementation provides information about key environmental aspects of the project, particularly the environmental impacts of the project and the effectiveness of mitigation measures. Such information enables the borrower and the Bank to evaluate the success of mitigation as part of project supervision, and allows corrective action to be taken when needed. Therefore, the EMP identifies monitoring objectives and specifies the type of monitoring, with linkages to the mitigation measures described in the EMP. Specifically, the monitoring section of the EMP provides(a) a specific description, and technical details, of monitoring measures, including the parameters to be measured, methods to be used, sampling locations, frequency of measurements, detection limits (where appropriate), and definition of thresholds that will signal the need for corrective actions; and (b) monitoring and reporting procedures to (i) ensure early detection of conditions that necessitate particular mitigation measures, and (ii) furnish information on the progress and results of mitigation.

Capacity Development and Training4. The EMP provides a specific description of institutional arrangements who is responsible for carrying out the mitigatory and monitoring measures (e.g., for operation, supervision, enforcement, monitoring of implementation, remedial action, financing, reporting, and staff training). To strengthen environmental management capability, most EMPs cover one or more of the following additional topics: (a) technical assistance programs, (b) procurement of equipment and supplies, and (c) organizational changes.

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Implementation Schedule and Cost Estimates

5. For all three aspects (mitigation, monitoring, and capacity development), the EMP provides (a) an implementation schedule for measures that must be carried out, showing phasing and coordination with overall project implementation plans; and (b) the capital and recurrent cost estimates and sources of funds for implementing the EMP. These figures are also integrated into the total project cost tables. Mitigation Plan

Construction Phase

ActivityExpected Environmental Impact

Proposed Measure for Mitigation

Responsibility for Implementing Mitigation Measure

Period of Implementing Mitigation Measure

1.2.…

Operation Phase

1.2.…

Monitoring Plan

Construction Phase

Whatparameter is to be monitored?

Whereis the parameter to be monitored?

Howis the parameter to be monitored (what should be measured and how)?

Whenis the parameter to be monitored (timing and frequency)?

By Whomis the parameter to be monitored– (responsibility)?

1.

2.

…

Operation Phase

1.

2.

…

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Annex 4- Terms of Reference to hire an individual consultant to assist ACGF to introduce the ESMS

1. Background

The Access to Finance project for Afghanistan financed by the World Bank aims to build institutional capacity and to improve access to credit of micro, small and medium enterprises.

The grant is a five-year Specific Investment Loan and consists of - providing continuing support to the microfinance sector through MISFA, as well as, supporting MISFA to take on a broader role as a catalyst for innovations to increase access to financial services to the lower end of the market (notably micro and small enterprises) as per its new strategic plan;- increasing lending to SMEs provided by (i) financial institutions through the expansion of the Credit Guarantee Facility implemented by ACGF (which has supported SME lending in Afghanistan since 2006 and has a strong track record) and technical assistance to ACGF and the partner financial institutions to strengthen their SME lending capacity (also referred as “downscaling”) (ii) microfinance institutions, by supporting the Credit Guarantee Facility’s coverage to microfinance institutions (MFIs) lending to SMEs and technical assistance to ACGF and the MFIs (also referred as “upscaling”) (component 2).

MISFA has a long track record of microfinance and a strong engagement with the Afghan microfinance sector, and has implemented two projects financed by IDA and Afghanistan Reconstruction Trust Fund (ARTF). For the implementation of IDA microfinance project, the environmental assessment framework was prepared in accordance with the World Bank OP4.01 environmental assessment and the Afghan laws and regulations to ensure that the microcredit subprojects are environmentally sound. MISFA also provided several training and awareness raising events on social and environmental safeguards to Microfinance Partners (MFPs).

ACGF has been engaged in credit guarantee facility for SME loans in Afghanistan since 2006, initially financed by USAID and BMZ (German Federal Ministry for Economic Cooperation and Development). The facility currently has three Participating Financial Institutions (PFIs). SMEs that will be supported are not known yet and no specific social safeguards issues are foreseen. Therefore, the project has prepared an Environmental and Social Management Framework (ESMF) to manage any potential environmental and social impacts, in compliance with the World Bank’s environmental standards and national laws. A procedurally simple system of environmental and social safeguards, based on the exclusion of activities that carry high environmental and social risks, would be implemented.

2. Tasks and Responsibilities

The task of consultant is to introduce the environmental and social management system at the ACGF as described in the Environmental and Social Management Framework (ESMF) at the beginning of the first year of the project.

The Consultant's primary functions will be, but not limited to:

Finalize the proposed terms of reference for the focal points in collaboration with ACGF and (if applicable) with the PFIs;

Finalize the classification matrix for risk rating based on ACGF existing portfolio and typical SME business types;

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Finalize the questions for the Environmental Screening Form pertaining to the social information review

Define training and awareness building activities to be undertaken. Generally two types of training are needed:o Awareness programs: sessions for managerial grades of PFIs and ACGFo Competence development training: to cover the field experience, sharing the technical

capacity needs, hence mainly targeting the field offices of PFIs Establish the user requirements for the reporting related to this ESMF. The implementation will

be carried out by the MIS developers / service providers. Finalize the negative lists (and conditional list) and the proposed environmental and registration

screening form after reviewing the activities undertaken by SMEs receiving support from the project and taking into account the applicability of Afghan laws, as well as develop systems for the introduction and use of the negative lists.

3. Selection Criteria

The consultant should be familiar with SME finance, with a good knowledge of environment issues affecting SMEs, a proven track record in ESMF best practice and with the ability to adapt such ESMF best practice to the peculiarities of the environment prevailing in Afghanistan.

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Annex 5- Terms of Reference for focal points for ACGF and PFIs

1. Focal point for ACGF: Environmental and Social Management officer (ESM)

The ESM is the focal officer who is in charge of social and environmental issues related to the project within ACGF.

The main responsibilities of the focal officer or ESM are to ensure adequate capacity of the PFI for environmental and social evaluation in the guarantee process through clear accountability, training and proactive coordination with local NEPA offices.

Additional responsibilities include, but are not limited to:1) Organizing environmental and social screening training for credit officers both at PFI and at ACGF;2) Provision of technical guidance and assistance of environmental and social issues for guarantee committee members and credit officer. The ESM is an advisor and coordinator to ACGF on all socio environmental aspects related to the project. The ESM is integrated into the decision making process;3) Assessing subproject belonging to the conditional list of subprojects and decide if the subproject can be supported based on defined mitigation measures compiled in a simplified environmental and management plan (EMP)4) Conducting regular environmental and social supervision and monitoring of environmental and social screening and management of subprojects and periodically reporting to the stakeholders;5) Preparing environmental and social reports to ACGF and the World Bank;6) Maintaining adequate liaison and coordination with NEPA, related state functionaries and other environmental agencies.7) Establishing contacts with NEPA, Forest/Wildlife Departments, local/regional NGOs, local officials, other SME operators, and related stakeholders connected with environmental issues.8) Other related tasks.

The Environmental and Social Management officer will be housed within ACGF. S/he will be one of the existing ACGF staff, e.g. one of the experienced credit analysts or compliance officers, with intimate knowledge of the environment prevailing in Afghanistan. S/he will receive the required training (outside of Afghanistan if not available inside the country) and will commit the required time and effort to her/his ESM tasks.

2. Focal point within PFI: Environmental and Social focal officer (if applicable)

The appointed Environmental and Social focal officer is responsible for environmental and social issues related to the project, ensuring compliance with the applicable environmental, health, safety and labor provisions under the pertinent laws and regulations of Afghanistan as well as World bank/IFC policies and guidelines.

S/he is to be responsible for regular inspection, monitoring, and supervision of the credit officers on their environmental and social screening work and periodically reporting to ACGF (DEG). The appointed person will submit annual reports to ACGF on the environmental performance of the loans that benefited from the guarantee.

Furthermore, the appointed person will act as a training coordinator in charge of ensuring that all relevant staff is trained in environmental and social prescreening. He or she is required to seek external professional consultation as necessary.

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The Environmental and Social focal officer will be housed within the PFI. S/he will be one of the existing PFI staff, e.g. one of the experienced credit officers or compliance officers, with intimate knowledge of the environment prevailing in Afghanistan. S/he will receive the required training and ongoing support by the ESMF consultant and by ACGF’s ESM and will commit the required time and effort to her/his related tasks.

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Annex 6 – Detailed Project Description

Component 1: Improving access to financial services for micro and small enterprises [$32m]

The proposed activities under this component will be across Afghanistan. This component will include the following activities:

Sub-component 1.1: Strengthening of the microfinance sector through MISFA [$13m]

Capacity Building Fund [$10m]. This Capacity Building Fund will have two windows: (i) Innovation Window and (ii) Systems Strengthening Window. The Innovation Window will allow MISFA to support innovations to improve access to financial services proposed by MFIs and other institutions which have a focus on access to finance. As such, this fund would cover the testing and piloting of new financial products (small enterprise finance, agricultural credit, savings, sharia-compliant products, insurance, etc.) as well as the use of technology to improve access to financial services. The Systems Strengthening Window will support efforts from MFIs and CSPIs to strengthen their systems and their human resources (MIS, internal control, risk management, etc.) based on a detailed capacity strengthening plan. This fund will also support systems strengthening of MFIs aiming to become Deposit taking MFI (DMFI), once the regulation is approved. The Capacity Building Fund will not include on-lending funds as MISFA has currently enough resources for on-lending (which could be mobilized in parallel by the applying institutions, if needed).

Support to Policy, Regulation and Advocacy [$3m]: this sub-component will provide support to agencies in charge of policy, regulation and advocacy, namely: the Ministry of Finance, which has the responsibility to set the policy direction for financial sector development in Afghanistan; the Central Bank of Afghanistan (DAB) which once the Deposit taking MFIs regulation will be approved will be responsible for regulating these institutions and the Afghanistan Microfinance Association (AMA) which is the representative body for the microfinance sector.

Sub-component 1.2.: Targeting the Ultra Poor (TUP) Program [$15m]

This sub-component will support the national scale up of the Targeting the Ultra Poor (TUP) program piloted by MISFA in Bamyan and Badakshan. The TUP program aims at “graduating” participants from safety nets programs to income-earning activities, linking them with microfinance programs. Building on the lessons learned from the pilots and from international experience, the program will provide TUP beneficiaries a two-year package of inputs which includes the transfer of productive assets (such as livestock) as well as training (classroom and hands-on); a subsistence support (monthly stipend, as short term income support); and basic healthcare through community-based health workers. The total cost of this package (including its delivery) is estimated at US$2,000 per household. This Program will be replicated in 20 districts (across 5 provinces) and the program will reach 7,500 beneficiaries (representing 52,500 households)

Sub-component 1.3: Strengthening of MISFA [$4m]

This sub-component will provide support to MISFA to implement its new business plan. This sub-component will in particular support the establishment of a Research and Development Department within MISFA to develop innovative programs, as incubator, to better serve under-served groups, notably women and youth. Under its new strategic plan, MISFA intends to develop a Women Empowerment Program as well as a Youth Entrepreneurship Program (combining financial and non-financial services). This component will also support the establishment of a Knowledge Management Department at MISFA to document best practices, lessons learned, and provide timely and relevant information to stakeholders

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by commissioning research and studies. This Department would also be tasked to implement the Progress out of Poverty Index (based on international experience) to better track microfinance impacts. MISFA will also strengthen its Client Profile database to have more accurate information on clients and avoid multi-lending to clients and over-indebtedness. This sub-component will also strengthen project implementation capacity at MISFA (with a focus on fiduciary aspects). It will in addition support coordination efforts between various initiatives with a focus on access to finance supported by development partners (notably USAID, with FAIDA and ABADE) and the World Bank (such as Financial Sector Strengthening Project, Financial Sector Rapid Response Project, New Market Development Project, Rural Enterprise Development Project, Skills Development Project, Non Formal TVET Project and Justice Service Delivery Project).

Component 2: Improving access to financial services for small and medium enterprises [$18m]

The proposed activities under this component will be across Afghanistan. This component will include the following activities

Sub component 2.1: Supporting the expansion of the Afghan Credit Guarantee Foundation [$13m]This component will provide [$13m] to the Afghan Credit Guarantee Foundation (the current guarantee fund of US$8.6m is fully committed and will reach in the coming weeks the maximum leverage). It will support the funding needs resulting from the expansion of the Credit Guarantee Facility caused by its organic growth and by additional initiatives, e.g.:, (i) volume growth with existing partner institutions (the Facility currently works with 3 partner institutions); (ii) cooperation with additional partner institutions (an increasing number of commercial banks and MFIs have expressed an interest for support to develop SME lending); (iii) regional expansion and new product development.

Sub component 2.2: Providing technical assistance to ACGF and partner financial institutions [$5m]

This sub-component will finance the following activities by the Credit Guarantee Facility: (i) technical assistance on SME lending to partner financial institutions (banks and MFIs), until the Facility considers that the partner institutions no longer require the technical assistance; (ii) technical assistance on new product development (such as trade finance, rural/agricultural SME lending, sharia compliant SME lending, adapted products to female entrepreneurs and reverse factoring, also known as supply chain financing); (iii) support to the geographical expansion of the Credit Guarantee Facility, with the opening of offices in the North (e.g. Mazar-e Sharif and possibly Herat).

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Annex 7- Afghan Credit Guarantee Facility: Example of existing DEG-clauses

Credit Guarantee Fund Agreement, article 16 specifies:

“ Article 16

ENVIRONMENTAL, SOCIAL & HEALTH COMPLIANCE

AIB undertakes

1. to obtain and maintain the know-how and implement the organizational procedures necessary to evaluate the environmental impacts and risks of its projects;

2. to comply with the applicable environmental, health and safety and labour provisions under the pertinent laws and regulations of Afghanistan as well as World bank/IFC policies and guidelines;

3. to contractually bind the Borrowers to comply with the applicable environmental, health and safety and labour provisions under the pertinent laws and regulations of Afghanistan as well as World bank/IFC policies and guidelines;

4. to check if financing of the investment is allowed according to the exclusion list given in the Annex to the Cooperation Guidelines for guarantees funded by funds of USAID resp. BMZ which is an integral part of this contract.”

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