Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11682-MAG STAFF APPRAISAL REPORT REPUBLIC OF MADAGASCAR FINANCIAI. INSTITUTIONS DEVELOPMENT TECHNICAL ASSISTANCE PROJECT APRIL 28, 1993 Industry and Energy Operations Division South-Central and Indian Ocean Department Africa Regional Office This 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. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 11682-MAG
STAFF APPRAISAL REPORT
REPUBLIC OF MADAGASCAR
FINANCIAI. INSTITUTIONS DEVELOPMENT TECHNICAL ASSISTANCE PROJECT
APRIL 28, 1993
Industry and Energy Operations DivisionSouth-Central and Indian Ocean DepartmentAfrica Regional Office
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EOUIVALENTS
Currency Unit = Malagasy Franc (FMG)USS 1 1,899 FMG (March 1993)
= 1,833 FMG (average for 1992)
WEIGHTS AND MEASURES
Metric BritishtUS Eauivalent
1 meter (m) = 3.28 foet1 square meter (sq. m) = 10.76 square feet1 kilometer (km) = 0.62 mile1 square kilometer (sq. km) = 0.39 square mile
ABBREVIATIONS AND ACRONYMS
AON = Appels d'Offres Negatives (Liquidity Withdrawal)AOP = Appels d'Offres Positives (Liquidity Injection)BCRM = Banque Centrale de la Republique Malgache (Central Bank)BFV = Banky Fampandrosoana ny Varotra (State-Owned Commercial Bank)BITS = Swedish Agency for International Technical and Economic CooperationBMOI = Banque Malgache de l'Ocean Indien (Private Commercial Bank)BNI = Bankin'ny Indostria (Private Commercial Bank)BTA = Bon du TrEsor par Adjudication (Short-Term Treasury Bill)BTC = Bon du TrEsor Classique (Medium-Term Treasury Bond)BTM = Bankin'ny Tantsana Mpamokatra (Stae-Owned Commercial Bank)CCBEF = Commission de Contr6le des Banques et Etablissements Financiers
(Financial Supervisory Commission)CCP = Compte de Chequer Postaux (Postal Checking Institution)CD = Certificates of depositCEM = Caisse d'Epargne de Madagascar (Postal Savings Institution)CNAPS = Caisse Nationale de Prevoyance Sociak (Social Security Fund)CNFPB = Centre National de Formation de la Profession Bancaire (School of Banking Training)CPI = Consumer Price IndexIASC = Intenational Accounting Standards CommitteeIFAC = Intenational Federation of AccountantsINSCAE = Institut National des Sciences Comptabia et de l'Administration des Entreprises
(School of Business Management and Accounting)NGO = Non-govemmental OrganizationNPCB = Nouveau Plan Comptable Bancaire (New Banking Chart of Accounts)PCM = Plan Comptable Malgache (1987 General Chart of Accounts)PIT = Postal and Teleommunications ServicesSA = Societe Anonyme (Private Limited Company)SDP = Plan StratEgique de DEveloppement (Strategic Development Plan of BCRM and
CCBEF)SILI = Syst&me d'Importations Liberalis&a (Open General License)SME = Small and Medium Enterprises
FISCAL YEAR
January 1 - Deenmber 31
FOR OFFICIAL USE ONLYSTAFF APPRAISAL REPR
MADAGASCAR
FINANCIAL INSTITUTIONS DEVELOPMENT TECHNICAL ASSISTANCE PROJECT
TABLE OF CONTENTS
Page No.
CREDIT AND PROJECT SUMMARY ...................... (i)
I. INTRODUCTION .......................................... 1
II. THE FINANCIAL SYSTEM ....................................... 2
B. The Financial Sector ......................................... 4- Recent Developments ......................................... 4- Required Institutional and Policy Reforms ........ .................... 6- Financial Sector Strategy ....................................... 7
C. The BCRM (Central Bank) ........................................ 9D. The CCBEF (Financial Supervisory Commission) ......................... 13E. The Commercial Banks ......................................... 14F. The Insurance Sector ......................................... 14G. The Social Security Fund. 15H. Postal Financial Services ............................. 15I. The Payments System ............................. 16J. Financial Markets ............................. 16K. Accounting and Audit Framework .............................. 16
III. THE PROJECT ............................. 18
A. Project Objectives and Scope ............................. 18B. Rationale for IDA Involvement . ............................. 19
This report is based on the findings of a Bank appraisal mission which visited Madagascar from Pebruary 20, 1993, to March5, 1993, comprising of Messrs/MMme Govindan Nair, financial economist, (AF31E - mission leader and task manager); SimonGray, economist, (AF31E); Maud Borg (consultant, central bank mauagement); and Ake Andolf (consultant, informationsystems). Mr. Khalid Siraj (ASTlF) was Iead reviewer and Mr. P"cal Bouvier (IMF) was peer reviewer. Contributions areacknowledged from Mrs. Claudine Morin, lawyer (LEGAF), and Mr. Colin Lyle, auditing and accounting specialist (AFTCP).Messrs. Stokes and Thomet, respectively consultants for USAID and the Swiss Government, also participated in various aspectsof the appraisal mission. Bilingual seretarial support was provided by Mrs. Franqoise Schatten, staff assistant, (AF31E).Messrs. Francisco Aguirre-Sacasa (AF3DR) and Michael N. Sarris (AP31E) are respectively the Department Director and themanaging Division Chief for the operation.
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
C. Project Description ....................... .... .... ..... .... .. . 191. Restructuring BCRM ........... ............................. 192. Strengthening CCBEF .......... ............................. 233. Improving the Accounting and Audit Framework ....................... 244. Support to State Bank Privatization ............................... 25
D. Project Costs. 25E. Project Financing .26F. Project Implementation, Monitoring and Mid-Term Review .26G. Procurement .27H. Disbursements .29I. Accounting, Auditing and Reporting .30J. Project Supervision .30
IV. PROJECT BENEFITS AND RISKS ................................. 31
V. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS .. 32
ANNEXES
1. Statement of Financial Sector Reform and Development Policy2. Madagascar: Monetary Survey, 1986-19923. Main Technical Assistance and Training Activities:
Summary Description of First Year Tasks.4. BCRM Informatics Program5. Project Costs6. Estimated Disbursement Profile7. Implementation Schedule for Key Project Components8. Monitorable Actions under the Project9. Project Supervision Plan10. Terms of Reference for BCRM Coordinator of Strategic
Planning and Development
MADAGASCAR
FINANCIAL INSTITUTIONS DEVELOPMENT TECHNICAL ASSISTANCE PROJECT
CREDIT AND PROJECT SUMMARY
Boffower: Republic of Madagascar.
Beneficiaries: Central Bank of the Republic of Madagascar (BCRM), Financial Supervisory Commission(CCBEF), Ministry of Finance.
Amount: SDR 4.6 million (US$6.3 million equivalent).
Terms: Standard IDA terms with 40-year maturity.
PRelending Government passes SDR 3.5 million of the Credit toITrms: BCRM on a grant basis.
Objectives: The project objective is to facilitate investment and growth in the productive sectors byimproving the functioning of the financial system. This is in line with the Bank's countryassistance strategy which emphasizes increased private sector savings and investment asengines for future growth. The project aims at strengthening key financial institutions andmarkets in Madagascar (including privatization of the two remaining state banks), therebyenhancing public trust in them and enabling them to mobilize savings to meet theinvestment financing needs of the private sector. The project will be implemented in thecontext of the Government's Statement of Financial Sector Reform and DevelopmentPolicy adopted in March 1993. Specifically, the project would aim at: (i) enhancing theCentral Bank's (BCRM) ability to formulate and conduct monetary policy based onindirect instruments; (ii) improving the prudential supervision environment through thestrengthening of the Financial Supervisory Commission (CCBEF); (iii) formulating andenforcing accounting audit and financial disclosure standards based on internationalnorms; and (iv) supporting the privatization of state banks.
ProjectDescription: The project consists of:
(a) restructuring BCRM, the Central Bank, principally through improvements in itsresearch, open market, treasury, internal audit and accounting operations, andthrough the implementation of information technology and human resourcedevelopment plans;
(b) strengthening CCBEF, the Financial Supervisory Commission, with technicalassistance to create an effective supervision structure, training for inspectors andequipment for on- and off- site surveillance;
(c) improving the accounting and audit enviroment, through two sets of activities:(i) training and technical assistance activities to accelerate the development of the
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accounting profession and to ensure the availability of reliable financialinformation on enterprises based on international standards; and (ii) specifictechnical assistance and training to bankers, auditors and other professionals toestablish, disseminate and implement transparent international accounting andaudit procedures for commercial banks and financial institutions; and
(d) supporting the privatization of banks in the context of an ongoing process ofprivatizing one of the two state banks, BTM, and a Government commitment toa similar process for the other state bank, BFV, by supporting specializedconsultant services such as for valuation and placement of these banks withprivate investors.
The Credit would finance technical assistance, training, equipment and vehicles.
Benefits: The major benefits of the project will derive from its contribution to the establishmentof an efficient financial system, with an effective banking system at its core, which isessential for the development of a market-oriented economy. The project will helpimplement an overall strategy for market oriented financial reforms, particularly instrengthening the framework for prudential supervision, accounting and audit. In turna sound financial system will facilitate productive investments and contribute toaccelerated economic growth and the creation of employment opportunities which are keyfactors in poverty alleviation. Specifically, the project is expected to: (i) enhance theeffectiveness of BCRM to conduct monetary policy; (ii) strengthen the prudentialsupervision role of CCBEF and over time engender greater confidence in the use ofindirect controls rather than direct controls to allocate resources; (iii) enhance the securityand efficiency of financial transitions and the quality of financial intermediation througha greater stimulus for financial savings and more efficient allocation of capital; and (iv)help avert future financial crises rather than simply react to them.
Risks: The major risks of the project stem from the possible impact of the present transitionalpolitical decision-making structure on effective implementation. Successfulimplementation is predicated on political will being maintained to preserve the authorityof BCRM and CCBEF, respectively, to formulate and execute monetary policy and toexercise prudential oversight of banks. At the same time, the institutional developmentgoals for BCRM and CCBEF are complex and ambitious, including significantlyredefined business objectives and extensive use of information technology, and could besubject to implementation slippages. These risks are mitigated by: (i) the high level ofcommitment to project objectives and to the project's urgency expressed by a broadspectrum of political figures and technicians; (ii) limiting the project core to BCRMwhich has demonstrated continuity in its institutional capacity; (iii) the progress alreadymade, by BCRM and CCBEF themselves, towards preparing this project, indicating earlyownership and internalization of project design and objectives; and (iv) up-frontagreement and implementation of key organizational and institutional changes necessaryto execute the project.
Rate of return: Not Applicable
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SUMMARY PROJECT COSTS ESTIMATES f(USS thousand)
ESTIMATED PROJECT COSTS: L l gll ~~~~~~~~~~~~~~~~LoOcal Foreign Total
1. Strengthening BCRM T TAdvisory Services for Central Bank Organization - 60.0 60.0
Research Department - 832.0 832.0
Credit Departmnt - 295.0 295.0
Foreign Exchange - 315.0 315.0
External Debt Management - 218.0 218.0
Planning & Management of Circulation of Notes & Coins 53.0 854.0 907.0
Accounting 82.0 499.0 581.0
Internal Audit 26.0 307.0 333.0
Information Systems 345.0 4,014.0 4,359.0
Human Resources 144.0 380.0 524.0
Project Management Assistance - 502.0 502.0
Sub-Total 650.0 827 892.0
2. Strengthening CCBEF 21.0 556.0 577.0
3. Improving the Audit & Accounting Framework 204.0 456.0 660.0
4. Supporting the Privatization of State Banks - 200.0 200.0
TOTAL _.488.5 D0.360
a The incremental staff and operating costs under the project will be borne by the implementingagencies concerned, mainly BCRM.
k/ Includes annual physical contingencies of 5%, and annual price contingencies of 4% in US$.
FINANCIAL INSTITUTONS DEVELOPMENT TCNCAL ASSISTANCE PROJECT
STAF APPRAISALRE R
L.INTRODUCTO
1.1 In 1991, a number of economic reforms were abandoned as Madagascar entered into a periodof political turbulence. Fundamental weaknesses in the financial sector had severely undermined thecapacity of the authorities to execute structural adjustment programs and as a consequence theirsustainability was thwarted. Madagascar is still in a period of political transition with limited authorityto undertake a comprehensive structural adjustment program. This period of transition does, however,present the opportunity to strengthen key financial institutions in preparation for the resumption of broadeconomic reforms and economic recovery and growth.
1.2 Significant strengthening of the Central Bank (BCRM) and the Financial Supervisory Commission(CCBEF) is indispensable for mobilizing savings to meet the investment financing needs of the privatesector and to laying the foundations for sustainable economic growth. The proposed project will beimplemented in the context of a Government Statement of Financial Sector Reform and Development.The core of the project is centered on BCRM which has demonstrated continuity in its institutionalcapacity over the transition period.
1.3 The project will specifically: (i) reinforce the institutional capacity of BCRM so that it caninitiate and sustain financial sector reform through more effective formulation and execution of monetarypolicy; (ii) develop CCBEF so that it can effectively execute its prudential supervision functions andconsequently engender greater confidence in the use of indirect controls in allocating financial resources;(iii) improve financial accounting and audit in enterprises and in the financial sector, specifically thebanking system, by basing them on internationally accepted standards; and (iv) help complete the processof privatizing the remaining two state banks.
1.4 The proposed project was appraised in February 1993 by a World Bank mission consisting of:Messrs./Mme Govindan Nair, financial economist, (AF3IE - mission leader and task manager); SimonGray, economist (AF3IE); Claudine Morin, lawyer (LEGAF); Maud Borg, (consultant, central bankmanagement); and Ake Andolf (consultant, information systems). Contributions are acknowledged fromMr. Colin Lyle, accountant (AFTCP), and Messrs. Stokes and Thomet, respectively consultants forUSAID and the Swiss Government, who also participated in various aspects of the appraisal mission.
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II. HE FINANCIAL YSTEM
A. Macroeconomic Context
Background
2.1 Madagascar, with a population of 12 million growing at 3 percent per year, and per capitaincome of about US$220, is one of the world's poorest countries. It is the fourth largest island on theplanet with wide variations in soils, topography and climate, and it features unique flora and fauna. Thecountry's staple is rice, and the major exports are coffee, vanilla, cloves and shellfish. In the early yearsof independence in the 1960s, Madagascar witnessed modest growth, followed by stagnation from 1970to 1980, and a severe downturn to 1982. Financial stabilization followed with limited economic growthfrom 1983 to 1987. Since 1988, the economic results were encouraging until 1990, shortly after whichthe country entered into a period of political turbulence in 1991.
2.2 In the period from 1983 to 1988, Madagascar implemented a comprehensive program ofstabilization and economic reform. The Government's deficit was slashed from 18 percent of GDP in1981 to just over 4 percent in 1989. Monetary creation slowed and so did inflation from a high of 31percent in 1981 to 9 percent in 1989. At the same time the external current account deficit (includingtransfers) dropped from 10 percent to 5 percent of GDP. In achieving these stabilization measuresMadagascar was supported by four IMF standby arrangements since 1985, which were subsequentlyreplaced by arrangements under the Enhanced Structural Adjustment Facility in 1989.
2.3 Actions, albeit slower than required, were also taken to reform the trade and exchange rateregimes. The exchange rate moved away from being fixed administratively to more flexibly managedwith significant depreciation of the real effective exchange rate. Complementary actions on tariff reformwere also implemented. All quantitative restrictions were lifted by 1988, followed by a four-year programinstituting ad valorem tariffs, rationalizing product import categories from 69 to 16, and introducingminimum and maximum tariffs of 5 percent and 80 percent, respectively.
2.4 In tandem with these trade reforms, structural adjustment was tackled on a number of differentfronts. Price controls were virtually eliminated over the decade with prices on agricultural commoditiesand the consumer price of rice being completely freed in 1985 and retail prices on 90 percent of valueadded in industry being decontrolled by the end of the decade. Over the same period, the Governmentrolled back the monopoly of public marketing authorities, most notably in coffee, clove and pepperexports and through the legalization of private trade in rice, pulses and groundnuts. Currently, only thevanilla trade remains controlled. The effect on the rice industry was immediate, with significant increasesin production in the 1987 season and a significant decline in import rice dependency to 1990.
2.5 Public expenditures underwent a fundamental reorientation in the 1986-90 Development Plan thatemphasized: maintenance and rehabilitation, improved utilization of capacity, a much reduced role of theState in manufacturing, and a major rationalization for agriculture. The first rolling triennial investmentprogram was formulated for 1989-1991 and was followed by further improvements in a subsequentprogram for 1990-1992, which included increased aggregate provision for counterpart funding forexternally assisted projects, and the beginning of a significant reorientation of current expenditurestoward priority needs in primary health, basic education and public safety.
2.6 The Government took initial steps to reform the completely state-owned banking sector. By theend of 1989, the loan portfolios of these banks had been cleaned of most non-performing and doubtfulassets. In 1990, a new full private bank with majority foreign capital started operations, and in 1991 oneof the state banks was privatized and another obtained minority private participation. Moreover, in 1990,Central Bank (BCRM) embarked upon a process of replacing direct credit allocation with a more flexiblesystem based on indirect market instruments.
2.7 BCRM losses, however, mounted over the 1980s which indicated a fundamental flaw in thefinancing of public expenditure. In taking direct liability for the exchange rate risk on governmentexternal debt, in addition to providing advances to the Government at well above the statutory limit andat near zero percent interest rates, BCRM registered operating losses which averaged 3 percent of GDPfrom 1985 to 1990 and resulted in accumulated losses equivalent to 9.6 percent of GDP in 1990. Limitedaction was taken to redress this situation in 1991 when it was decided to remunerate Treasury depositsand charge Treasury borrowing with the BCRM at money market rates.
2.8 Overall, the stabilization and subsequent structural reforms contributed to the resumption of percapita growth in early 1988. This supply response was, however, slower than desired partly because ofinadequate progress in institutional reforms in the financial sector. It was undermined by political eventsin 1991.
Recent Developments
2.9 In 1988-90, strong growth in agricultural production and new export-oriented manufacturingactivities (e.g., garments, leather, wood processing) led to modest per-capita GDP growth. Thedevelopments in 1990, however, demonstrated the fragility of the reform and recovery. Even prior to thepolitical turmoil, growth in agricultural production slowed to about 2 percent due to poor weather, whilethe secondary sector stagnated due to weak performance in the public sector textile and food industries,despite continued strong performance by the new manufacturing enterprises. The setback centered on thefailure of the authorities to effectively link and manage exchange rate policies and credit policies.Merchandise imports rose by 58 percent in nominal U.S. dollar terms as a result of an uncontrolledexpansion of credit (provided largely through BTM, the only remaining fully state-owned commercialbank), an appreciating real effective exchange rate, and an increased oil bill. This, together withstagnating merchandise exports in current dollar terms, due largely to the continued sharp decreases inthe prices of the country's major exports (in particular that of coffee), led to a trade deficit of 6 percentof GDP, compared to a small surplus in 1989. As a result, the external current account deficit widenedfrom 8.6 percent of GDP in 1989 to 11.7 percent in 1990. These developments, combined withlower-than expected aid inflows, caused foreign exchange reserves to decline from five months of importsat end-1989 to less than two months by end-1990.
2.10 The Government acted, albeit slowly, to restore financial equilibria by devaluing the FMG by16 percent in January 1991 and by severely tightening credit expansion between November 1990 and June1991. These measures and increased external support helped improve the country's external positionduring the first half of 1991, and the economy was on the way to another year of positive growth, whenpolitical turmoil broke out in the second half of 1991. As widespread demonstrations and strikesparalyzed public administration, economic activity was severely disrupted, and the adjustment processwent off-track.
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2.11 Real GDP contracted by 6 percent in 1991; inflationary pressures built up; financial imbalanceswidened significantly; and large domestic and external payments arrears were accumulated. Politicaldisturbances in 1991 resulted in a shortfall in tax collection and the rise in the budget deficit to about 10percent of GDP; in 1992, tax collection did not improve and budgetary discipline worsened. The truesize of the fiscal deficit was masked by the quasi-fiscal operations of the Central Bank which since 1983has been assuming debt-servicing obligations once borne by the Treasury. The internal imbalances werereflected in a worsened external position of Madagascar, with the overall current account deficit reaching10 percent of GDP in 1992. The growing shortage of foreign exchange had led to the suspension of theOpen General License system in October 1991.
2.12 A transitional power-sharing arrangement, agreed in late October 1991 by all major politicalforces, became effective in January 1992. Under this arrangement, the President remained in office withgreatly curtailed executive powers; the National Assembly was dissolved and replaced by a High StateAuthority headed by a key opposition leader; and a government of national consensus was formed. Thenew Constitution was approved by referendum in August 1992, followed by presidential elections in lateNovember 1992 and February 1993. Legislative elections are scheduled for June 1993. Political andeconomic turmoil have exacerbated issues which were already adversely affecting Madagascar's projectimplementation performance. Notable among these is weak management, ill prepared to meet thechallenges of a market economy. While the political transition runs its course, institution building willbe critical to permit the timely and efficient return to private sector led growth.
B. The Financial Sector
Recent Developments
2.13 In the second half of the 1980s, reforms in the financial sector centered on steps to strengthenthe banking sector, which was completely state-owned and experiencing severe financial problems. Bythe end of 1989, the loan portfolios of these banks had been cleaned of most non-performing and doubtfulassets. In 1990, a new, fully private bank with majority foreign capital started operations; in 1991, oneof the state banks was privatized and another obtained minority private participation while two privateforeign banks opened representative offices in Madagascar. In parallel with these actions, the CentralBank embarked upon a process of replacing direct credit allocation with a more flexible system based onindirect market instruments. These financial sector reforms have had mixed results. The new privatebanks and the majority privatization of one of the state banks has proved successful. Progress was lesssustainable, however, in maintaining the overall health of the banking system following the portfolioclean-up of 1989, because the two majority state banks have shown increasing weaknesses since 1991.These difficulties led to a virtual standstill in the interbank money market, jeopardizing the success of amarket-based system of interest rates introduced in November 1990. As discussed below, theestablishment of market-based interest rates was also undermined by the suspension of the Treasury Billmarket in mid-1991.
2.14 Problemns in establishing market-based interest rates. Direct refinancing operations by BCRMwere replaced in November 1990 by money market auction operations, to both inject and removeliquidity from the financial system. They were interrupted in June 1991 in the wake of political strife,but were reinstated again in November 1991. The root of this perturbation in the money market was there-emergence of macroeconomic instability in 1991, as outlined in paragraph 2.11. At the same time,institutional weaknesses in the two state banks have undermined the development of a money market.Specifically, in 1990/1991 a rapid expansion in credit by the largest state bank undermined monetary
stability, which was later compounded by a similar increase in credit in the other remaining state bankin 1992. It is noteworthy that while the two state banks have at various times exceeded their creditceilings for extended periods, the two private banks have generally kept within their credit ceilings.
2.15 Another reason the money market has not worked well has been the lack of clear objectives inmonetary policy which is partly reflected in an inability to coordinate money market operations withpublic financing operations of the Treasury. Currently the only treasury bills being issued are BTCs (Bonsdu Tresor Classiques), representing medium to long-term investments. Returns on this paper, becauseof up front interest payments and tax exemption, provide effective rates which have remained static overa two-year period and bear little relation to the prevailing market conditions. Since the money marketwas reinstated in November 1991, the market has been highly liquid, due to the suspension of the OGLimport system combined with lower tax recovery and increased government spending. BCRM has,therefore, been systematically removing liquidity from the system through the money market auctioninstrument "appel d'offres n6gatives' (AONs). To avoid wide fluctuations in rates that could result fromfiscal problems and weaknesses of state banks, BCRM openly or covertly attempts to regulate the marketwhich results in rigid interest rates, while basic policies of either removing or injecting li-uidity aremechanistically followed. Under these conditions, the Treasury has no incentive to issue short-, erm paper(BTAs) in lieu of borrowing from BCRM at money market rates.
2.16 The problems of state banks and lack of adequate coordination of monetary and fiscalmanagement have resulted in three indications of a lack of market-based interest rates. First, interest rateson both BCRM deposit and refinancing instruments have remained exceptionally static over the last twoyears despite a complete reversal in the money market situation from a highly illiquid market fromNovember 1990 to June 1991, to a highly liquid situation following the resumption of the market in 1991.Second, operations in the interbank market have been extremely modest, with most of the operationsoccurring between the two state banks, while the private banks, for reasons of confidence, prefer torefinance or place resources directly with BCRM. Third, the wide divergence in returns on savings isindicative of the of lack of market forces at play: sight deposits averaging 2.6 percent, term depositsaveraging 14 percent, AONs 8.75 percent, special deposits with BCRM 5 percent, and six-month treasurybills (Bons du Tresor par Adjudication, BTAs) 18 percent and with an effective return of 25 percent.
2.17 Problems of state banks. With regard to the banking system, despite the 1986 to 1988 portfolioclean up and the privatization moves referred to in paragraph 2.6, the authorities were unable tosatisfactorily control the growth of credit in 1990 and 1991. This inability to control credit centered oninstitutional weaknesses in one bank, the wholly state-controlled BTM, which witnessed a severedegradation of its loan portfolio over the 1990/1991 period. This was a major factor in the discontinuationof the OGL import system in September 1991. Remedial action was taken in February 1992 with thereplacement of BTM top management, which has led since April 1992 to the reduction of BTM loanportfolio to within the specified BCRM credit ceiling, and to a position where BTM reversed its normalrefinancing requirement with BCRM to a situation where it placed excess liquidity with BCRM as ofAugust 1992. While BTM's adverse impact on overall credit management appears to have now beencontained, the state of the bank's loan portfolio has worsened. Consequently, the profitability of the bankis declining while provisioning requirements for doubtful assets increase, making the prospects forimmediate privatization more remote.
2.18 Problems at BTM recently spilled over to the other remaining state bank, BFV. The 1991accounts for this bank could not be satisfactorily audited and the loan portfolio has significantlydeteriorated and, consequently, a large increase in provisions is required. Furthermore, since late 1991,
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BFV has consistently failed to respect credit ceilings. While the two private banks have been in positionsof excess liquidity and BTM reduced its refinancing requirement, showing excess liquidity in August1992, BFV still had a net refinancing requirement with BCRM.
2.19 The problems of establishing market-based interest rates and of the state banks reflect two setsof weaknesses in the financial system. First, the lack of independence of the Central Bank (BCRM) andFinancial Supervisory Commission (CCBEF) has resulted in the conduct of monetary policy andprudential oversight being influenced by political factors. Second, the lack of independence of these keyinstitutions is compounded by inadequate capacity to formulate and execute monetary policy based onindirect instruments and the lack of concise and comparable information on the health of bankinginstitutions as well as inadequacies in the prudential supervision system, the accounting framework, andthe financial disclosure and audit standards for banks. All these factors have made early detection andcorrection of financial distress difficult.
Required Institutional and Policy Reforms
2.20 The Government and BCRM are conscious that a wide variety of monetary and financial reformsare required to develop a market oriented economy. Accordingly, the Government adopted a Statementof Financial Sector Reform and Development Policy in March 1993 containing a two-stage strategy forstrengthening the financial system (see Annex 1). The first phase of reform aims at the following priorityinstitutional reforms: (i) strengthening the independence and accountability of the Central Bank; (ii)enhancing the capacity of CCBEF in prudential supervision; (iii) improving the framework for audit andaccounting; and (iv) supporting the privatization of state banks. Some of the remaining reforms arepredicated on macroeconomic stability through fiscal prudence and clear policy decision with politicalstability. In many cases, however, the ground can be laid to facilitate the implementation of futurereforms while the necessary fiscal and political preconditions are in the process of being fulfilled. Indeed,the unsatisfactory results of earlier financial sector reforms underscore the urgency of institutionalstrengthening in order to allow macroeconomic reform to succeed.
2.21 On the monetary front, a number of improvements are required to the workings of the market.Chief among these is the implementation of a pure Dutch auction system for BCRM refinancing with theremoval of any BCRM limits on interest rates for auctions. In addition to this, the standardization ofmaturities and a well defined and publicized auctioning schedule for both refinancing and placing needsto be accomplished. Furthermore, alternative BCRM instruments to borrow and deposit funds whichundermine the auction system should be removed. This must be complemented with a well designedresearch capacity combined with improvements in the monetary programming in BCRM. Eventually, bankcredit ceilings and limits should be abolished once there is adequate progress towards: (i) the developmentof an active money market; (ii) a sound privatized banking system; and (iii) improvements in planningand financing public debt. This series of measures should begin to place the functioning of financialmarkets and conduct of monetary policy using market instruments on a more firm footing.
2.22 While progress has been made in developing reserve requirements into a fully fledged tool ofmonetary control, a number of measures are required to improve this instrument. These includeimproving the computing lag time, being more flexible on what constitutes reserves and not being undulysevere on the penalty when reserve requirements cannot be met. Again, capacity building measures inBCRM could overcome many of these shortcomings.
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2.23 In the area of public finance and monetary policy, greater coordination between BCRM and theTreasury needs to be developed to ensure a more planned and systematic approach that avoids ad hoefinancing and increases the efficiency of public finance operations. BTAs issued for six months andtwelve months should be reintroduced. This will require concurrent flexibility in auction operations toguarantee that rigid auction rates do not undermine the attractiveness of BTAs. Increased research andmanagement capacities at BCRM are required to ensure that short-term liquidity management is integratedwithin a well formulated overall policy of monetary management and that returns on BTCs are more inline with the market, and to allow for the development of a secondary market for both types of treasurybills.
2.24 While prior credit approval has been abolished by BCRM, there remains a prior authorizationby BCRM of any individual loan that a bank uses to collateralize refinancing with BCRM. As capacitiesto enhance supervision of financial institutions in CCBEF improve, this requirement should be abolished.BCRM refinancing will become more a function of the commercial bank risk rather than the individualborrower risk, though provision could still be made to exclude loans to specific individual borrowers withinsufficient creditworthiness from being used as collateral for BCRM refinancing.
2.25 In the light of the present banking crisis and given the policy objective to shift to indirectmonetary controls, increased support for banking supervision and the upgrading of financial accountingand auditing standards is crucial. This will require strengthening the technical and legal capacity of theFinancial Supervisory Commission (CCBEF) in tandem with the dissemination and implementation of animproved and uniformly applicable chart of accounts for commercial banks, as well as the introductionof appropriate auditing procedures, both of which should reflect international norms.
2.26 Besides improved supervision, the key to solving present problems in the banking system is theprivatization or liquidation of the two state banks. The privatization route may necessitate theintroduction of interim management to turn these banks around and render them privatizable. In the eventthat it is concluded that the alternative of liquidation is the only feasible outcome, financial policy willdictate that all efforts are made to explore the possibility of selling the assets to another bank with a viewto maintaining the depth and range of financial services as is economically feasible.
2.27 In the process of restructuring the financial sector, policies which engender financial andeconomic autonomy and transparency of financial institutions, should be pursued to ensure that theyoperate in an efficient and self sustaining manner. This is a particularly important objective for BCRM,whose institutional and financial independence will also form an important policy objective. Furthermore,wherever feasible, policy to broaden and deepen the financial markets through the creation andstrengthening of existing institutions and instruments will be pursued.
Financial Sector Strategy
2.28 The strengthening of the financial sector is critical to sustaining the reforms embarked on in thelate 1980s, whose principal objective was to ensure the successful transition from a state to a privatesector-based market economy. The centerpiece of the financial strategy is to efficiently mobilize savingsto meet the investment fmancing needs of the private sector. The major constraint to increasing the levelof investment in Madagascar, particularly private sector investment, is the low level of domestic savings.Despite increases in domestic savings to 10 percent of GDP in 1989, Madagascar's gross domesticsavings rate is below the average for sub-Saharan Africa (12 percent). Equally, Madagascar's investmentrate has been below the sub-Saharan average at 10 percent of GDP between 1985 and 1989, against a sub-Saharan average of 14 percent. While the primary obstacle to mobilizing savings and increasing
investment remains a fiscal problem crowding out private investment and dampening incentive to save,a number of secondary problems are related to institutional capacities and the quality of financialintermediation.
2.29 To enable the financial sector to play its role in recovery and growth, a seven-part sector strategyhas been developed jointly with the Government. This strategy is the outcome of a dialogue which beganin January 1992 with discussions of the World Bank's Financial Sector Study (Report No. 9817-MAG).The various elements of this strategy are included in a Government Statement of Financial Sector Reformand Development Policy (See Annex 1). EiM, the Government will pursue a public expenditure programconsistent with a significant lowering of the budget deficit in the short to medium term, and will relieveBCRM of all its quasi fiscal obligations. Second, a full range of institutions, markets and instruments willbe developed over time to ensure that all segments of the population have access to financial services,which effectively mobilize financial savings and efficiently transfer them into the real economy. Financialdepth, M2/GDP, has hardly changed and remained below 25 percent of GDP in Madagascar since the1970s (1985-88 average: 22.5 percent), which is low when compared with other developing countries.Furthermore there is highly disparate availability of financial intermediation in Madagascar, dependingon geographical location and income group. The majority of the rural population has limited access tofinancial services, and these services have limited usefulness to a large part of the active populationbecause of the low level of incomes and the restricted and inflexible nature of the services offered. ThiW,over time the financial system will promote a market determined set of key prices, notably interest ratesthat would remain positive in real termns and, eventually, an exchange rate that is market determined.At present, despite monetary reforms, interest rates are extremely rigid and thus fluctuate in real termsfrom negative to positive without any reference to demand for and supply of resources. Removal of therigidities in interest rates is, therefore, key to the efficient allocation of resources. It is recognized,however, that this can only be achieved if macroeconomic stability is restored and fundamentalinstitutional weaknesses in the banking sector are resolved.
2.30 A fQ.gh element of the financial sector strategy is the development of a rigorous and effectiveprudential supervision which also implies an appropriate framework of accounting, auditing and financialdisclosure for financial institutions. At the core of many of the financial sector problems experienced inMadagascar over recent years has been the lack of reliable financial information, combined with adeficiency in the prudential supervision of financial institutions. A strategy to raise standards in financialinformation and strengthen supervision is, therefore, essential to the financial sector reform. Fifth, therewill be an eventual shift to indirect instruments of monetary control. sixth, state ownership and controlin all bank and non-bank financial institutions will be removed and a sound institutional framework withstrong and competitive financial institutions will be promoted. Finally, the appropriate financialinfrastructure (legal system, payments system) will ensure the efficiency and security of all financialtransactions (payments, deposits, loans, etc.).
2.31 The proposed project will help in the implementation of the overall sector strategy. It will focuson immediate priorities of reforms in BCRM and the CCBEF and improvements to accounting and audit.It will provide technical assistance, training, equipment and supplies to strengthen both BCRM andCCBEF. Furthermore, the project will strengthen the accounting and auditing environment by providingtechnical assistance and training for upgrading and disseminating improved accounting and auditingstandards in line with international norms. Experience with prior adjustment programs has demonstratedthat there are advantages to initiating institutional reforms as early as possible, because of the time it takesto bring them about. Having stronger institutions is a precondition for the application of effectivefinancial policies and structural reforms in the sector.
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2.32 IDA involvement in financial sector reforms: World Bank involvement in the financial sectordates back to the mid-1980s when the Government began to place limits on banking sector credits topublic enterprises. In 1987, state owned banks started restructuring their portfolios by provisioning moreaggressively against non-performing assets. In 1988, a new banking law allowed private sectorparticipation in the financial sector, which resulted in a new private commercial bank opening its doorsin 1989 and one of the three state banks being fully privatized and another partially. The World Bank'srole in these initiatives was complemented by the IMF which, inter alia, provided assistance in the designand launching of a new money market in Madagascar in 1989-1990. Bank/IMF collaboration includedIMF participation in the Bank's Financial Sector Study (Report No. 9817-MAG, March 1993).
2.33 The Government, conscious of the need to establish solid financial institutions as a vehicle forprivate sector development and the resumption of growth, requested in January 1991 assistance from theBank in preparing a series of operations designed to meet this objective. With regard to the proposedproject, the World Bank has been involved in a series of discussions with both the Government andBCRM, including seminars in three subsequent missions before appraisal in February/March 1993. Thesediscussions have been aimed at early ownership of the project by BCRM which created a project groupin August 1992 to draft a strategic development plan. In parallel with these discussions, the IMF reviewedBCRM and banking issues and reforms in May 1992, and provided advice on how the balance sheet ofBCRM could be restructured to eliminate all quasi fiscal obligations more properly attributed to the State.At the same time, the IMF has taken the lead in reviewing the statutes of BCRM and in helping defineappropriate steps for strengthening the supervisory role of CCBEF, including an IMF initiative to recruita foreign bank supervisor as technical adviser. These initiatives intimately complement those of theproject, and reflect the critical role the IMF has played in reviewing and defining the framework for thistechnical assistance operation.
C. BCRM (Central Bank)
2.34 The core functions of the Central Bank of the Republic of Madagascar (BCRM) are consistentwith those of a modern central bank, namely: issuing legal tender and assuring economic growth withprice stability through appropriate monetary policy. However, as is the case with many countries in thedeveloping world, BCRM has taken on a number of other functions, notably quasi fiscal activities, whichare inconsistent with its development into an independent institution ensuring stability in money andfinancial markets. To better identify institutional development needs of BCRM, the scope and results ofits primary functions (domestic and foreign operations, credit, research), as well as support (accountingand audit, information systems, human resources) are reviewed below:
(a) Formulating and Executing Monetary Policy
2.35 As previously indicated, there are major weaknesses in the monetary operations of BCRM whichhave resulted in a rigid money market and the maintenance of a number of direct controls on the market.The first weakness is a lack of research capacity to formulate monetary policy based on an analysis ofdevelopments in the real and financial sectors (see paragraph 2.39 below). The second weakness is thelack of coordination with the Treasury on government financing and open market operations. Institutionalstrengthening through the development of (i) research capacities, (ii) open market operations and(iii) improved coordination with the government financial operations, would give BCRM more confidencein allowing the market to function. BCRM would, therefore, be better prepared to remove credit ceilings
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and other direct controls, once macroeconomic stability has been established and fundamental institutionalweaknesses in the commercial banks resolved.
(b) Government Banker
2.36 Apart from acting as the Government's banker, BCRM has also been implicitly obliged tofinance the public sector deficit, which is illustrated by the mounting operating losses of BCRM in the1980s. This financing took three forms: (i) taking direct liability for the exchange rate risk onGovernment and private sector external debt during the London and Paris Club rescheduling negotiationsin the 1980s which, in the case of the Government, effectively meant recording losses on the balancesheet of BCRM that should have been ascribed to the national budget; (ii) providing advances to theGovernment well above the statutory limit; and (iii) providing the advances at virtually zero percentinterest until 1991. Since the Government does not systematically respect its obligations to compensateforeign exchange and operating losses, three fifths of BCRM operating assets represented unremuneratedclaims on the Government by the end of the 1980s.
2.37 The resolution of this problem centers on legally enshrining the independence of BCRM andrestructuring its balance sheet. Initiatives involving the IMF in both these areas are already underway.With regard to the independence of BCRM, revisions to the 1973 Ordinance setting forth BCRM'sStatutes have been prepared to: (i) clearly limit the objective of BCRM to the stability of the currency;(ii) increase its authority in formulating monetary policy; (iii) increase the independence of the Governorand Board through lengthened tenure, fixed-term appointments and clear dismissal criteria; and (iv) ensurethe regular publication of BCRM audited accounts. A first step towards the restructuring of the balancesheet was undertaken in 1992, when the non-interest earning assets of BCRM representing claims onGovernment and associated liabilities were recorded in specific new accounts outside of the balance sheetof BCRM, which now render these quasi fiscal operations more transparent.
2.38 Increased legal and financial independence of BCRM are key to general financial sector reformand critical to the successful application of any technical assistance provided to BCRM or CCBEF.Consequently the independence of BCRM and the elimination of its fiscal obligations constitute explicitobjectives of government policy for the financial sector which need to be forcefully pursued. (See theGovernment's Statement of Financial Sector Reform and Development Policy, Annex 1).
(c) Primary Functions
2.39 Research. A fully fledged research and statistics function does not exist in any significant senseat BCRM. Currently, a unit consisting of four staff is engaged in collecting macroeconomic data, mainlyin preparation for BankI/IMF missions. There is a multitude of research and policy-related data gatheringand processing efforts through BCRM which are uncoordinated and which result in numerous redundantdata requests from various departments of BCRM to the outside (commercial banks and financialinstitutions, ministries, etc.). The research function until very recently lacked a director and, as a result,the authority to coordinate and streamline data requests from the outside and data flows within BCRM.Consequently, no monetary programming is carried out. Furthermore, there is no strategic or policyresearch, for example for helping formulate monetary policy or better understanding links between thefinancial system and the real economy.
2.40 Credit. The credit department in BCRM has primary responsibility for the implementation ofdirect monetary controls, and in the last few years has been responsible for reforming a number of these
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instruments and for implementing new money market instruments to manage the level of liquidity in themarket. While some progress has been made in dismantling some of the direct controls, notably inabolishing all prior credit approval and in developing reserve requirements as a tool of monetary control,the operation of the money market remains rigid (See para. 2.15) and credit is still micro-managed byBCRM. Notwithstanding that credit ceilings will need to be maintained until fiscal problems andinstitutional weaknesses in the commercial banks are resolved, a great deal of institutional strengtheningis required over the transition to improve the flexibility, responsiveness and effectiveness of the nascentmoney market and the new monetary instruments.
2.41 Foreign Exchange Operations. BCRM monitors all foreign currency operations and managesall foreign currency transactions on behalf of the Government. Until September 1991, when the OpenGeneral License System (OGL) was abolished, all foreign currency receipts had to be surrendered toBCRM. Currently the commercial banks are permitted to keep 60 percent of the foreign currency receiptswhile ceding 40 percent to BCRM, which maintains its role of monitoring all foreign currencytransactions. Given the existing foreign exchange shortage and the need for commercial banks to conductforeign exchange transactions at an overvalued official rate, this system effectively puts the burden ofrationing on commercial banks. A strategy, cognizant of present fiscal and monetary problems, needs tobe developed with the long term objective of BCRM playing a supervisory role in a market where foreigncurrency is freely traded. Furthermore institutional weaknesses in managing and monitoring foreigncurrency operations have to be addressed to prepare BCRM for the implementation of this strategy andto increase the efficiency of existing operations.
2.42 External Debt Management. BCRM manages all external public debt on behalf of theGovernment, and has been obliged to bear losses on external debt that should have been borne by theTreasury, notably exchange rate losses. A strategy to ensure that all obligations on foreign debt contractedby the Government are correctly attributed to the Treasury was developed in 1992 as part of the overallpolicy to eliminate quasi fiscal activities from BCRM balance sheet, referred to in paragraph 2.37. Thisresulted in the creation in early 1993 of a distinct department within BCRM to implement this strategyand to manage all external debt. Technical assistance is required to develop the capacities of thisdepartment to manage these external debt operations.
2.43 Circulation of Bank Notes. Activities associated with the circulation of bank notes at BCRMcenter on national currency management. BCRM is poorly equipped to monitor and manage the level ofnational currency in circulation due to: (i) limited operational capabilities within BCRM to forecast andcontrol demand for national currency; and (ii) poor communications with both BCRM domesticcorrespondents and the commercial banks. These problems need to be tackled in tandem with a reviewof the domestic payments system.
(d) Support Functions
2.44 Accounting. Whereas BCRM appears to have managed to maintain and prepare accounts on aregular basis, the internal organization of the accounting function suffers certain weaknesses. These result,principally from an unsatisfactory segregation of responsibilities, and the fact that there is no separate unitwhich is primarily responsible for accounting and for reporting on financial matters directly tomanagement. Currently, departments or units are not only initiating transactions but are also responsiblefor recording them, thus bypassing a fundamental principle of adequate internal control within theinstitution. Furthermore this situation inhibits the preparation and diffusion to general management ona timely basis, of the financial information necessary to effectively execute their managerial
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responsibilities. The absence of regular external audits of BCRM accounts is an additional shortcomingin the overall control exercised over the bank's operations.
2.45 Internal Audit. Within BCRM the activities normally attributed to an internal audit office orunit are currently carried out by the Inspection Department. This includes routine verification and internalcontrol functions which are more properly handled by a separate accounts unit. The InspectionDepartment also carries out a variety of other activities (review of applications for the banking licenses,on-site and off-site inspection of financial institutions) which should now be the responsibility of CCBEF.Moreover, the Inspection Department is not directly responsible to the Board of Directors of BCRM anddoes not, therefore, enjoy the independence usually associated with the function of internal audit.
2.46 Information Technology. Information processing plays an important role in the day to dayoperations of BCRM, though a number of activities lack required computer support due to the scarcityof data processing resources. Likewise there is a need for more active general management participationin data processing planning and implementation. Furthermore, in a changing environment with aprogressive shift to using indirect instruments of monetary policy, the role of information technology willbecome increasingly important in attaining BCRM objectives. Strengthening strategic capacities in the areaof information technology is, therefore, a central part of BCRM development.
2.47 Information processing at BCRM today relies on an outdated mainframe computer system forwhich the supplier has discontinued maintenance. Although spare parts can still be procured from placesas far away as Europe, it often entails a wait of up to ten days. This constitutes a considerable operationalrisk for some of the basic data processing functions. High priority is, therefore, being accorded to movingthe most important systems, accounting and payroll, to other hardware. Despite the relatively highquality of BCRM computer staff, compared to that of other countries at a similar stage of development,the number of qualified systems analysts and programmers is limited. Significant emphasis on trainingprograms is required to meet the information technology skills requirements of BCRM.
2.48 Human Resources. While the quality of staff in BCRM is quite high on average, there appearsto be a lack of broad-based understanding of the functions of central banking. Most staff have onlylimited knowledge of the operations of departments other than the one in which they are working. Thereis virtually no systematic planning for staff rotation or long-term training. BCRM senior managementhave also expressed the need to review the present system of classifying personnel to improve incentivesand prospects for horizontal and vertical mobility. BCRM is examining the possibility of introducing ofoccupational streams (economists, financial analysts, etc.) to guide future recruitment, training, andpromotion.
(e) Recent BCRM Reforms
2.49 BCRM senior management and staff have generally been conscious of the problems and the needfor improvements within the institution. A number of steps have been recently initiated to strengthenBCRM capabilities to more effectively meet its responsibilities in an increasingly market-based economy.A major initiative is the revision of the 1973 Statutes of BCRM, which will give BCRM a clearer andmore independent role in both the formulation and execution of monetary policy. The Government hasadopted the ordinance setting forth the revised Statutes, which were agreed at negotiations, and thepromulgation of this ordinance is a condition of Credit effectiveness.
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2.50 Furthermore, BCRM began preparing in August 1992 a strategic development plan (SDP) whichwill constitute a business plan for its organizational development over a 3 to 5 year period. The plan hasfour elements described below: (i) a statement of key policy and business objectives; (ii) action plans fordepartment strengthening and restructuring BCRM; (iii) more effective application of informationtechnology systems; and (iv) human resource development. The SDP represents the beginnings of astrategic planning and development function in BCRM. Although the SDP will remain a workingdocument to be continually reviewed, a first completed version of the text was adopted by the Board ofBCRM in April 1993 to commit the institution to a more strategic approach to its organizationaldevelopment. In addition, to help institutionalize this new function, a new position of Coordinator forStrategic Planning and Development has been created in BCRM. The coordinator is expected to help thesenior management of BCRM to more effectively plan and co-ordinate organizational changes and the useof information technology. BCRM will also form a steering committee comprised of senior BCRMmanagement and department managers to continually review the implementation of the SDP and approveorganizational and information technology plans. The steering committee will continually consult withoutside advisors on worldwide organizational practices in central banking.
2.51 Under its SDP, BCRM statement of objectives are categorized into 'business objectives" and'institutional objectives". The business objectives comprise: (a) price stability through the pursuit ofmonetary policy, eventually based on indirect instruments, and (b) legal, administrative and financialindependence of the Central Bank through the revision of its statutes and the removal of all quasi fiscalobligations. Institutional objectives include: (i) strengthening the budget and internal control functionswithin BCRM through improved accounting systems and procedures and their harmonization with a newchart of accounts for banks; (ii) development of an internal audit function; (iii) development of a fully-fledged research and statistics department; (iv) strengthening of capacities in foreign exchangemanagement, with the Central Bank ultimately playing a supervisory rather than a clearing role in theforeign exchange market; (v) strengthening capacity to implement monetary policy through indirectinstruments and, ultimately, open market operations; (vi) increasing capacities to monitor credit-worthiness of banks going hand in hand with the elimination of the review of individual bank loans forBCRM refinancing; (vii) enhancing domestic currency management by improving planning andcommunication capacities; (viii) development of modern information systems for the generation,processing, storage, transmission, and retrieval of operational and management information in alldepartments; and (ix) improvement of human resource functions especially in the areas of recruitment,training, and promotion.
D. CCBEF (Financial Supervisory Commission}
2.52 The Financial Supervisory Commission (CCBEF) was established under the April 1988 BankingAct governing the banking sector. CCBEF which is not a legal entity is chaired by the Governor of theCentral Bank. The primary roles of CCBEF are to monitor and safeguard the financial health of allfinancial sector institutions and to ensure that these institutions respect all laws and regulations governingtheir operations. CCBEF also has the power to issue regulations regarding the management, accountingand other technical practices of these institutions.
2.53 The development of CCBEF since its inception has, however, been stunted. Consequently, itspresent available capacity is inconsistent with the demands of full regulatory and supervision functionsof financial institutions in an environment of greater reliance on indirect controls in the conduct ofmonetary policy and increased competition among banks on both sides of their balance sheets. CCBEF
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has lacked full-time trained staff and, until recently, had only one full-time professional, its SecretaryGeneral. Instead, it has relied on the staff of the Inspection Department of BCRM on an ad hoc basis,which has impeded effective financial sector supervision. The principal reasons for this are: (i) thecontinued reliance by BCRM on direct controls, entailing review of individual bank loans for refinancing,rather than ensuring financial institution health through supervision activities. The Credit Department ofBCRM has thus also assumed responsibilities for off-site surveillance, and remains a major force withinBCRM for directing credit, while the function of monitoring commercial bank risk has secondaryimportance; (ii) the lack of distinction between the roles of the Inspection Department in BCRM andCCBEF; and (iii) the absence of accounting and auditing standards, particularly for banks, which reflectinternational norms. Rationalization of BCRM and CCBEF roles in on- and off-site supervision isrequired, with primary responsibility for supervision belonging to CCBEF. A systematic program oftraining under a seasoned bank supervisor is envisaged to strengthen CCBEF supervision capacities.
E. The Commercial Banks
2.54 In 1975, Madagascar's banking system was nationalized and in 1977 the five nationalized bankswere restructured into three commercial banks with the intention of each specializing in a sector of theeconomy, i.e., agriculture (BTM), industry (BNI) and commerce (BFV). Credit increased rapidly from1975 to 1980 and witnessed more modest growth thereafter. In 1985, following the first steps ofstructural adjustment, there was a rapid deterioration of the commercial banks' overall loan portfolio,with 40 percent considered doubtful. In the 1986 - 1989 period, through a process of revaluation of fixedassets, commercial banks loan portfolios were significantly cleaned up, reducing doubtful loans to 15percent of gross loans by the end of 1989. In May 1988, a new Banking Act paved the way for theprivatization of the banking sector. In August 1989, a new commercial bank, BMOI, opened its doorswith two major foreign investors, BNPI and SFOM. In February 1991, Credit Lyonnais acquired themajority shareholding and took over the management of BNI (now known as BNI-Credit Lyonnais), andInstituto Bancario San Paolo di Torino (IBSP) acquired a 22 percent stake in BFV in March 1991.
2.55 As previously indicated in paragraph 2.17, despite the 1986 to 1989 portfolio clean up and theprivatization achievements, the banking sector again finds itself in crisis, because of renewed deteriorationin the portfolios of the two remaining state controlled banks, BTM and BFV. BTM profitability isdeclining while provisioning requirements for doubtful assets increase, making the prospects forimmediate privatization more remote. However, as of mid-1992 BTM began keeping within its creditceilings and has reduced its refinancing requirement, which is not the case of the BFV. The BFV hasconsistently failed to respect credit ceilings since the strike of 1991, and while the other three commercialbanks had excess liquidity in August 1992, BFV still had a net refinancing requirement with BCRM.Moreover, the 1991 accounts for this bank could not be certified and the loan portfolio has deterioratedsignificantly. The two private commercial banks by contrast appear to be in a sound financial situationdespite the numerous political and economic problems witnessed in the years 1991/92. More encouraging,a fifth commercial bank with Mauritian and South African investors has recently opened its doors inMadagascar, and a sixth bank is currently in the process of being granted its banking license.
F. The Insurance Sector
2.56 Madagascar's insurance industry, both non-life and life insurance, is in the early stages ofdevelopment. The ratio of gross insurance premiums to GDP (1987) was 0.05 percent, compared to that
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in developed countries of 4.5 percent. There are two major insurance companies in Madagascar, AROand NY Havanana; these are joint-stock companies with majority interest held by the Government. Afurther two insurance companies are in quasi liquidation, and have no impact on the market. The natureof the industry is consequently highly oligopolistic, which includes provision for the sharing ofinformation and a non-competitive agreement between the two companies ensuring that one company willnot take a client from another. These barriers to competition have allowed these companies to dorelatively well even in harsh economic times, and as is the nature of the business they have accumulatedsubstantial reserves and thus are important investors. While strong arguments have been made to maintainthe duopolistic nature of the industry because of the small size of the market and the need to protectindividual savings, there is little rationale to defend continued government participation in theseindustries. The insurance sector could therefore have an important role to play in terms of both theprivatization process and the development of a securities market discussed in section J below.
G. The Social Security Fund
2.57 In Madagascar wage earners are covered by two systems of social security - a small governmentscheme for public sector employees through the Ministry of Finance and the social security fund, theCaisse Nationale de Prevoyance Sociale (CNAPS). CNAPS undertakes three social security functions,i.e., family benefits, workers' compensation, and retirement benefits. The fund, together with theinsurance companies, is one of the major mobilizers of term funds and an important institutional investorin Madagascar. However, its soundness as a financial institution has been under question. The WorldBank is financing under the APEX project a series of studies on CNAPS - a financial audit, anorganizational diagnosis, an actuarial study, and a study of investment policies - which are being executedsince October 1992 by the Social Security Department of the International Labor Organization (ILO).
H. Postal Financial Services
2.58 The Postal and Telecommunication Services (PTT) is made up of three entities, the Post Office,the postal checking institution (Comptes Cheques Postaux - CCP) and the postal savings institution, CEM.Although CEM was transformed into a savings bank in 1985 it continues to operate as a traditional postalsavings institution. It has a number of advantages in that, through the post office, it operates 220 windowsin 208 towns throughout Madagascar, with a high number of individual accounts. (e.g. every fourthresident of Antananarivo has an account). Its major weaknesses are: (a) its total dependence on theTreasury for financial management, which requires it to place all funds with the Treasury at below marketrates; and (b) the lack of financial transparency in the costing of services between the three PTT entities.In July 1992, the Government adopted a new policy for restructuring the post and telecommunicationssector. Besides proposing to commercialize the telecommunications entity, the new policy proposes toreorganize the Post Office and the two postal financial services as independent entities. A number ofproposals are currently being considered by the Minister of Post and Telecommunications to strengthenthe autonomy of postal financial services. One proposal is that the Post Office and the two postalfinancial services each be established as individual enterprises with independent boards which could inan initial phase be placed under a holding company. Subsequently, private capital should be allowed intoany one or all three of these entities. The Post Office should become a service provider on a fee basisto the new postal checking and postal savings entities and should structure contractual relationships forproviding services through its post office network to these entities.
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I. The Payments System
2.59 The present system of effecting payments through financial instruments (checks, wire transfers,money orders, etc) is riddled with delays, risks and inefficiencies, particularly for out-of-towntransactions. Clearance and settlement of checks and transfers can in some instances take up to 90 days.Most of the delays are due to basic problems with road transport and inadequacies in the quality of publicnetwork telecommunications. The present institutional set-up includes 15 clearinghouses throughoutMadagascar for clearance of checks, in which all four banks, BCRM and the post office participate, andthe use of windows at about 220 post offices for payments through the postal checking system (CCP).Some improvements that have already been suggested to the Government are as follows: (i) introductionof a single clearing center in the capital for all out-of-town checks, to avoid the delays currently incurredthrough bilateral exchanges of checks among all 15 clearinghouses; (ii) development of either an expressmail system or a low-cost high-frequency radio network for data transmission, to expedite informationexchange; and (iii) introduction of new safety standards and procedures to allow clearing based onexchange of information rather than documents.
J. Financial Markets
2.60 In addition to the money markets described in para. 2.15, there is further potential for financialmarket deepening through the trade of equities and private debt instruments. One of the economic changesthat Madagascar is currently undergoing involves the privatization of state enterprises and thestrengthening and creation of private shareholding in a number of existing and new enterprises. Amechanism to facilitate the trading and transfer of equity would enhance this process of expanding privateownership. Analysis of the potential for a small securities exchange was undertaken in 1992 and it isenvisaged to be further developed in the near future, which will include the fiscal and legal changes thatwould be required to allow for an efficient system of share transfer. Furthermore public securitiescould also be traded in a secondary market, which could facilitate the reintroduction of BTAs (referredto in paragraph 2.23). Finally in the light of the weaknesses in the interbank market there is potentialto allow financial institutions (principally the banks and insurance institutions) to issue negotiablecertificates of deposit (NCDs). In broadening the market this would allow banks with excess liquidityanother form of investment apart from BCRM in which to place their surpluses, and provide alternativesources of refinancing (again apart from BCRM) for other financial institutions. All these aspects of thefinancial market require further analysis in preparation for regulatory and institutional reforms.
K. Accounting and Audit Framework
2.61 Accounting. Financial information in a concise and comparable form is not easily available inMadagascar. Outdated accounting principles continue to be applied by commercial banks, as Madagascarhas failed to revise its 1983 Bank Chart of Accounts or even ensure its universal application. This causesmajor problems in gaining an accurate interpretation of the financial position of banks and other financialinstitutions; specifically with regard to the provisioning of doubtful debts, income recognition, and theuse of suspense accounts. Therefore, difficulties are experienced in comparing the financial performanceof like organizations in Madagascar such as commercial banks. Consequently BCRM, concerned withinstitutional weaknesses and the veracity of financial information, has been reluctant to give up directmonetary controls. On the other hand, the implementation of indirect controls, such as reserverequirements, over the last two years has been accompanied by confusion on the part of the commercial
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banks as to the exact nature of financial accounting required and the rationale behind BCRM demands.The lack of understanding on both sides has generally led to the implementation of an overly rigid systemwith penalties for reserves deficiencies that are unduly severe. This has neither inspired confidence inindirect controls nor in either BCRM or CCBEF capacity to effectively regulate the financial markets.
2.62 Although there have been some developments in accounting over recent years (the developmentof the 1987 General Chart of Accounts, PCGM-87, introduced with effect from January 1, 1989, and anew uniform chart of accounts for commercial banks, NPCB, for introduction with effect from January1st, 1994), two fundamental weaknesses in the accounting profession need to be addressed. These are(i) the limited number of professionally qualified accountants; and (ii) the lack of a regulatory frameworkto stimulate the development of a national accounting profession with standards and ethics at par withlevels accepted internationally. The absence of a suitable regulatory framework has been at the core ofthe problem although a professional body has been in existence since 1962. The IDA financed Accountingand Audit Organization and Management Training Project (Cr. 1 155-MAG), sought to establish legislativeand training requirements for the accounting profession and financed the National Institute for AccountingScience and Enterprise Administration (Institut National des Sciences Comptables et de l'Administrationdes Entreprises (INSCAE). INSCAE ongoing activities and development are currently being supportedunder the ongoing Accounting and Management Training Project (Cr. 1661-MAG). However, INSCAEis currently able to train to the level of accounting technician only.
2.63 Under new legislation governing the accounting and audit profession, a student who hassuccessfully completed the INSCAE program or who has obtained an equivalent diploma, can take examsfor admission as a trainee for the qualification of ExDert Comptable et Financier, as defined by this newlegislation, and thus become a fully fledged member of this professional body. Furthermore, there area number of transitory measures which will expand the admission to the profession of other practitioners,provided they can demonstrate an acceptable level of expertise. This new regulatory framework is a keytool in the development of the profession and in the introduction of accounting and auditing standardsacceptable internationally. The new legislation does, however, have fundamental flaws in that foreignaccounting and audit firms are discriminated against, and certain anomalies need to be resolved tofacilitate the development of international accounting standards. Allowing foreign nationals with theappropriate qualifications to compete freely with national firms in the local market is important instimulating future development in the profession.
2.64 This process will not only improve the quality of local services but together with the newregulatory framework, will also expand employment opportunities for graduates of INSCAE. Many ofthese graduates have been unable to find worthwhile jobs in the professional sector and these initiativeswill help create incentives for their professional development. These regulatory changes in addition totechnical assistance to facilitate the introduction of the NPCB, will help in overcoming the problems ofunsatisfactory audits particularly in the commercial banks experienced in the past, and create a localprofession capable of providing accounting and audit services acceptable internationally.
2.65 Audit. There are four professionally qualified accountants in the country with either French orCanadian qualifications, each of whom has his/her own auditing firm. The four firms together employa total of some 300 people, about 40 of whom are audit staff with experience ranging from one to tenyears or more. Although a body of qualified accountants with legal status was set up in Madagascar on1st October 1962, it has never become a dynamic force in developing the profession and has but the fourprofessionals referred to above as members. As a result, auditing standards have not evolved in anorderly manner in line with those applied internationally. The legal framework for statutory auditing
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continues to be the French 'Companies Act' of 1867 which provides for the appointment of aCommissaire aux Comptes but fails to clearly define the scope of his audit interventions. Most financialinstitutions, therefore, have undertaken the report of the Commissaire in tandem with an audit report onmore conventional lines but not governed by local or international standards. In implementing the NPCB,complementary projects need to be carried out to ensure that International Standards of Auditing, asestablished by the International Federation of Accountants (IFAC), are being applied.
m. HE PROJECT
A. Project Objectives and Scope
3.1 The project objective is to facilitate investment and growth in the productive sectors byimproving the functioning of the financial system. This is in line with the Bank's country assistancestrategy which emphasizes increased private sector savings and investment as engines of future growth.The project aims at strengthening key financial institutions and markets in Madagascar (includingprivatization of the two remaining state banks), thereby enhancing public trust in them and enabling themto mobilize savings to meet the investment financing needs of the private sector. The project will beimplemented in the context of the Government's Statement of Financial Sector Reform and DevelopmentPolicy adopted in March 1993. Specifically, the project would aim at: (i) enhancing the Central Bank's(BCRM) ability to formulate and conduct monetary policy based on indirect instruments; (ii) improvingthe prudential supervision environment through the strengthening of the Financial SupervisoryCommission (CCBEF); (iii) formulating and enforcing accounting audit and financial disclosure standardsbased on international norms; and (iv) supporting the privatization of state banks.
3.2 The scope of the project, which would be supported by the proposed SDR 4.6 million Credit,is described in detail below. The project consists of:
(a) restructuring BCRM, the Central Bank, principally through improvements in its research, openmarket, treasury, internal audit and accounting operations, and through the implementation ofinformation technology and human resource development plans;
(b) strengthening CCBEF, the Financial Supervisory Commission, with technical assistance to createan effective supervision structure, training for inspectors and equipment for on - and off - sitesurveillance;
(c) improving the accounting and audit environment, through two sets of activities: (i) technicalassistance and training activities to accelerate the development of the accounting profession andto ensure the availability of reliable financial information on enterprises based on internationalstandards; and (ii) specific technical assistance and training to bankers, auditors and otherprofessionals to establish, disseminate and implement transparent international accounting andaudit procedures for commercial banks and financial institutions; and
(d) supporting the privatization of banks in the context of an ongoing process of privatizing one ofthe two state banks, BTM, and a government commitment to a similar process for the other statebank, BFV, by providing specialized consultant services such as for valuation and placement ofthese banks among private investors.
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The project components are described in detail in paras. 3.4 to 3.27 below. The Credit would financetechnical assistance, training, equipment, and vehicles. Several working groups were created within theGovernment and the private sector for preparing and eventually implementing these financial sectorreforms. Collaboration with IMF has been especially important in: (i) the design of CCBEF componentof the project in follow-up to IMF initiative in recruiting and placing a seasoned bank inspector to leadthe institutional development of CCBEF; and (ii) the review of BCRM statutes. The revision of BCRMStatutes, recently adopted by Govermnent, will ensure greater independence and accountability of BCRM.During negotiations, when the revisions were finalized, assurances were obtained that promulgation ofthe ordinance on the revised statutes would take place prior to credit effectiveness. The project is acritical first step in a wider program of financial reforms which is needed to help revive private savingsand investment after an extended period of political turbulence. It will lay the foundations for broaderpolicy reforms in the financial sector, which will facilitate and reinforce an adequate macro-economicframework once it is developed.
B. Rationale for IDA Involvement
3.3 The project conforms to the Bank's country assistance strategy as presented to the Board on June9, 1992, in that it supports the country's key objectives to: (i) improve macroeconomic management bystrengthening formulation and execution of monetary policy, which would entail increased Central Bankindependence, with a view to promoting the productive use of credit and containing inflation; (ii) reducethe role and scope of the public sector, notably in the financial system; and (iii) promote private sectordevelopment by enhancing the quality of financial intermediation. The project forms part of the Bank's"core" lending program to Madagascar aimed at institutional capacity building. The project followsIDA's Madagascar financial sector study (Report No. 9817-MAG, March 1992) and extensive dialogueand preparation in close collaboration with the IMF, notably in the areas of reviewing the BCRM Statutesand the design of the CCBEF component.
C. Project Description
1. Restructuring BCRM
3.4 BCRM has demonstrated continuity in its institutional capacity over a number of difficult periodsof economic and political transition. Its structure, however, is still largely geared to the allocation ofcredit through direct controls. BCRM is ill prepared to play its role of formulation and execution ofmonetary policy through indirect market based instruments. Two distinct deficiencies are at the base ofthe institutional weaknesses of BCRM. Firstly, BCRM has an inappropriate structure in both primary(e.g., research) and support functions (e.g., accounting) to conduct monetary policy through indirectcontrols. Secondly, the Bank's human and information technology resources need to be improved andadapted so that they are better equipped to meet the demands of a market oriented financial sector.
3.5 The project is designed to strengthen BCRM to ensure that both an appropriate structure andresource base develop so that BCRM has the institutional aptitude to perform its transformed centralbanking role, as discussed in paragraphs 3.6 - 3.22 below. Much of the preparation work for the projectwas done by BCRM itself through the development of its Strategic Development Plan (SDP) which hasbeen the basis for the preparation of the project. Over seventy BCRM staff members, including all
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department managers and professionals, have been involved in the preparation of the SDP since August1992. The BCRM SDP was adopted by its Board as working document in April 1993.
(a) Streng2tening and Restructuring BCRM DeDartnents and Functions
3.6 The SDP that BCRM has prepared contains a statement of objectives on which will be basedaction plans to restructure and strengthen all departments of BCRM. In their current form, these actionplans diagnose existing problems in the functioning of these departments and propose a three-year strategyfor revamping each department's operating methods, logistics and manpower. The project will provideassistance in further specification of these action plans and financing for key features thereof as discussedbelow.
3.7 Advisory services in Central Bank Organization: The project will finance the services of asmall team of Central Bank advisers who will advise the management of BCRM in worldwideorganizational practices in central banking and particularly assist in redefining the functionalresponsibilities of various departments of BCRM. This will enable the management of BCRM to identifythe best or most appropriate practices developed in other central banks to apply in reorganizing theBCRM over the three-year span of the project.
3.8 Research Functions. With the requirement for BCRM to have access to macroeconomic, andpolicy related data on a systematic basis so that it can fulfill its role in formulating and executingmonetary policy, the SDP provides for the development of the Research Department exercising specificdata analysis and policy functions. The project will support: (i) the work of an expatriate technical advisorto help implement a three-year action plan for this department, during which time a local director andcore staff will be trained to take over this function and ensure the flow of critical information in theformulation of monetary decision (see terms of reference in Annex 3); (ii) strengthening, through specifictraining and technical assistance, BCRM capacity to formulate monetary policy as well as act as advisorto the Government ; and (iii) improvement of BCRM ability to keep the public informed through theregular publication of statistical, policy and research information. This element of BCRM componentwill be financed in large part by the United States Agency for International Development. Actions willthen result in: (a) the preparation of an annual review of the economic and monetary environment;(b) enhancement of the quarterly statistics bulletin; and (c) the publication of occasional research papers.
3.9 Open Market Operations. In preparation for a progressive shift away from direct to indirectmonetary controls, as and when fiscal and commercial bank reforms permit, the project will providetraining and technical assistance to the Credit Department to: (i) improve money market auctionoperations so that they are responsive to the supply and demand for resources; (ii) develop reserverequirements into a fully fledged tool of monetary control; (iii) improve planning and coordination withthe Treasury in the financing of public debt; and (iv) generally improve the utilization of information inorder to permit better liquidity management.
3.10 Foreign Exchange Operations. In preparation for a gradual shift to a market determined systemof allocating foreign resources, which will be closely coordinated with fiscal and institutional reforms,the project will provide training and technical assistance to the Foreign Services Department in BCRMto: (i) improve information systems so that BCRM is in a position to play a supervisory rather than anallocative role in the foreign exchange market; and (ii) improve procedures in forecasting and analysisof treasury management in foreign currencies. The Government of Switzerland (GOS) has confirmed itsinterest to finance this component, administered directly by the Swiss Development Cooperation.
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3.11 External Debt Management. To support the efficient management of external debt, the projectwill provide technical assistance and training to the newly created department (Department for theManagement of External Debt) in BCRM to: (i) improve procedures in forecasting and analysis ofexternal public and private debt servicing burdens and appropriate asset-liability management techniques,and; and (ii) improve planning and coordination with the Treasury in the management of public externaldebt.
3.12 Clearing Operations and Circulation of Bank Notes. To increase the efficiency of managementin clearing operations and in the distribution of notes and coins, the project will provide technicalassistance, training, and equipment to the Financial Operations Department to: (i) strengthen capacitiesin forecasting currency requirements for payments needs of the banking system; (ii) improve logistics innote and coin management to minimize insurance and transportation costs; (iii) improve domesticcommunications with the bank's branch in Tamatave and its agencies throughout the country; (iv) reviewthe need and possibilities to introduce clearing based on exchange of information rather than documents;and (v) strengthen security in the handling and distribution of coins and bank notes for payments needs.
3.13 Accounting Systemns. In order to provide the appropriate financial information to managementand, at the same time, improve the capacity within BCRM to monitor and control its accountingfunctions, the project will provide technical assistance to: (i) evaluate the accounting system and makerecommendations for its improvement; (ii) introduce an improved accounting system permitting a properseparation of responsibilities between the different departments and operating units involved, as well asmore effective record keeping and internal control; (iii) assist in the introduction of the NPCB withinBCRM, taking into account the specific requirements of a central bank and the need to adhere to theInternational Accounting Standards applicable to banking institutions. This work will include theelaboration of an accounting manual; (iv) provide associated training; and (v) assist in establishing amodern archiving system which will be coordinated with the overall filing initiative at BCRM. Anexternal audit of BCRM will be undertaken in mid-1993. Apart from the traditional audit, this will alsoinclude an assessment of the accounting and internal audit capacities of BCRM. The process ofundertaking the external audit is already underway and its completion is a condition of Crediteffectiveness. This first external audit also lays the ground for regular annual audits beginning in 1994,and the annual publication of audited accounts. Recommendations resulting from this audit will be takeninto consideration when redefining and reorganizing the accounting system of BCRM. The redefinitionand reorganization of the accounting system will be undertaken in a broader study, the terms of referenceof which are presented in Annex 3 and which will initiate the technical assistance described above.
3.14 Internal Audit. The SDP envisages the creation of an internal audit unit within BCRM with aclear distinction between its activities and those associated with prudential supervision of financialinstitutions, thereby eliminating the problems being experienced by the present Inspection Department.The project will provide technical assistance to: (i) define the structure and responsibility of the internalaudit unit with a view to ensuring its independence. This unit will be directly responsible to the Boardbut will report to the Governor on a day to day basis; (ii) assist in developing and implementing methodsneeded for meeting the requirements of an efficient internal audit unit; (iii) assist in developing an internalaudit work plan for 1994, as well as appropriate detailed audit programs, procedures and reportingformats. The annual internal audit work plan and a report on its implementation, will be presented to theBoard of BCRM; and (iv) evaluate the capabilities of existing and newly recruited staff and develop andimplement a training program to ensure that the unit has the human resources and skills necessary toimplement its work plan effectively and thereby assume its role as a key element of control withinBCRM. The project will also provide the necessary equipment needed to by the internal audit unit
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including the provision of calculators. The Government of Switzerland (GOS) has confirmed its interestto finance this component.
(b) Information Systems
3.15 Restructuring of the information systems in BCRM will be guided by an information technologystrategy whose objective will be to ensure that the information needs of the restructured and strengthenedBCRM departments (outlined in paras. 3.8 to 3.14 above) and more generally the evolving informationrequirements of the bank are met. The overall objective is to develop new institutional capabilities atBCRM through improvements in administration and information systems. While computer technology willbe used for this, the emphasis of the program is placed not on the technology itself, but on theinstitutional improvements that can be achieved through its judicious use. Following the definition of aninformation strategy, a three-year information plan will be drawn up as part of the project (see Annex3 for terms of reference of first year activities and Annex 4 for detailed description of informaticsprogram).
3.16 The project will provide technical assistance, training and equipment which will:
(a) Support the finalization and implementation of the Information Technology Strategy (IT)including:
- procedures for annual planning and follow up on the information technology plan;
- introduction of modern information technology methods and techniques, as well asimprovement of management and staff skills to plan, develop, maintain and useinformation systems;
- development and implementation of an IT security strategy.
(b) Assist in the development and the implementation of an information technology plan. Based onthe information strategy this plan will detail the work to be done during 1993- 1995. Thisincludes both procurement of application packages and systems development;
(c) Assist in the procurement of hardware, which will include a strategy for the replacement of theoutdated mainframe system;
(d) Assist in the design and implementation of a pilot information system in the bank.
3.17 The introduction of the information technology plan will be phased, taking into account theinstitutional readiness to absorb new technology and implement administrative and managerial changes.The plan will be sensitive to the fact that modern information technology - while flexible, ubiquitous, andrelatively inexpensive - requires orderly implementation to yield expected benefits. It also recognizes thatinvestments in information technology will only be successful if BCRM first has an informationtechnology strategy and concurrently takes measures to improve its operational, administrative andaccounting practices.
3.18 Implementation of Information Technology. The planned steps for implementing theinformation systems aspects of the project are as follows: (i) first, the Information Technology strategy
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will be finalized; (ii) in parallel, with the implementation of the IT strategy, a pilot subproject will runwith a view to test the IT strategy and at the same time replaced the outdated mainframe; (iii) anInformation Technology Plan for 1994-96 will be developed and adopted during the last quarter of 1993as part of the budget process of BCRM; (iv) based on the IT plan, the information systems agreed uponwill be developed and implemented in different areas of BCRM; and (v) the hardware required will beprocured in accordance with the IT strategy and installed in pace with the implementation of theapplications. Annex 4 provides further details on the information technology aspects of the project.
Human Resource Development
3.19 A human resource development plan will ensure that the skills requirements of the restructuredand strengthened BCRM departments (outlined in paras 3.8 - 3.18 above), and more generally theevolving personnel needs of BCRM, are met. Initial work has already been carried out to determine thequalifications and the quality of skills in 35 of the higher professional staff at BCRM.
3.20 The project will provide assistance to: (i) develop and implement an improved personnel policyincluding systems for staff classification, career planning and promotion and job-rotation; (ii) reviewpersonnel needs in different departments and to define the complementary training needed forredeployment; (iii) define training modules for various occupational streams such as economist andfinancial analysts; (iv) support training programs to meet the skills requirements of the restructured bankover a three-year period; and (v) assist in the development of the personnel management function toimprove staff classification, rotation, promotion and training. This element of the component of BCRMwill be financed in large part by the United States Agency for International Development.
3.21 It should be noted that the training areas outlined in the human resource development plan willidentify the needs and plans in the restructured departments outlined in paragraphs 3.8-3.14 andsupplement them in functions which cut across more than one department (eg. accounting).
3.22 Project Management Assistance. To ensure the sustainabiity of the new strategic planning anddevelopment function it has created, BCRM will seek assistance over a two-year period in projectplanning and execution. The initial objective will be to train and support the Coordinator for StrategicPlanning and Development, a new director-level position that has been created in BCRM, in latestmethods of business planning and execution of information technology projects. At the end of two years,it is expected that BCRM will acquire a basic capacity to design and execute institutional developmentprojects of this kind on its own. Consulting services for this component is expected to be financed by theSwedish Agency for International Technical and Economic Cooperation (BITS). The project will provideadditional support for overseas training and study visits.
2. Strenethenine CCBEF
3.23 In anticipation of a shift to greater reliance on indirect controls in the conduct of monetarypolicy, the supervision capacity of CCBEF will be strengthened under the project so that it can undertakecomplete prudential supervision of financial institutions, consistent with the management of an openmarket system. The project complements the initiative of the Monetary and Exchange Affairs Departmentin IMF to recruit a seasoned bank inspector before July 1993, as external advisor to the Chairman ofCCBEF. The advisor will, in close cooperation with the Secretary General of CCBEF, define theobjectives and action plan for CCBEF to be financed by the project based on CCBEF StrategicDevelopment Plan to be adopted by its Board. This action plan will ensure that CCBEF, in assuming the
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primary role of supervision of financial institutions, develops adequate capacity for this purpose. A keyfeature of the action plan will be the systematic on site inspection of all the commercial banks. The firstround of these annual on-site inspections will be completed by June 1994. Another key element in theprogram of the advisor will be to lead a training program to upgrade skills in existing and newly enlistedstaff to ensure the sustainable implementation of rigorous prudential supervision. The project will financeadditional necessary training and equipment and standard packages for developing and implementinginformation systems, hardware in the form of stationary and portable micro computers, and vehicles tofacilitate on-site inspections. CCBEF will also monitor the interventions of external auditors (includingthe Commissaire aux Comptes) and will promote the application of international standards of auditing inthe examination of the accounts of banks.
3. Improving the Accounting and Audit Framework
3.24 Two issues are addressed in this part of the project to improve the transparency and effectivesupervision of the banking system, corresponding to two sets of activities. First, improvements inaccounting and audit practices are supported to accelerate the development of the accounting professionand to ensure the availability of reliable financial information on enterprises based on internationalstandards. Training and technical assistance activities in this area will be complemented by the Ministryof Budget in collaboration with the Ordre des Experts Comptables et des Comptables Agres (Instituteof Chartered Accountants). Modifications to the existing ordinance governing the profession, whichensure that international standards are subscribed to and foreign accounting firms are not discriminatedagainst, were detailed during negotiations and the promulgation of a revised ordinance is a condition ofdisbursement of this subcomponent of the credit. The development of the profession should allow for theadmission of appropriately qualified accountants of other nationalities, and the general application ofInternational Accounting Standards and International Standards of Auditing throughout the country, thusfacilitating the eventual entry to membership of IFAC of the Malagasy accounting profession; and theprovision of the training necessary for the implementation of such Standards. Terms of reference for theseactivities are found in Annex 3.
3.25 Second, improvements in accounting and audit practices are supported to ensure the availabilityof reliable financial information in the banking sector to facilitate financial supervision by CCBEF, sothat it can adequately perform its regulatory functions.The new chart of accounts for banks and financialinstitutions (NPCB) has been discussed between CCBEF and the commercial banks and its introductionhas been agreed. It now needs to be finalized, approved by CCBEF, and disseminated with a view tobeing correctly implemented in all financial institutions, with special reference to BCRM and thecommercial banks, from January 1, 1994. This will ensure that, in the future, financial information ina concise and comparable form is readily available. Furthermore the presentation of this informationshould conform to International Accounting Standards as laid down by the International AccountingStandards Committee (IASC). The project will support: (i) an ongoing review of the NPCB to ensure thatit adheres to existing and future international accounting standards applicable to financial institutions,including IAS30 (Disclosure in the Financial Statements of Banks and Similar Financial Institutions); and(ii) the implementation of the NPCB through training and seminars in the financial sector with specialreference to the commercial banks. CCBEF will assume a key role for undertaking these activities. Theresulting training activities are expected to be placed in INSCAE (School of Business Management AndAccounting) in association with CNFPB (Banking Training School). Detailed terms of reference are foundin Annex 3.
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3.26 Training and technical assistance activities in both the above activities will be implemented bythe Ministry of Budget in collaboration with the Ordre des Experts Comptables et des Comptables Agres(nstitute of Chartered Accountants) and CCBEF respectively.
4. Support to State Bank Privatization
3.27 The privatization of the two state banks is featured as a goal in the Government's Statement ofFinancial Sector Reform and Development Policy (see Annex 1). The process of privatizing one of thetwo state banks, BTM, has already begun and the Government has committed itself to a similar processfor the other state bank, BFV. Preliminary valuation work for BTM was financed under the on-goingIDA Financial And Private Sector Development (APEX) Project (Cr. 2104-MAG). A strategy detailingfurther steps to be taken in the privatization of both banks was agreed at negotiations. The project willsupport the privatization process to the point of sale, by financing specialized consulting services suchas for the valuation and placement of these banks with private investors. In the course of privatization,it is expected that all regular activities such as annual financial audits will continue to be self-financedby the banks themselves.
D. ProJect Cost
3.28 Total project costs are estimated at US$10.4 million, with a foreign exchange component ofUS$9.5 million. These are summarized in the Project Summary Table on page (iii) and detailed inAnnex 5. Costs have been calculated excluding taxes and duties. Costs include expenses related toconsulting services for technical assistance and studies; training both locally and abroad; the purchaseof equipment, including computer hardware/software, vehicles and teaching materials.
3.29 Technical assistance and training costs are based on recent costs for comparable technicalassistance and training being provided by the Bank under other projects and by other institutions,including UNDP. The costs include transportation and housing allowance where needed, such as in thecase of the short term consultants and of travel abroad. The costs have been estimated as follows:(i) specialist services, USS130,00 per annum; (ii) short-term consultants, US$20,000 per month;(iii) short-term seminars abroad for high level staff, US$10,000 per week.
3.30 Equipment costs are based on (i) international procurement prices recently awarded for similarprojects following ICB procedures and (ii) estimates of freighting costs to Madagascar.
3.31 The base costs for the project are expressed in end-1992 prices. Project costs include physicalcontingencies for equipment averaging about 5 percent of base costs per annum. Price contingencies(expressed in dollars) have also been added, with annual rates of 4 percent during project implementation.
3.32 Estimates for the foreign exchange component were arrived at as follows: (a) equipment andvehicles, 100 percent; (b) training abroad, 100 percent; and (c) specialist services and short-termconsultants, 88 percent. The resulting foreign exchange component, including contingencies, is estimatedat about US$9.5 million.
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E. Project Financing
3.33 The proposed IDA credit of US$6.3 million equivalent would finance 60 percent of total costs.USAID financing, estimated at US$3.0 million, would provide technical assistance and training supportfor the areas of research and human resource functions element under the BCRM component of theproject. Switzerland will contribute an estimated US$0.6 million of the project which will cover technicalassistance, training and equipment for foreign exchange and internal audit operations. BITS, the Swedishtechnical assistance agency, will provide US$0.5 million equivalent for project management assistancefor project coordination. Effectiveness of all co-financier agreements will be a condition of IDA Crediteffectiveness. A summary of the financing plan is outlined in the Project Summary Table on page (iii),with Annex 5 giving details of the project financing by nature of the activity to be funded. Allincremental staff costs of formulating and implementing Strategic Development Plans (SDPs) will bedirectly and fully assumed by BCRM and CCBEF, including the costs of the newly-created Departmentof Strategic Planning and Development. Furthermore, the project coordinating cost in the Ministries ofFinance, Budget, BCRM and CCBEF will be borne by these implementing agencies.
F. Project Implementation, Monitorinf and Mid-Term Revi
3.34 Institutional arrangements: BCRM is the executing agency for the BCRM component of theproject. Since CCBEF is an independent commission but not a legal entity, and is chaired by theGovernor of BCRM, the Government has also designated BCRM as the executing agency for the CCBEFcomponent. The Ministry of Budget has been designated the implementing agency for the thirdcomponent - improving the accounting and audit framework - in which it will collaborate with the Ordredes Experts Comptables et Comptables Agrees and with CCBEF. The Ministry of Finance will implementthe fourth component - supporting the privatization of banks - in collaboration with BCRM. Project fundsfor the first and second components will be made available by the Government to BCRM on a grant basisas provided for in a subsidiary credit agreement, to be signed prior to Credit effectiveness.
3.35 To implement its strategic development plan, BCRM has created and filled a new position ofCoordinator for Strategic Planning and Development. (See Annex 10 for the Terms of reference of thecoordinator). The coordinator will also be responsible for the overall coordination and monitoring of thisproject. During negotiations, assurances were given that this position will be filled at all times withqualified personnel acceptable to IDA. The project coordinator will act as secretary to BCRM steeringcommittee which will review and approve all organizational and information technology plans for BCRM.The BCRM component of the project will be guided by the BCRM Strategic Development Plan and itscomposite Human Resource and Information Technology plans.
3.36 In addition, an expatriate adviser to the Research Department will be responsible for helpingimplementation of this key area under the BCRM component of the project. Project coordinators in theCCBEF and Ministries of Budget and Finance, whose terms of reference were finalized at negotiations,in addition to the BCRM Coordinator for Strategic Planning and Development will supervise the selectionof consultants and procurement of equipment, materials and supplies for the components which concernthem directly.
3.37 In the case of the accounting and audit component, the Ministry of Budget will take the lead inimplementing this component in collaboration with the Ordre des Experts Comptables et ComptablesAgrees and CCBEF. Technical assistance to review and implement changes in the regulatory framework
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of the accounting profession will primarily be under the responsibility of the Ordre des ExpertsComptables et des Comptables Agrdes. Technical assistance specifically related to reviewing the NPCBand providing training for its implementation within the financial sector will primarily be coordinated byCCBEF.
3.38 The Ministries of Finance and Budget, BCRM, CCBEF and IDA will jointly organize a projectlaunch workshop immediately after credit effectiveness to familiarize key officials of all agencies withimportant aspects of the project, including procurement and disbursement procedures. The scope of theproject launch workshop has been discussed with the beneficiary agencies.
3.39 An annual project implementation review will be conducted by the World Bank, BCRM StrategicPlanning and Development Coordinator, the coordinators of the Ministries of Finance and Budget andof the CCBEF, and relevant staff from each of the beneficiaries. These reviews will, in addition, monitoroverall project execution with specific reference to the monitorable indicators mentioned in Annex 8 andagreed at negotiations, update the project timetable, identify implementation issues and developappropriate solutions to arising problems. The BCRM, CCBEF and Ministries of Finance and Budgetcoordinators will make the necessary arrangements to provide the required information for the annualreview and to furnish any other information that maybe required by IDA on an ad hoc basis of theproject.
3.40 Mid-Term Review. It was agreed that BCRM and the Ministries of Finance and Budget shallno later than September 30, 1994, carry out, jointly with IDA and with the participation of CCBEF, amid-term review of the project with a view to implementing soon thereafter the recommendations of thereview. This review will cover inter alia: (a) overall project performance against established and agreedkey performance indicators (see Annex 8); (b) an assessment of project sustainability; (c) evaluation ofconsultant's performance; (d) review of the organizational changes in BCRM and CCBEF during the firstyear of the project to gauge how far departmental functions have been appropriately streamlined; (e)evaluation of the progress of the accounting and audit component; and (f) evaluation of the completionof privatization of banks. In order to facilitate this review, BCRM and the Ministries of Finance andBudget have agreed to prepare, no later than four weeks before the review date, a preliminary mid-termreview report, the format of which will be agreed upon beforehand with IDA.
3.41 Finalization of the action plans of individual BCRM departments and the related allocation ofproject funds among different departments is expected to be agreed upon during the mid-term review.This would enable the major parts of the informatics program and human resources development plan totake place during 1995 and 1996. The mid-term review will also be the occasion to finalize the neworganization charts for BCRM and CCBEF, detailing the new functional responsibilities and staffing ofvarious departments, based on the implementation of their strategic development plans (SDPs) during thefirst year of the project.
G. Procurement
3.42 Madagascar's cumbersome procurement regulations were a major constraint to theimplementation of Bank-financed projects. This was due to the fact that many ministries performednumerous reviews. In January 1991, the Government issued new regulations on public procurementfollowing a comprehensive review of the country's procurement regulations (Country ImplementationReview (CIR), December 1990). A follow-up CIR occurred in March 1992, resulting in the
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Government's decision to use Bank Sample Bidding Documents (Prime Minister's decree No. 892/92,March 6, 1992). This is expected to speed up procurement and project implementation considerably.
3.43 Procurement for equipment amounting to more than US$125,000 would be based on contractsawarded following international competitive bidding procedures, in accordance with 'Guidelines forProcurement Under IBRD Loans and IDA Credits," dated May 1992. Bid packages for goods with anestimated value below $125,000 up to an aggregate amount equivalent to US$600,000 would be awardedthrough local competitive bidding procedures advertised locally in accordance with procedures satisfactoryto IDA. Small contracts for equipment, furniture and office supplies amounting to US$50,000 or less percontract, and up to an aggregate amount equivalent to US$200,000, would be procured through localshopping with price quotations from at least three local suppliers, in accordance with proceduresacceptable to IDA. Consultancies include technical assistance, training and studies (US$3.2 million).Consulting services would be selected in accordance with "Guidelines: Use of Consultants by World BankBorrowers and by the World Bank as Executing Agency," dated August 1981. This would allow theProject coordinators to engage consultancy services up to a limit of US$50,000 based on standarddocuments agreed during negotiations. All major consultancy works above this ceiling would require IDAapproval on a non-objection basis. A summary of procurement arrangements is given in Table 1 below.Procurement will be the responsibility of the project coordinator who will organize selection committeesconsisting of the relevant departments of their respective organizations and government agencies to revieweach tender offer.
Table 1: Summary of Proposed Procurement Arrangements(US$ million)
PROCUREMENT METHOD
Project Element TotalI.C.B. L.C.B. Other N.B.F. Cost
TOTAL 2.3 0.6 3.4 4.1 10.4(2.3) (0.6) (3.4) - (6.3)
Note: Figures in parentheses are the amounts financed by the IDA credit.N.B.F: Not Bank-financed.
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3.44 IDA-financed contracts above a threshold of US$50,000 would be subject to IDA's prior reviewfor the first year of the project, or until it is determined that there is sufficient experience; at that point,a higher ceiling may be set. Under these procedures, IDA's prior review would cover about 80 percentof total contracts. Selective review of awarded contracts below the threshold levels should be carried outon about one in six goods contracts. To simplify the task of contract review, standard bidding documentsand letters of invitation for consultants will be prepared prior to effectiveness.
H. Disbursements
3.45 Disbursement under the IDA Credit would be made on the basis of categories and percentagesshown in Table 2 below. The Credit would be disbursed on the basis of fully documented withdrawalapplications, except for expenses disbursed against SOEs, as described in para.3.46. The estimateddisbursement profile is outlined in Annex 6.
3.46 Special Accounts: In order to facilitate the disbursement of funds, two Special Accounts willbe opened, one by BCRM in one of its foreign correspondents and the other by the Ministry of Financein a commercial bank, acceptable to IDA. The initial deposits amount to US$ 200,000 and US$ 100,000respectively and cover four months of eligible expenditures. Replenishments of the Special Accountswould be made on a monthly basis and would be fully documented except for contracts valued at less than$ 20,000 equivalent which will be on the basis of Statements of Expenditures (SOEs), for whichdocumentation shall be reviewed as part of annual audits of the project. Replenishments will be supportedby bank statements and reconciliation of statements.
3. Refunding of Project Preparation Advance Amounts due 0.35
4. Unallocated 100% 0.40
TOTAL - 6.30
All foreign costs exclude taxes and duties.Z/ Except local expenditures for which the credit will finance 85 of local costs.
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I. Accounting. Auditing and Reporting
3.47 BCRM, CCBEF and the Ministries of Finance and Budget will establish and maintain projectrelated accounts for their respective interventions. Project accounts, to reflect all project resources,expenditures, assets and liabilities, will be maintained in accordance with generally accepted accountingprinciples. Annual General Statements will be prepared in accordance with International AccountingStandards and audited in accordance with International Standards on Auditing by independent auditorsacceptable to IDA. A review of the Special Account and an auditor's opinion with special emphasis onthe audit of SOEs will be provided. The auditor's report will include a statement on the inadequacy orotherwise of the accounting systems and internal controls, the reliability of the statement of expendituresas a basis for credit disbursements, and compliance with financial covenants. BCRM annual financialstatements will be prepared and audited in accordance with International Accounting Standards andInternational Standards on Auditing. The audited financial statements and auditors' reports thereof willbe submitted to IDA within six months of the end of the period to which they relate.
3.48 The Ministries of Finance and Budget, BCRM, and CCBEF no later than September 30 of eachyear, will provide IDA for its review and approval detailed work programs of their respective componentsof the Project for the forthcoming year. Furthermore, the Ministries of Finance and Budget and BCRMwill provide IDA with an evaluation report of the Project activities undertaken in the previous twelvemonth period between September 1 and August 31. These programs, budgets and reports will beprepared by BCRM, with the assistance of CCBEF for the first and second components of the projectreferred to in paragraph 3.2., and by the Ministry of Budget, with the assistance of the Ordre des ExpertsComptables and CCBEF, for the third component, and by the Ministry of Finance, with the assistanceof BCRM, for the fourth component. During negotiations, assurances were obtained in that respect.
3.49 The project coordinator of BCRM, in collaboration with the coordinators in the Ministries ofFinance and Budget, and CCBEF, will submit to IDA semi-annual reports on project implementation,including procurement information and expenditures by March 30 and September 30 of each year,beginning in March 1994, using a standardized reporting format, and indicating:
(a) updated cost estimates for individual contracts and the total project; and
(b) the revised timing of procurement actions, including advertising, bidding, contract awards, andcompletion time for individual contracts.
3.50 The Project completion date is expected to be September 30, 1996. A Project Completion Reportwill be submitted to IDA within six months of the Closing Date of the IDA Credit.
J. Project Supervision
3.51 Given the multi-faceted nature of project components requiring specialized follow-up andinvolving important institution building efforts, project supervision input by Bank staff is expected to beabove average in the early stages of the project (during the first fifteen months, beginning with Crediteffectiveness). The organizational structure of the project, which includes an experienced ProjectCoordinator at the BCRM to oversee BCRM component, and the common reporting and reviewarrangements, which the co-financiers have agreed to adopt, will facilitate project implementation andsupervision. To ensure clear understanding of project implementation requirements, an implementation
_ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ - - - - - - -
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manual has been drafted and will be finalized with Malagasy counterparts during the project launchworkshop in September 1993. The workshop will include sessions on procurement and disbursementunder IDA-financed projects, standard formats and procedures to be used for project reporting, anddetailed review of the implementation timetable with all concerned departments of BCRM and CCBEF.A proposed supervision plan for the project is found in Annex 9.
IV. PROJECT BENEFITS AND RISKS
A. Project Benefits
4.1 The strengthening of the financial sector is critical to the development of market orientedfinancial institutions. In turn, a sound financial system, with an effective banking system at its core, willfacilitate productive investments and contribute to accelerated economic growth and the creation ofemployment opportunities which are key factors in poverty alleviation. Fundamental institutionalweaknesses in Madagascar's financial sector have undermined previous structural adjustment programs,underscoring the importance that needs to be attached to institution capacity building to ensure theeffective resumption of economic reform and its sustainability. This project takes advantage of a periodof political transition to improve the effectiveness of the financial sector in preparation for further stridestowards a market determined economy. The project will help implement an overall strategy for marketoriented financial reforms, particularly in strengthening the framework for prudential supervision,accounting and audit.
4.2 The project is expected to contribute significantly to enhancing the capacity, transparency andaccountability of key financial institutions, notably the central bank (BCRM) and the FinancialSupervisory Commission (CCBEF). Through a process of restructuring and improvements to human andinformation technology resources, BCRM and CCBEF will be better prepared to play their fundamentalrespective roles of regulation and supervision of the monetary and financial markets through indirectmarket based instruments. Furthermore the project will play an important role in strengthening the bankenvironment by providing technical assistance for the implementation transparent accounting and auditprocedures with specific emphasis on the commercial banks and support for the privatization of the tworemaining state banks.
4.3 Through these initiatives the project is expected to increase the capacity and consequently thequality of financial intermediation, better preparing the financial sector to play its role in stimulatingfinancial savings and efficiently channeling them into the real sector, to promote private sectorinvestment. The project will, therefore, enhance the financial sector's ability to respond to futureeconomic reforms in a manner that ensures their successful implementation, and helps avert crises ratherthan simply react to them.
B. Project Risks
4.4 The major risks of the project stem from the possible impact of the present transitional politicaldecision-making structure on effective implementation. Successful implementation is predicated onpolitical will being maintained to preserve the authority of BCRM and CCBEF, respectively to formulateand execute monetary policy and to exercise prudential oversight of banks. At the same time, the
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institutional development goals for BCRM and CCBEF are complex and ambitious, including significantlyredefined business objectives and extensive use of information technology, and could be subject toimplementation slippages. Another set of risks relates to the timing of resumption of macroeconomicreforms. This project is designed to strengthen institutional capacities in anticipation of a return to furthereconomic liberalization in the medium term. If the political transition is longer than expected, institutionalcapacity building now will have limited application in the immediate future and consequently limitedsustainability.
4.5 These risks are mitigated by: (i) the high level of commitment to project objectives and to theproject's urgency expressed by a broad spectrum of political figures and technicians; (ii) limiting theproject core to BCRM which has demonstrated continuity in its institutional capacity; (iii) the progressalready made, by BCRM and CCBEF themselves, towards preparing this project, indicating earlyownership and internalization of project design and objectives. Over seventy staff members of BCRMand CCBEF, including all senior and department managers and professional staff, have participated inthe preparation of the strategic development plans (SDPs) of both institutions since August 1992; (iv) theinclusion in the project of project management assistance for a two-year period which will help BCRMstrengthen its capacity to plan and implemmnt projects of this kind involving strategic business analysisand use of information technology; and (v) up-front agreement and implementation of key organizationaland institutional changes necessary to execute the project.
V. AGREEMENS SURANCES AND RECOMMENDATIO
5.1 Prior to Board Dresentation:
(a) the Government adopted in early May 1993 the revised Statutes of BCRM (para. 3.2);
(b) the Government furnished to IDA a Statement of Financial Sector Reform andDevelopment Policy dated March 3, 1993 (para. 3.1 and Annex 1);
(c) the BCRM and CCBEF Boards adopted their respective Strategic Development Plans(SDPs) in April 1993 (para. 3.5 and 3.23).
5.2 During negotiations. agreement was reached on:
(a) the terms of reference for BCRM external audit and the process for selecting the externalauditors was started (para. 3.13);
(b) the position of Project Coordinators in BCRM, in the Ministries of Finance and Budgetand in CCBEF to be filled at all times with personnel with responsibilities, qualificationsand experience satisfactory to the Association (para. 3.39);
(c) a privatization strategy for the remaining two state banks (para. 3.27);
(d) the modifications required for the ordinance governing the accounting profession (para.3.24);
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(e) monitorable actions for the project (para. 3.39, Annex 8);
(f) the timing and scope of the mid-term review (para. 3.40).
(g) annual detailed work programs and budgets to be furnished to IDA for review andapproval together with an evaluation report of project activities undertaken during theprevious year (para. 3.48).
5.3 Conditions of effectiveness:
The following will be conditions of effectiveness for the proposed Credit:
(a) promulgation of the ordinance setting forth revised BCRM statutes (para. 3.2);
(b) receipt by IDA of the external audit report of BCRM for fiscal year 1992 (para 3.13);
(c) signing of the subsidiary credit agreement between the Government and BCRM (para.3.34).
(d) effectiveness of all co-financier agreements (para 3.33).
5.4 Conditions of Disbursement:
The promulgation of a new ordinance, with contents satisfactory to IDA, for the "Ordre desExperts Comptables et Financiers et Comptables AgrWes (Institute of Chartered Accountants)will be a condition of disbursement for technical assistance, training and equipment to the Ordredes Experts Comptables et Comptables Agr6ds under the third component of the project (para.2.63 and 3.24).
5.5 Recommendation:
Subject to the above terms and conditions, the proposed project would be suitable for an IDACredit of SDR 4.6 million (US$ 6.3 million equivalent) to the Republic of Madagascar onstandard IDA terms with 40 years maturity.
Annex 1Page 1 of 6
UNOFFICIAL TRANSLATION
MADAGASCAR
FINANCIAL INSTITUTIONS DEVELOPMENT TECHNICAL ASSISTANCE PROJECT
Statement of Financial Sector Reform and Development Policy
1. Recognizing the vital importance of ensuring the effective allocation and mobilization ofcapital through the use of efficient financial systems, the Government wishes to pursue a two-phasecomprehensive program for the reform and development of the financial system in Madagascar. Thisprogram is related to the pursuit of macroeconomic stability and economic growth based on a reductionand non-inflationary financing of the budget deficit, including the elimination of the quasi-fiscal deficitof the Central Bank of Madagascar (BCRM), the program related to the Government's divestiture fromthe productive sectors of the economy, and a higher degree of factor mobility. The importance whichthe Government attaches to this program is primarily a reflection of the concern for sound developmentin the private sector, so that restored private investment and savings can serve as a driving force foreconomic growth in the coming years.
2. The comprehensive program for the reform and development of the financial sector is designedto reach the following objectives:
(i) To improve the regulatory, legal, and accounting environment with a view to ensuringthe security of contracts and financial instruments, and the sound management of financialinstitutions in accordance with the internationally-accepted rules of prudence andtransparency;
(ii) To shift to a monetary policy based on indirect instruments, to enable BCRM in the longterm to eliminate the credit ceilings allocated to individual banks;
(iii) To reinforce the market mechanisms with increased competition resulting from the entryof new private institutions operating within an appropriate regulatory framework;
(iv) To encourage the creation of money and capital markets, aiming initially, inter alia, atimplementing a more effective structure for the issuance and trading of treasury securities(concurrently with a strict ceiling on claims on Government and Government paper heldby BCRM), and the gradual issue of financial securities by financial institutions and/orprivate nonfinancial enterprises; and
(v) To promote interest rates determined by the market as competition intensifies and as amore market-oriented regulatory framework develops;
3. In the context of this comprehensive program, reinforcement of the institutional capacities of thefinancial system, primarily those of BCRM, the Financial Supervisory Commission (CCBEF), and thestrengthening of the accounting and audit framework, constitute an absolute priority for phase one of the
Anex 1Page 2 of 6
financial system reforms, aiming to lay the foundations for other fundamental reforms which include,among others, the shift to the use of indirect monetary policy instruments. The reform and developmentof the financial system in Madagascar will begin with an initial phase of reforms. This first phaseprimarily involves the institutional reinforcement of the financial system as stated below:
(i) to strengthen the independence of BCRM and its institutional capacity to formulate andexecute monetary policy, eventually through indirect instruments (see paragraphs 6 to10);
(ii) to restructure financial institutions and remove the Government from the ownership andmanagement of financial institutions, and specifically commercial banks (see paragraphs11 and 12); and
(iii) to reinforce the supervision of banks and financial institutions and to adapt the regulatoryframework (see paragraphs 16 to 18).
4. Phase one pertains to specific priority measures already identified and under way, and measuresto be defined by June 1993. The Government believes that the specific strategy for phase two of theprogram will be developed before end-1993.
5. All activities and measures stipulated in the comprehensive program for reform and developmentof the financial sector cover all financial institutions, infrastructure, and financial markets. The strategicorientation of this program and the activities under way and to be undertaken are indicated below.
I. Financial Institutions
Central Bank of Madagascar
6. In light of the critical role which an efficient, independent, and responsible central bank plays inany program to develop the financial system, the restructuring and strengthening of the capacities ofBCRM constitute one of the priorities of the program which is being pursued by the Malagasy authorities.This objective involves three areas of focus: (i) strengthening BCRM institutional and financialindependence; (ii) making BCRM more accountable and its operations more transparent;(iii) strengthening the human and logistic resources of BCRM to prepare it more effectively to formulateand execute monetary policy, primarily with a view to the shift to indirect control of monetaryaggregates.
7. The independence of BCRM involves both institutional and financial factors. As regards theinstitutional aspect, revised statutes for BCRM will be developed by the end of April 1993. This revisionaims primarily at limiting its excessive dependence vis-a-vis the Government in matters concerning thedevelopment and execution of monetary and credit policy. These new statutes will be adopted by theGovernment before the middle of May 1993. The financial aspect of BCRM independence consistsprimarily of ensuring that its activities do not include those responsibilities which must clearly beincumbent on the Treasury. To that end, there are two types of actions. The first, which was completedat the end of 1992, consists of isolating credit to the Government resulting from previous losses andplacing it in a separate account, while stipulating the conditions and modalities for settling these claims.This makes the quasi-fiscal activities of BCRM which to date have encumbered its balance sheet with non-interest earning assets and liabilities more transparent. Stage two consists of taking steps before the end
Annex 1Page 3 of 6
of 1993 to prevent the recurrence of past problems and the accrual of new losses. These steps would beaccompanied by a reduction in the budget deficit.
8. The accountability of BCRM and its more transparent operations will be accompanied bystrengthening of ifs independence, as described above. Accordingly, an external audit of BCRM and ananalysis of its internal audit function will be assigned to an independent firm, to be undertaken duringthe first half of 1993. In addition to a conventional financial audit, this audit will include a study of thepresent internal audit function in BCRM and will make recommendations to strengthen this function. TheGovernment has specified that FINDEP should provide assistance for the structuring and developmentof a new internal audit function for BCRM, which would be separate from other functions of BCRM andwould report directly to the Governor and the Board of BCRM.
9. This initial external audit will then lead to systematic external audits of BCRM for each fiscalyear, to be conducted by an independent and qualified firm, and which would lead to an annual reportpublished by BCRM accompanied by audited financial statements. The first report is scheduled to bepublished in 1994.
10. The independence of BCRM and its increased accountability will be facilitated by strengtheningof its human and logistic resources, with a view to pursuing its main objective, i.e., to ensure pricestability through monetary policy. To that end, BCRM has prepared a strategic development plan whichit will adopt in March 1993 and which provides for a strengthening of the departments which are directlyresponsible for the core functions of central banking (Credit, Foreign Services, and Research) and allsupport functions (primarily accounting, data processing, and administration). The assistance of FINDEPshould contribute to the implementation of this plan over a three-year period.
Commercial Banks
11. In keeping with its concern to ensure that the above mentioned objective is attained, i.e., thecreation of a real financial market with freely determined interest rates, the Government recognizes theimportance of a competitive banking system which meets the needs of economic agents. This goal isconsistent with the orientation which the government adopted in 1988, which consists of replacing theformer roles of the Government as the owner of the financial institutions, and the decision maker forselective policies for credit and direct control, with a strategy which limits the role of the Governmentessentially to providing the appropriate regulation and the supervision necessary for market mechanismto function properly.
12. With the final objective of Government divestitureof remaining ownership and bank management,the Government intends to pursue and accelerate the policy which it began in 1988. Accordingly, theprocess of privatizing the BTM was undertaken in 1992, and the Government has followed up on therecommendations of the consulting firms recruited to that end. Similarly, the Government will pursuethe privatization of the BFV by increasing the share of private stockholders to at least a majority level,if not to one hundred percent of the capital, by end-1993.
Ins-rance
13. In the insurance sector, the Government will pursue the objective of introducing private capitalinto the two existing state-owned corporations and to open this sector up to competition. Concurrentlythe regulatory system governing this sector will be reviewed. These activities will be carried out duringphase two of the program for reform and development of the financial system.
Page 4 of 6
CNaPS and Social Security
14. Considering the weight which it carries in mobilizing financial resources, the Caimn Nationalede Prevoyance Sociale (CNaPS) is, in addition to its fundamental role as a social institution, aconsiderable institutional investor and, therefore, is one element which must be taken into account in thereform and development of financial markets and institutions in Madagascar. The Government's goal isto make the management of CNaPS more efficient by providing it with the required transparency andincreasing its level of accountability. In this connection the Government during the last quarter of 1992initiated a series of three studies on CNaPS with the assistance of the World Bank and the IntenatonalLabor Office, i.e., an organizational and financial analysis of CNaPS, an actarial study, and a tudy onthe investment of funds. After these studies are completed, prior to June 1993, nd in the context ofphase two of the program for reform and development of the financial system, a plan of action will bedeveloped to reorganize CNaPS, which will primarily involve the following elements: (i) moretransparent operations, achieved, inter alia, by preparing financial statements according to internationalaccounting procedures and auditing them in accordance with the relevant international standards; (ii)strengthened management of this institution, which includes establishing actuarial forecasting and analysiscapabilities; and (iii) regulations concerning investments of funds more suitable to ensure the security offunds while participating in the development of financial markets.
Postal financial services
15. The postal financial services, i.e., the Caisse d'Epargne de Madagascar (CEM), a postal savingsinstitution, and the Centre de Cheques Postaux (CCP), a postal checkling institution, wIll be restructuredwith a view to making them better suited to meet the needs of small- and medium-scale savers and thepayments system, respectively. In the context of its sectoral policy on post and telecommunicationsadopted on June 30, 1992, the Government already provided for these services to be more autonomousand to be managed according to commercial principles. This policy is intended to result in a separationof the activities of the postal financial services from the Treasury's overall operations, and theirprivatization, to the greatest extent possible. The practical ways and means for the implementation ofthis strategy are being studied, including the development of the relationships between these services andprivate businesses and financial institutions. Phase two of the reforms will include the implementationof this strategy to be adopted before end-1993.
II. The Financial Infrastructure
16. The Government attaches particular importance to the financial infrastructure, primarily theregulatory framework governing banking operations, including prudential supervision, the accounting andaudit framework, and the legal environment for financial transactions. The reinforcement of the processof the supervision of banks and financial institutions and the improvement of accounting and auditstandards will, inter alia, facilitate the elimination of direct controls applicable to banks and the shift toindirect monetary policy instruments. The first phase of the reforms stipulated in this connection willaccordingly give priority to the strengthening of the Financial Supervisory Commission (CCBEF), theimplementation of a regulatory framework governing the accounting profession, and the adoption of textsgoverning financial institutions before end-1993.
17. As regards the operation of CCBEF, the present situation which is characterized by sharedresponsibilities between BCRM and CCBEF for the functions and staff involved in supervising thebanking system, will be modified in the context of the implementation of the strategic development planfor BCRM. The main responsibility for the supervision of banks and financial institutions, as regards
Annex IPage 5 of 6
on- and off-site supervision, will fall to CCBEF. The transfer of the banking supervision functions ofBCRM to CCBEF, the strengthening of the human resources of CCBEF by the assigmnent of a minimumnumber of permanent staff, and the development of a plan of action for CCBEF, under the supervisionof a technical assistant-a seasoned inspector recruited from the outside before June 1993 for a three-yearperiod-will be completed by the end of 1993. The technical assistant will serve as an advisor to theGovernor of BCRM, as Chairman of CCBEF, and will be responsible for implementing a systematictraining program for CCBEF staff, including on-the-job training, and for reinforcing all aspects of on-and off-site supervision. CCBEF will conduct a general on-site inspection of each commercial bank atleast annually. The first series of these on-site inspections will be completed by June 1994.
18. Financial management will be reinforced by the establishment of audit and accounting standardscompatible with international standards. To ensure that these standards are applied and observed, theaccounting profession will be subjected to a regulatory framework developed by the profession itself andsubmitted for the approval of the authorities before end-1993. This regulatory framework will ensurethat accounting experts uphold high professional ethics and standards in their endeavors, so that therequirements of sound financial management can be met more effectively, primarily thorough the use ofthe following measures:
- Authorization of the title of accountant and the right to practice this profession;
- Professional ethics to be observed, and disciplinary measures for failure to observe them;
- Organization and operation of the Association of Accounts, including its goals, initiationfees, financial conditions, etc.; and
- The statutory component, including the production and auditing of annual financialstatements and the filing of such statements with the competent authorities, and thedeadlines to be met.
19. In the general context of improving the legal framework governing business, more particularattention will be focused on filling the gaps both in the basic legal texts and in the application texts relatedto financial transactions. These gaps involve the following fields of business law: law applicable tostocks and bonds; general law and procedures pertaining to guarantees, mortgages, and collection ofclaims, as well as bankruptcy and liquidation. The actions to be taken to that end will be coordinatedwith the other components of the legal framework to be improved (commercial code, law on competition,and mining code), as discussed earlier with IDA. A program of specific activities will be developedbefore end-1993, to be incorporated into phase two of the reforms stipulated in this program.
20. The Government, BCRM, and the banking industry will examine the different options for makingthe existing payments system more effective. The Government and IDA will examine therecommendations of a consultants' study on this subject, with a view to identifying a strategy before theend of 1993.
III. Financial Markets
21. The Government's goal is to promote the development of financial markets which can determineinterest rates through the interplay of supply and demand for financial resources. The immediate priorityfor the Government in the development of such financial markets is to restore the proper operation of theinterbank market, which has for all intents and purposes been dormant since the two Government banks
Annx IPage 6 of 6
began to experience problems. The privatization of these banks and the opening of the sector shouldimprove the operation of the interbank market.
22. The Government intends to restore the regular issue of Treasury bills and concurrently reduceits direct recourse to BCRM. This action to reinforce the operation of the money market will beaccompanied by a considerable effort to manage Government cash flow and to implement strictercoordination between the Treasury and BCRM. This will result in improved liquidity forecasts made byBCRM in the context of monetary policy management.
23. The Government also believes that initiating the development of a nascent capital market inMadagascar would be a decisive step in fostering the economy's market orientation. The private sectorshould play a vital role in the design and organization of such a market. With a view to helping stimulatethe start-up of such a market with high grade marketable securities, the Government will accelerate asmuch as possible its program to privatize financially viable public enterprises (for example, in theinsurance sector, banks, telecommunications, and transportation) and for which a portion of thedesignated capital could be privatized through a public offering for sale, aimed, inter alia, at small-scaleowners and institutional investors. The Government will examine the ways and means to reach this goalas quickly as possible in the context of phase two of the reforms under the comprehensive developmentprogram for the financial sector.
Adopted by the Government
Antananarivo, March 3, 1993.
Annex 2
Pego 1 of iMADAGASCAR
FINANCIAL INSTI1UTIONS DEVELOPMENT TECHNICAL ASSISTANCE PROJECT
Morlery Survey. 1966-92
yAaIamy Franc billon: End of Pwiod)
1900 1967 !90 193 2K 1991 __
Est
Total Domestic Credit WI-2 .9 91¢ 1.029.9 1,183.4 1 4691
Credit to te Government Net 377.0 365.0 342.7 32 251.5 292.3 412.3
Credi to th Private Saco en
State Enterprisee 449.1 52 540.2 S7 778.4 891.1 1.056.8
FINANCIAL INSTITUTIONS DEVELOPMENT TECHNICAL ASSISTANCE PROJECT
Main Technical Assistance and Training Activities
Summary Description of First Year Tasks
A. Strengthening BCRM
Research Department ComponentTechnical Advisor to General Management to Strengthen the Research Department.
1. The objectives of this consulting assignment are fourfold: (i) to improve the organizationalstructure and work methods of the Research Department; (ii) to train the Research Department staff toexecute the action plan for the Research department and to ensure that the quality and level of expertisewill be sustained after the life of the Project; (iii) to improve the capacity of BCRM to formulate andexecute monetary policy by improving information generating capacities of the Research Department togeneral management; (iv) to improve BCRM's capacity to keep the general public informed on economic,monetary and financial issues through the regular publication of statistical, policy and researchinformation.
Accounting ComponentReview of the Accounting Systems.
2. The objectives of this consultancy are fourfold: (i) to review the existing accounting system withinBCRM; (ii) to propose a new system of accounting that will expedite the application of the new bankingaccounting plan in January 1994; (iii) identification of a work program that ensures the smooth transitionfrom the existing accounting system to the newly designated system; (iv) to propose operation and supportprocedures for the new accounting system.
Information Systems ComponentInformation Technologv Systems and Equipment Planning
3. The overall objective of this study is to devise a method for procuring information technologyhardware that will facilitate the implementation of the Information Technology Plan once it is formulated.The consultancy will have four components: (i) an evaluation of the current computer system defininga number of strategies for its replacement; (ii) definition of a new information systems structure; (iii)development of a procedure for the purchase of hardware and software; (iv) the framing of generalagreements with hardware and software suppliers.
Annex 3Page 2 of 23
Information Systems - Security
4. As part of BCRM's Information Technology Strategy in the specific context of improving theoverall security of information systems, this consultancy will: (i) review the existing security system; (ii)provide assistance tot BCRM in defining a strategy for an information security system; (iii) providesupport for the implementation of the security system; (iv) draw up an information security systemmanual for BCRM; (v) devise a crisis management strategy in the event of a breakdown of the computersystem.
Information Systems - Methods
5. As part of the development of BCRM Information Technology Strategy standard informationsystem methods need to be developed. This consultancy will: (i) review the present information systemmethods; (ii) provide technical assistance in producing a methods manual for information systems at theBCRM; (iii) provide training to ensure that the new methods are correctly implemented by analysts andprogrammers; (iv) devise an organization structure for the Data Processing Department of BCRM.
B. Improving the Audit and Accounting FrameworkImDroving the Accounting & Audit Regulatory Framework.
6. As part of the development of a fully functioning professional body (Ordre des ExpertsComptables et Comptables Agres) this consultancy will provide assistance to: (i) establish a governingcouncil of the professional body (Conseil de l'Ordre); (ii) establish and implement appropriate "One time"transitory measures for admission of members under the "grandfather" clauses contained in the regulatorytexts; (iii) establish the criteria and procedures for admitting to membership nationals and non-nationalshaving acceptable alternative professional qualifications; (iv) draft and circulate to its members theinternal rules of procedures including all those covering ethical matters; (v) establish and circulate tomembers the initial minimum acceptable professional standards and set up procedures for ensuring theiruniversal application, as well as their regular review and updating in the light of practical experience andinternational trends within the profession; and (vi) establish an annual budget and adequate sources offunding from within the membership to ensure the sustainability of the Ordre in Madagascar as a dynamicbody committed to maintaining the highest professional standards.
Provision of Bank Accounting and Audit Traininy
7. This consultancy will support Institut National des Sciences Comptables et de l'Administrationdes Entreprises (INSCAE), in association with Centre National de Formation de la Profession Bancaire(CNFPB), to develop and be able to dispense a broad-based training program specifically directed tobanking and professional personnel who already have a sound basic knowledge of accounting andfinancial reporting to: (i) increase the participants knowledge and understanding of the risk applicable tobanking operations and of the corresponding prudential requirements and ratios necessary to ensure thefinancial well being of a banking institution; (ii) expand the participants knowledge of the specificitiesof banks and financial institutions accounting and of reporting financial information; (iii) provide adetailed understanding of the requirements of the new bank chart of accounts; and (iv) develop a solidunderstanding of the international accounting and auditing standards specifically applicable to banks andfinancial institutions.
The detailed terms of reference for the above tasks are exhibited below:
Annex 3Page 3 of 23
UNOFFICIAL TRANSLATION
CENTRAL BANK OF THE REPUBLIC OF MADAGASCAR (BCRM)
Draft Terms of ReferenceTechnical Advisor to General Management for the
Strengthening of the Research Department
1. The Technical Advisor:
(i) Will be accountable solely to General Management of BCRM;
(ii) Will comply strictly with the statutes and internal regulations of BCRM;
(iii) Will work under the general authority of the Governor and General Management ofBCRM, and will report to them on his or her activities at their request or at the Expert'sown initiative.
2. The expert will be responsible for assisting in the development of the major focuses of a plan ofaction for the Research Department with a view to reinforcing its analysis and forecasting capacities andits ability to collect and organize statistics. The preliminary definition of the criteria and operatingmethods for carrying out the various secondary projects and the implementation schedule is an integralpart of this action plan.
When this action plan is adopted by the General Management of the Central Bank, the Expert willassist in:
(i) improving the structural organization and the working methods of the ResearchDepartment;
(ii) training of the Research Department staff, and maintaining them at a sufficient level innumber and quality to carry out the terms of reference of the Research Department;
(iii) training of staff responsible for examining and using statements, documents, and statisticssubmitted by banks and financial institutions, ministries, other public agencies and otherbodies, including international organizations, with the support of other experts orinstructors who may be required for specific activities.
(iv) preparation, for the Governor and General Management, of economic and financialstudies and recommendations pertaining to monetary policy and the procedures necessaryfor their implementation.
The Expert will be responsible for coordinating and monitoring the results obtained in secondaryprojects and will write periodic progress reports.
The Expert will ensure that before he or she leaves, the Department has acquired know-how tocarry out its functions correctly and to handle any responsibilities which may not have been specificallyaddressed.
Annex 3Page 4 of 23
3. To achieve these goals, depending on the Expert's availability, he or she will participate in allmeetings concerning monetary policy management and pertaining to the collection of economic,monetary, and financial statistics, and will receive all information necessary to carry out his or her dutiesand to allow the Expert to propose the improvements which he or she deems appropriate for the researchfunction of BCRM. In particular, the Expert will participate in the development of the ResearchDepartment's annual working plan. For 1993 and 1994 this plan will include the writing of an annualreport of BCRM. The 1993 report will be published before the end of the second quarter of 1994, andwill contain a review and analysis, with comments, on the developments in the economic cycle and themonetary situation.
4. As regards the training of research staff, the Expert will supervise missions assigned toinsufficiently experienced staff and will supervise those led by more seasoned staff, possibly in the formof individual activities at different stages of supervision. The Expert will ensure that the methods andtechniques proposed by him or herself or by other instructors have been sufficiently assimilated and thestaff involved are able to use them on their own and if applicable to convey their knowledge to theircolleagues. More generally, the Expert will take every opportunity (such as the discussion of the reportswhich have been filed, organization of training sessions on difficult topics, etc.) in order to enhance theknowledge of the Research Department staff and to improve their working methods, so as to makeongoing training a spontaneous activity, thus guaranteeing that the goals of excellence are pursued afterthe Expert leaves, to ensure that Research Department operates properly.
5. The Expert's monitoring or direct supervision activities shall become progressively less directive,yielding management to the Direct of the Research Department.
As regards analytical and forecasting work, the Expert's contribution will lead to the followingaccomplishments during a one-year implementation phase:
- Development of methodology and the implementation and analysis techniques;
- Supervision of tasks.
The Research Department will subsequently directly undertake the tasks under the guidance ofthe Expert.
6. Candidates for this position must have a knowledge of economics (preferably a doctorate) andapproximately ten years of experience in a central bank and/or a ministry of finance or internationalorganization.
Annex 3Page 5 of 23
UNOFFICIAL TRANSLATION
CENTRAL BANK OF THE REPUBLIC OF MADAGASCAR (BCRM)
Draft Terms of ReferenceTechnical Advisor Responsible for the Review
of the Accounting Systems
Context
The goal of FINDEP is to facilitate investment and growth in the productive sectors by makingthe financial system function better. FINDEP sustains key financial institutions and markets inMadagascar, in order to revive the public's confidence and thus encourage it to make savings availablefor meeting the financial needs of the private sector. FINDEP is particularly designed to: (i) improve thecapacity of BCRM to perform its monetary and regulatory functions, and (ii) to improve the prudentialsupervision environment by strengthening the Commission de Contr6le des Banques et EtablissementsFinanciers [Bank and Financial Establishment Control Commission] (CCBEF) and by introducing newrules with respect to accounting, audit and financial disclosure for banks.
One of the project's main components consists of implementing for BCRM a strategicdevelopment plan (SDP) that will coordinate all the objectives and plans of action over a period of threeyears. The project is designed to strengthen BCRM by developing especially its accounting, banking,research and internal audit activities and its monetary and exchange operations, and by implementing aninformation technology plan and a human resources development plan.
Purpose of the Assistance Requested for Accountine
The requested assistance is to focus on:
- Proposal of a new bank accounting system;
- Identification of the work and improvements necessary for the existing system to permitthe implementation of the new system;
- General specification of an application and a configuration required to support the newsystem.
Scope of the Project
The consultant and the project's working group will rely on previous plans and research carriedout:
- The bank's strategic development plan;
- The information technology strategy;
- The information technology plan;
- The strategic plan for the development of accounting.
Annex 3Page 6 of 23
Description of Resources and Management
The consultant will assist the accounting subproject group, composed of BCRM accountingsupervisors and employees and led by a project chief.
The members of the working group will be assigned to that project from inception to completion.
The steering group of the subproject, composed of the representatives of the departmentsconcerned, will be responsible for follow-up and for evaluating their work. Coordination of the projectwith others will be ensured by the Coordinator for Planning and Strategic Development.
Work Plan and Reports
The consultant will have to draw up a general work plan describing the methodology to befollowed and the results to be produced, and containing a schedule indicating when those results will beavailable. They should include:
- The principles of a modern bank accounting system, with a multi-currency component;
- A description of steps taken to overhaul the existing system;
- a coordination plan and a timetable showing the completion of those steps.
The selection will be based partly on the soundness of the work plan, which must be the very firstitem carried out in the study.
Consultant's Oualifications
The consultant chosen for this work must meet the following criteria:
(a) Be a senior bank accounting consultant with a record of at least 10 years' experience ina banking establishment or an accounting service company (preferably a central bank);
(b) Be thoroughly familiar with problems of accounting organization and automation;
(c) Have a good knowledge of French;
(d) Be capable of submitting complex solutions to those in charge and to obtain resultsthrough training based on actual cases;
(e) Be conversant with methodological techniques geared to this task and not requiringsubstantial lead time;
(f) Have solid experience in transmitting know-how;
(g) Prove total contractual and financial independence with respect to the suppliers, in orderto preclude any conflict of interest between them and BCRM.
Ann§x 3Page 7 of 23
UNOFFICIAL TRANSLATION
CENTRAL BANK OF THE REPUBLIC OF MADAGASCAR (BCRM)
Draft Terms of ReferenceInformation Technology Systems and Equipment Procuranent Planning
These terms of reference cover the assistance to be provided for BCRM by a senior consultantin information technology for a three-month period starting approximately September 1, 1993. The threemonths will be divided in two or three periods of two to six weeks, at three- or four-month intervals.
Context
1. The goal of FINDEP is to facilitate investment and growth in the productive sectors by makingthe financial system function better. FINDEP sustains key financial institutions and markets inMadagascar, in order to revive the public's confidence and thus encourage it to make savings availablefor meeting the financial needs of the private sector. FINDEP is particularly designed to: (i) improve thecapacity of the Central Bank of Madagascar (BCRM) to perform its monetary and regulatory functions,and (ii) to improve the prudential supervision environment by strengthening the Commission de Controledes Banques et Etablissements Financiers (Financial Supervisory Commission, CCBEF) and byintroducing new rules with respect to accounting, audit and financial disclosure for banks.
One of the project's main components consists of implementing for BCRM a strategicdevelopment plan (SDP) that will coordinate all the objectives and plans of action over a period of threeyears. The project is designed to strengthen BCRM by developing especially its accounting, banking,research and internal audit activities and its monetary and exchange operations, and by implementing aninformation technology plan and a human resources development plan.
2. The bank's computer hardware is antiquated and needs to be replaced. Replacement will proceedstep by step, department by department, over the three years of the project. But in order to give everyoneidentical equipment, it is necessary to list all the needs for equipment and to select one or more suppliers.Contracts will have already been entered into with suppliers, and deliveries could be made as soon as thevarious projects are sufficiently advanced.
Objectives
3. The objective of this study will be to devise a method for procuring the hardware needed toimplement the information technology plan. The study includes:
(a) An evaluation of the current situation as regards computer equipment and the possibleapproaches to its replacement;
(b) Recommendations based on the definition of the system's architecture;
(c) Assistance for the purchase of hardware and software; and
(d) The framing of general agreements with hardware and software suppliers.
Arex 3Page 8 of 23
Scope of the Project
4. The consultant and the project's working group will rely on previous works carried out inconjunction with the FINDEP appraisal mission or on other occasions:
- The strategic development plan;- The appraisal report;- The information technology strategy;- The information technology plan.
5. The scope of the project will therefore encompass:
(a) Evaluation of present and future equipment needs, bearing in mind the condition of thecurrent equipment and its maintenance;
(b) Calculation of the total cost of the necessary equipment;
(c) Delivery planning; and
(d) Calling for bids and assisting in the selection of suppliers.
6. The equipment procurement project will consist of the fbllowing components, to be submitted toBCRM project steering committee for its approval:
(a) Recommendations on the presentation of the maintenance problem and the preparationof a replacement plan;
(b) A detailed plan and a timetable for hardware and software purchases. This plan must beupdated and adjusted to reflect changing estimate of needs in the course of the projects.
(c) Call for bids for equipment procurement, in accordance with the World Bank's biddingand procurement procedures; and
(d) A review of bids from hardware and software suppliers.
Description of resources and manaeement
7. The consultant will assist in equipment procurement. A working group composed of competentpersons from BCRM will participate in this task. This working group will be chaired by the Coordinatorof Planning and Strategic Development of BCRM.
The members of the working group will be assigned to this project from inception to completion, on apart-time basis.
8. BCRM steering committee will be responsible for supervising and evaluating their work. Thiscommittee will be composed of BCRM executives as well as supervisors of the departments concerned,charged with validating the principal decisions concerning BCRM information technology system, andin particular with directing and monitoring task assignment.
Work Plan and Reports
9. The consultant will have to draw up a general work plan describing the methodology to befollowed and the results to be produced, and containing a schedule indicating when those results will be
Annex 3Page 9 of 23
available. The selection will be based partly on the soundness of the work plan, which must be the veryfirst item worked out in the study.
Consultant's qualifications
10. The consultant chosen for this work must meet the following criteria:
(a) Be a senior information technology consultant with a record of at least 10 years'experience as the person in charge of information technology and purchasing, (preferablyin a financial institution);
(b) Be thoroughly familiar with the handling of problems relating to information technologyand equipment purchasing;
(c) Have a good knowledge of French;
(d) Be capable of submitting complex solutions to those in charge and to obtain resultsthrough training based on actual cases;
(e) Be conversant with methodological techniques geared to this task and not requiringsubstantial lead time;
(f) Have solid experience in transmitting know-how;
(g) Prove total contractual and financial independence with respect to the suppliers, in orderto preclude any conflict of interest between them and BCRM.
Annex Page 10 of 23
UNOFFICIAL TRANSLATION
CENTRAL BANK OF THE REPUBLIC OF MADAGASCAR (BCRM)
Draft Terms of ReferenceInformation Technology Systems - Security
These terms of reference cover the assistance to be provided for BCRM by a senior consultantin information technology for a three-month period starting approximately July 1, 1993. The three monthswill be divided in three periods of two to five weeks each, at two- or three- month intervals.
Context
1. The goal of FINDEP is to facilitate investment and growth in the productive sectors by improvingthe operating conditions of the financial sector). FINDEP supports key financial institutions and marketsin Madagascar, in order to mobilize the public's confidence and thus encourage it to make savings tomeet the financial needs of the private sector. FINDEP is particularly designed to: (i) improve thecapacity of the Central Bank of Madagascar (BCRM) to perform its monetary and regulatory functions,and (ii) to improve the prudential supervision environment by strengthening the Commission de ContrOledes Banques et Etablissements Financiers (Financial Supervisory Commission, CCBEF) and byintroducing new standards with respect to accounting, audit and financial disclosure for banks.
One of the project's main components consists of implementing a Strategic Development Plan(SDP) for BCRM that will coordinate all the objectives and action plans over a period of three years. Theproject is designed to strengthen BCRM by developing its accounting, banking, research and internal auditactivities in particular, as well as its monetary and exchange operations, and by implementing aninformation technology plan and a human resources development plan.
2. Information technology will be an integral part of every BCRM activity. It will back up thedecision-making process and facilitate usual business activities. It is necessary to institute security ruleswhich will cover all BCRM activities, provide absolute protection against non-authorized access toBCRM data, and highly sensitive information. Any BCRM employee who carries out computer workwill be responsible for the security and secrecy of these operations. Security will be an integral part ofthe project work. It will be necessary to develop a manual that defines information system security.
Go9al
3. The goal of this study is to develop and implement a strategy for information technology security.This study includes:
(a) assistance in the development and implementation of a strategy for information technologysecurity; and
(b) training in the field of information technology security.
Goals of the Project
4. The consultant and the project working group will base their research on the work done duringthe FINDEP appraisal mission and will use as required the following documentation:
The Strategic Development PlanThe Staff Appraisal ReportThe Information Technology Strategy
Annex 3Page 11 of 23
The Information Technology Plan.
5. The goals of the project will, therefore, be the following:
(a) the assessment of the security practices presently used in the field of information technology;
(b) an assistance in the preparation of security strategy in the field of information technology;
(c) the implementation of the security strategy to be used in the field of information technology;
(d) the development of an information technology security manual;
(e) and the development of a model for crisis management.
outDUtS
The Informatics Security Project will include the following outputs, which will be submitted forapproval to the Information Technology Committee of BCRM:
(a) an information technology strategy, developed in cooperation with BCRM;
(b) a security manual; and
(c) a model for crisis management.
Resource Description
7. The consultant will provide assistance in the implementation of a security strategy. A workinggroup of competent BCRM staff, which will be headed by the Director of the Planning and StrategicDevelopment Department of BCRM, will participate in this task. They will be assigned to this projectfor the whole duration of the project on a part-time basis.
S. BCRM Review Committee (Comite de Pilotage) will supervise and endorse the work of theworking group. The committee will include members from BCRM management and managers from thedifferent departments involved. More specifically, it will monitor and manage the distribution of thevarious tasks. It will also approve the main decisions related to BCRM Information Technology Plan.
Workini Plan and Re=orts
9. The consultant will establish a general working plan, which will indicate the methodology thathe plans to use and the nature and time framework of the outputs. The selection of the consultant willbe partially made on the soundness of the working plan which should first be developed in the study.
Oualifications of the Consultant
10. The consultant will have to meet the following criteria:
(a) Must be a senior consultant in Information Technology Science with at least ten years ofexperience in developing Information Technology Systems, if possible in a financial institution;
(b) Must be completely familiar with information technology security issues;
(c) Must have a thorough knowledge of French;
Annex 3Page 12 of 23
(d) be qualified to present complex issues to managers and to obtain results through a training basedon concrete cases;
(e) to be in possession of methodologies readily adapted for this type of work;
(f) to have experience in transmitting the required know-how.
Annex-3Page 13 of 23
UNOFFICIAL TRANSLATION
CENTRAL BANK OF THE REPUBLIC OF MADAGASCAR (BCRM)
Draft Terms of ReferenceInformation Technology Systems - Methods
These terms of reference cover the assistance to be provided for BCRM by a senior consultantin information technology for a three-month period starting approximately June 1, 1993. The threemonths will be divided in three periods of two to five weeks each, at two- or three- month intervals.
Context
1. The goal of FINDEP is to facilitate investment and growth in the productive sectors by improvingthe operating conditions of the financial sector). FINDEP supports key financial institutions and marketsin Madagascar, in order to mobilize the public's confidence and thus encourage it to make savings tomeet the financial needs of the private sector. FINDEP is particularly designed to: (i) improve thecapacity of the Central Bank of Madagascar (BCRM) to perform its monetary and regulatory functions,and (ii) to improve the prudential supervision environment by strengthening the Commission de Controledes Banques et Etablissements Financiers (Financial Supervisory Commission, CCBEF) and byintroducing new standards with respect to accounting, audit and financial disclosure for banks.
One of the project's main components consists of implementing a Strategic Development Plan(SDP) for BCRM that will coordinate all the objectives and action plans over a period of three years. Theproject is designed to strengthen BCRM by developing its accounting, banking, research and internal auditactivities in particular, as well as its monetary and exchange operations, and by implementing aninformation technology plan and a human resources development plan.
2. It is of the utmost importance that all the phases of a project be covered by a uniformmethodology and that modern information technology techniques be introduced. A strict discipline in thisrespect will make it possible for management to monitor and control project development. It will also leadto a unified conceptualization of project work and to the awareness of systematic and quality methods andtechniques which will be detailed in a methodology manual.
Purpose of the study
3. The purpose of this study is to define and introduce a methodology to develop an informationtechnology strategy and the future administrative structure of the Information Technology Department.This study will include:
(a) the definition and the introduction of an information technology strategy and a methodologymanual;
(b) the assessment of the administrative structure of the Information Technology Departnent.
Goals of the Project
4. The consultant and the project working group will base their research on the work done duringthe FINDEP appraisal mission and will use the following documentation as and when required:
The Strategic Development PlanThe Staff Appraisal ReportThe Information Technology Strategy
Annex 3Page 14 of 23
The Information Technology Plan.
5. The goals of the project will, therefore, be the following:
(a) an assessment of development methods presently used;
(b) an assistance in the preparation of a development manual;
(c) training for BCRM analysts and programming staff, and
(d) an assessment of the administrative structure of the Information Technology Department.
Outr)uts
The Informatics Security Project will include the following outputs, which will have to besubmitted for approval to BCRM Information Technology Committee:
(a) a methodology manual;
(b) training for the above;
(c) suggestions for the future administrative structure of the Information Technology Department.
Resource Description
7. The consultant will assist in the implementation of information technology methods. A workinggroup of competent BCRM staff, which will be headed by the Coordinator for Planning and StrategicDevelopment Departnent of BCRM, will participate in this task. They will be assigned to this projectfor the whole duration of the project on a part-time basis.
8. BCRM Review Committee (Comitd de Pilotage) will supervise and endorse the work of theworking group. This committee will include members from BCRM management and managers from thedifferent departments involved. More specifically, it will monitor and manage the distribution of thevarious tasks. It will also approve the main decisions related to BCRM Information Technology Plan.
Working Plan and Reports
9. The consultant will establish a general working plan, which will indicate the methodology thathe plans to use and the nature and time framework of the outputs. The selection of the consultant willbe partially made on the soundness of the working plan which should first be developed in the study.
Oualifications of the Consultant
10. The consultant will have to meet the following criteria:
(a) must be a senior consultant in Information Technology with at least ten years of experience indeveloping Information Technology Systems, if possible in a financial institution;
(b) must be completely familiar with information technology issues;
(c) must have a thorough knowledge of French;
Annex 3Page 15 of 23
(d) be qualified to present complex issues to managers and to obtain results through a training basedon concrete cases;
(e) to have in his possession methodologies readily adapted for this type of work;
(f) to have experience in transmitting the required know-how.
Annex 3Page 16 of 23
UNOFFICIAL TRANSLATION
REPUBLIC OF MADAGASCAR
Draft Terms of Referenceto Improve the Accounting and Audit Regulatory Framework
These Terms of Reference cover assistance to be provided to the Ministry of Finance to develop theabove training capacities.
Backyzround
1. The accounting, auditing and financial disclosure requirements and practices of a country areimportant for creditors, shareholders and potential investors. The main weaknesses in this area inMadagascar, have historically been the obsolescence of the accounting framework set by law and the poorquality and availability of records and information on companies generally. The Project's objective isto facilitate investment and growth in the productive sectors of the country's economy by improving thefunctioning of the financial system. The Project supports key financial institutions and financial marketsin Madagascar to enhance public trust therein, thereby enabling them to mobilize savings to meet theinvestment financing needs of the private sector.
2. An important element of the overall Project will be to provide assistance: (i) in implementing theprocess of reorganizing and strengthening the accounting profession, including restructuring the Ordredes Experts Comptables et Financiers et comptables Agrees (Ordre), following the recent adoption ofrevised regulatory texts; and (ii) putting in place an appropriate organization and infrastructure in orderthat the Conseil Superieur de la Comptabilite (CSC) - the regulatory body responsible for overseeingand/or approving the application of, and modifications to, national accounting standards - can undertakeits responsibilities with regard to ensuring the comprehensive application throughout the country of theGeneral Chart of Accounts (currently the Plan Comptable General Malgache of 1987 - PCGM-87) andreviewing and improving national accounting standards generally. In accordance with Article 2.2 of theDecree creating the CSC (Decret No. 89-161), this body is also required to give its prior approval to allrules, instructions or recommendations of an accounting nature, proposed by any other national entity,public or private. Any proposed sectoral chart of accounts, such as the new chart of accounts for banksand financial institutions (Nouveau Plan Comptable Bancaire - NPCB) being submitted by theCommission de ContrOle des Banques et Etablissements Financiers (CCBEF), should, therefore, alsoreceive prior approval from the CSC. With this in mind, close links will need to be established betweenthe CSC and the CCBEF in order that this approval process can be carried out with a minimum of delay.In fact, the CSC would be expected to assume the ongoing responsibility, in close association with theCCBEF, of reviewing and updating the NPCB to ensure that, as far as possible, it adheres to existing andfuture international accounting standards applicable to banks and financial institutions.
Objectives
3. The objectives of this consultancy are twofold. Firstly, it is expected that, at the conclusion ofthe assignment, there will be a fully functioning professional body (Ordre des Experts Comptables etComptables Agres) in Madagascar which will have: (i) established its own governing council (Conseilde l'Ordre); (ii) established and implemented appropriate 'One time" transitory measures for admissionof members under the 'grandfather' clauses contained in the regulatory texts; (iii) established the criteriaand procedures for admitting to membership nationals and non-nationals having acceptable alternativeprofessional qualifications; (iv) drafted and circulated to its members the internal rules of procedures forensuring their universal application, as well as their regular review and updating in the light of practicalexperience and international trends within the profession; and (v) established an annual budget and
_ - - - - - -
Annex 3Page 17 of 23
adequate sources of funding from within the membership to ensure the sustainability of the Ordre inMadagascar as a dynamic body committed to maintaining the highest professional standards.
4. In parallel with the first objective, at the end of the period of this consultancy, the CSC will havebecome an effective body, committed to ensuring the widest application of the PCGM-87 throughout thecountry. An organizational structure, together with access to appropriate ongoing funding sources, willbe in place to enable the CSC to: (i) pursue its responsibilities for monitoring the application of thePCGM-87 and the use to be made of the financial data which can be extracted from accounts presentedin accordance therewith; (ii) periodically make recommendations for changes or improvements in the lightof both practical experience and the evolution of international accounting standards generally; and (iii)update the implementation guidelines (Guide Annote) to take account of such changes or improvements.Appropriate links with the CCBEF will also be in place to facilitate monitoring the implementation of theNPCB and approve proposals for its improvement, as circumstances dictate.
Timing
5. The Consultant will be expected to be in Madagascar by early 1994 and immediately establishcontact with the person(s) designated by the Executing Agency as being directly responsible forcoordinating this part of the Project. As the person principally involved in carrying out the tasksassociated with this consultancy, the Consultant will report directly to the coordinator.
Additional Resources
6. A key factor for the success of this consultancy will be the very wide and active involvementexpected of members of the profession, particularly the President and existing members of the Ordre andthose other professionals who are in the major practicing firms. Given the importance of their input, theProject will support the cost of up to 36 staff-months of local short term consultancy, to be drawn forma broad base of professionals in the practicing firms, to assist the Consultant in carrying out certainspecific tasks and agreeing the terms of reference for the short term consultancies with the ExecutingAgency. The Consultant will also be expected to encourage the active involvement of representatives ofthe: Ministry of Finance (probably form the Direction G6nerale de la Coordination Financiere); InstitutNational des Sciences Comptables et de l'Administration des Entreprises (INSCAE); Commission deControle des Banques et Etablissements Financiers (CCBEF); and the primary banking sector. Inaddition, the Project will support the cost of a full time secretary for up to 24 months, as well as thenecessary office furniture, equipment and professional and technical literature up to a total value of USS35,000. The Executing Agency will provide appropriate office space for the Consultant and thesecretary, including a separate telephone line. Furthermore, it will provide resources to meet the costof document reproduction and diffusion, office supplies and all other incidental office expenses.
Work Plan
7. As part of this proposal, the Consultant shall define a general work plan for each of the twocomponents of the assignment, indicating the anticipated approach to carrying out the work and theprovisional timetable for its execution. In preparing the work plan, the Consultant will be expected tomake use of the information gathered during the appraisal mission and copies of the following documentsshould be obtained and studied by the Consultant, prior to making the submission:
- The Staff Appraisal Report;- The Report 'Strengthening the Banking Environment and the framework for Accounting
and Auditing in Madagascar';- The Plan Comptable General Malgache - 1987 and the accompanying Guide Annote;- (details of the relevant Ordonnances, Arrkt&s, Decrets etc. relating to the Ordre and the
exams and admission details, to be added once they have been received by (WB);
Annex 3Page 18 of 23
- Decret No. 89-161 creating the CSC;- Ordonnance No. 88-005 - the Banking Act;- Companies Act of 24 July 1867, as amended;- International Accounting Standards as released by the International Accounting Standards
Committee (IASC);- International Standards on Auditing as issued by the International Auditing Practices
Committee.
Selection of the Consultant will be made partly on the soundness of the work plan, which should berefined as the first task upon arrival in Madagascar and agreed with the Executing Agency.
Outputs
8. The assignment will result in a number deliverables which need to be presented to and approvedas follows:
(a) By the Executing Agency (copied to the World Bank)(i) 3-monthly progress reports;(ii) An execution report at the end of the first 12-month period and the program of
work for the following 12 months;(iii) An end-of assigmment report setting out what has been achieved and what
remains to be done to ensure the continued activities of both the Ordre and theCSC.
(b) by the Conseil de l'Ordre(i) All items identified within the latest regulatory texts as being with in its purview
(it is to be noted that these items also require approval/endorsement by variousgovernment bodies as identified in the texts); of particular importance are: theinernal regulations (Reglement Intdrieur), the auditing standards (bearing in mindthe importance the World Bank places on the adherence to International Standardson Auditing) and the disciplinary process;
(ii) An initial membership list for publication in the Official journal (i.e. after theadmission of new members following application of the 'grandfather' clauses);
(iii) An annual budget and recommendation for funding (e.g. subscription levels).
(c) By the Consei de Ia CoinptabiHtd(i) The organizational structure of the secretariat;(ii) A plan for ensuring general application and regular updating of the PCGM-87
and the Guide Annote throughout Madagascar;(iii) Proposals for the rational use of information available from the accounts in such
areas as the production of national and sectoral economic statistics;(iv) The process of consultation between CSC and the CCBEF on all accounting
matten relating to banks and financial institutions, including the review andapproval of the relating to banks and financial institutions, including the reviewand approval of the NPCB and related Guide Annote and any subsequentmodifications thereto;
(v) The process of consultation between CSC and both the Ordre and thoseeducational institutions which are designated as responsible for providing therequisite technical tuition in accounting and other related subjects up to admissionto membership of the Ordre.
(Me foregoing list is indicative and will need to be refined in the light of both the official texts relatingto the profession and the evolution of the work).
AnnexPage 19 of 23
Rerts
9. Through the assignment, the Consultant will meet regularly with the Executing Agency andsubmit a report on progress being made, problems encountered and the proposed solutions. The timingand frequency of such meetings will be agreed upon with the Executing Agency but should normally beat a minimum of three monthly intervals. At the end of the first 12 months a general report ofachievements will be submitted together with the program of work for the remaining 12 months tocompletion. At completion, the Consultant will submit a full implementation report, together with aprogram for the ongoing activities of both the Ordre and the CSC, including resource needs, subscriptionlevels and other funding sources. Copies of all such reports will be sent to the World Bank.
Oualifications of the Consultant
10. The Consultant selected for this assignment will be a qualified accountant with at least 10 yearspractical experience in the profession, a significant part of which will have been accumulated indeveloping countries, preferably Africa. (S) he will have: a sound knowledge of the workings of anestablished professional accounting body; a good understanding of the French accounting profession; anintimate knowledge of both International Accounting Standards and International Standards on Auditing;a sound knowledge of French accounting practices; and a proven ability to communicate clearly andconcisely both orally and in writing. In addition, the Consultant will be fluent in both written and spokenFrench and will be able to demonstrate a clear ability to organize and oversee the services to be providedby the short term consultants drawn from amongst the local profession and other bodies, in order toensure their sustained commitment to achieving the objectives of the assignment.
Administrative Details of the Assignment
11. The project financing provides for a family saloon car to be purchased for use by the Consultantthroughout the period of the assignment. all other personal logistic arrangements for the implementationof this contract, both prior to arriving and throughout the Consultant's stay in Madagascar, are, however,the responsibility of the latter.
Annex 3Page 20 of 23
UNOFFICIAL TRANSLATION
REPUBLIC OF MADAGASCAR
Draft Terms of Reference for the Provisionof Bank Accounting and Audit Training
These Terms of Reference cover assistance to be provided through the Ministry of Finance (the ExecutingAgency) to the Institute National des Sciences Comptables et de l'Administration des Entreprises -INSCAE (the Implementing Agency) in association with the Centre National de Formation de laProfession Bancaire - CNFPB.
Background
12. The Project's overall objective is to facilitate investment and growth in the productive sectors ofthe country's economy by improving the functioning of the financial system. The project supports keyfinancial institutions and financial markets in Madagascar to enhance public trust therein, thereby enablingthem to mobilize savings to meet the investment financing needs of the private sector. Specifically, theproject aims at: (i) improving the Central Bank's (BCRM) ability to formulate and conduct monetarypolicy; (ii) improving the prudential supervision within the banking sector by strengthening theCommission de Controle des Banques et Etablissement Financiers (CCBEF); and (iii) enforcing theapplication of both auditing standards and standards of accounting and disclosure, which reflectinternational norms.
13. The quality of banks' and financial institutions' accounting and financial disclosure within acountry are important for management, shareholders, the supervisory authority and potential investorsalike. The main weaknesses in this area in Madagascar have historically been the obsolescence of theaccounting framework set by law, the poor quality and availability of records and information on banksand financial institutions generally and a deficiency in their prudential supervision. In the light of theperceived need to strengthen the banking environment, an important element of the overall project, andcontinued in item (iii) above, will be to provide assistance in developing a training program, specificallydirected to banking and other professional personnel who already have a sound basic understanding ofaccounting and financial reporting. The program will be directed to: (i) increasing participants'knowledge and understanding of risk as applicable to banking operations and of the correspondingprudential requirements and ratios necessary to ensure the financial well-being of a banking institution;(ii) expanding their knowledge of the specificities of banks' and financial institutions' accounting and ofreporting financial information; (iii) providing a detailed understanding of the requirements of the newbank chart of accounts (Nouveau Plan Comptable Bancaire - NPCB); and (iv) developing a solidunderstanding of the international accounting and auditing standards specifically applicable to banks andfinancial institutions.
14. INSCAE was set up originally within the context of an IDA-financed project to establish thelegislative and training requirements for the accounting profession in Madagascar. Its ongoing activitiesand development are currently being supported under the Accounting and Management Training Project(Cr. 1661-MAG) and which provides training to students up to accounting technician level only.
15. With effect from February 1, 1991, the primary banking sector in Madagascar, together with theCentral Bank, formally set up its own training establishment called the Centre National de Formation dela Profession Bancaire (CNFPB). Since that time, CNFPB has developed and dispensed part time trainingcourses (including correspondence courses for participants living and working outside Antananarivo) tobanking personnel from basic clerical (brevet d'execution) up to first level supervisor (brevet de maltrise).(Courses are only delivered during the standard academic year). In order to achieve this, CNFPB
Annex 3Page 21 of 23
received some funding from the European Development Fund (EDF) and which was used to fit out andfurnish the offices of the secretariat and provide a certain amount of training equipment and basictechnical documentation.
Objectives
16. It is expected that at the conclusion of this consultancy, INSCAE, in association with CNFPB,will have developed and be able to dispense a broad-based training program, addressing the specific areasset forth above, to personnel in both the primary banking sector and the Central Bank, as well as to thoseresponsible for the regulatory supervision and external audit of banks. Given that a substantial proportionof those expected to participate in such a training program will most likely be based in Antananarivo.Initially, the course will be part time and structured for oral delivery, with accompanying detaileddocumentation for conservation by participants. Should it be deemed appropriate to extend access to thecourse to participants living and working outside Antananarivo, a version by correspondence could bedeveloped subsequently. Such an action is not part of the present assignment. In addition to theforegoing, a process of regular review and updating of the course content will be in place by the end ofthe period of the consultancy. This should ensure that new initiatives and improvements in bankingoperations as well as the comments and suggestions provided by course participants and their employers,are fully considered.
riming and Duration
17. It is expected that the Consultant will spend a total of 6 staff-months on the assignment spreadover a period of 24 months. It is very important that a maximum amount of this time be spent inMadagascar working with INSCAE and those professionals identified to participate in the developmentand delivery of the training program. Furthermore, the Consultant will be expected to consult closelywith the primary banking sector, the Central Bank and the banking sector's regulatory authority orSupervisory Commission (CCBEF); in identifying specific areas where staff understanding of bankingoperations and accounting is particularly weak. Ideally, at least one third of the estimated time shouldbe allocated to initial development of the course, in order that it can be given a trial duiring the academicyear 1994/1995. Thereafter, the Consultant will pay periodic visits to Madagascar to monitorimplementation. Such monitoring will include active participation in the course delivery and making suchmodifications to the course content as may prove necessary. Such active participation by the Consultantwill include sessions with those responsible, in how to improve overall course delivery and monitor anddocument participants' progress.
Additional Resources
18. Working closely with INSCAE, the Consultant will be able to use the former's office promisesand other facilities as well as the secretarial support. The project funding provides some US$8,000 forthe acquisition of technical literature in support of the course. All other expenses, includingtelecommunications, document reproduction and the printing of course material for participants, will beprovided by INSCAE and recouped from the course fees.
Workplan
19. As part of the proposal, the Consultant shall define a general workplan for the assignment,indicating the anticipated approach to developing the course material, the contribution to be expected fromCNFPB, training the trainers and monitoring implementation, as well as the expected timetable forexecution. In preparing the workplan, the Consultant will be expected to obtain and study copies of thefollowing documents prior to submitting proposals:
Annex 3Page 22 of 23
- The Staff Appraisal Report- The Report 'Helping to Strengthen the Banking Environment and Improving the
Framework for Accounting and Auditing in the Republic of Madagascar"- The Nouveau Plan Comptable Bancaire- Ordonnance No. 88-005 - the Banking Act- Copies of recent published accounts of banks- Existing INSCAE and CNFPB banking course material- International Accounting Standards, as released by the International Accounting Standards
Committee (IASC)- 'T-ternational Standards on Auditing, as released by the International Auditing Practices
(.ommittee.
Selection of the Consultant will be made partly on the soundness of the workplan, which should berefined as the first task upon arrival in Madagascar, and agreed with the Executing Agency and theCNFPB.
Outputs
20. The assignment will result in the following deliverables, all of which must be in the Frenchlanguage:
(i) A program of some 30 four-hour courses (one for each week of the academic year) fororal delivery, together with detailed course notes for retention by the participants; thecourses will include periodic test papers to evaluate participants' progress in each of thesubjects covered and the degree of overall competence achieved at the conclusion of theprogram;
(ii) A program of course familiarization for the training personnel;
(iii) At the conclusion of the first year's program of course, an evaluation of its strengths andweaknesses, together with proposals for any revisions to be incorporated in thesubsequent year's program;
(iv) At the conclusion of the assignment, a report setting out what was achieved and outliningthe ongoing process to be in place for reviewing and updating the course program andthe related material.
Items (i) and (ii) will initially be produced in draft form for review with the Executing Agency andINSCAE. They will then be finalized for introduction in time for the 1994/1995 academic year. If, afterdiscussion with the parties concerned, the Consultant deems that limiting the presentation of courses tothe period of the academic year is likely to prove detrimental to effective implementation of the trainingprogram, an alternative timetable should be proposed for adoption.
Oualifications of the Consultant
21. The Consultant selected for this assignment will have a recognized bakling qualification and atleast 10 year's practical banking experience, part of which will, probably, have been spent in a bankinspection and/or internal audit department. Furthermore, (s)he will be fluent in both written and spokenFrench and have significant experience in developing and delivering training courses on bankingoperations, preferable in a French banking environment. A good understanding of internationalaccounting and auditing standards, particularly as they affect banks and financial institutions, will be akey element in the Consultant's ability to develop a program of courses having the appropriate focus onthe primary areas of perceived weakness.
Annex 3Page 23 of 23
Administrative Detalh of the Assiganment
22. The Consultant will be fully responsible for all personal logistical arrangements for theimplementation of this assignment.
Annex 4Page 1 of 5
MADAiASCAR
FINANCIAL INSTITUTIONS DEVELOPMENT TECHNICAL ASSISTANCE PROJECT
BCRM INFORMATICS PROGRAM
1. This annex to the Staff Appraisal Report of the Financial Institutions Development TechnicalAssistance Project for Madagascar describes the informatics program of the BCRM component of theProject.
Present Situation
2. Despite resource constraints, poor supplies of spare parts, the lack of technical assistance, longprocurement lead times and limited training opportunities, BCRM has a relatively high quality computerdepartment, compared to that of other countries at a similar stage of development. Furthermore, amongthe staff of BCRM there is a growing awareness of the usefulness of modern microcomputer technology,and a wish to use this as a base for data processing. However, BCRM has an aging mainframe, forwhich the supplier has discontinued maintenance. This constitutes a significant operational risk to BCRMand consequently the replacement of the mainfrarne is a high priority, not only to ensure that existingoperations continue, but also to facilitate the future development of the Central Bank. Apart for themainframe, BCRM has about 15 microcomputers, of which about half were recently acquired.
Objectives
3. To perform its role as a fully-fledged central bank, BCRM needs to substantially improve itsinstitutional capabilities during the next few years. Specifically, the bank needs to be strengthenedthrough improvements in the areas of accounting, internal audit, open market, treasury and researchoperations.
4. The overall objective of the informatics program, therefore, is to contribute to the developmentof the above capabilities by improving BCRM administration and information systems. While computertechnology will and can be used for this purpose, the emphasis of the role of informatics will be placednot on the technology, but on the institutional improvements that can be achieved through its judicioususe.
5. Specifically, the following objectives will be pursued through the BCRM Informatics Program:
(a) implement and finalize an Information Technology Strategy, in order to establish routinesfor annual planning, to ensure the smooth running of the Information Technology Plan;
(b) strengthen the management and improve the work methods of the Informatics Department(DOI);
(c) improve staff skills to use and manage informatics resources;
Annex 4Page 2 of 5
(d) introduce new management techniques, work methods and modern equipment in a pilotproject; and
(e) install the computer application systems needed by each BCRM department in support oftheir day-to-day operations to support the decision making processes of the bank.
Design Strategy
6. A basic principle of BCRM Informatics Program will be to pace and condition the program toinstitutional readiness to absorb new technology and implement administrative and managerial changes.This strategy recognizes that:
(i) modern computer technology, while flexible and relatively inexpensive, requires orderlyand well informed management in order to yield expected benefits; and
(ii) investments in informatics will only be successful if BCRM improves first itsmanagement and administrative practices, its informatics strategy and its staff skills.
7. Consequently, to build up BCRM capacity to absorb technology inputs planned for a subsequentphase, a preparatory phase (Phase 1) of the program has been designed to pursue the objectives 5 (a) to5 (d) above. Completion of Phase 1 is a critical step in the Informatics Program. Further, technologyinvestments and activities planned for the subsequent phase can only be efficiently implemented if thisfirst phase is successful.
8. Once the preparatory phase is completed, the second phase, the information systemsimplementation phase, will start. This phase will be based on the Information Technology Plan (ITP),which integrates all the informatics requirements of the different departments and functions of BCRM.
Implementation Activities
Phase 1 - Preparatory Phase
9. Phase 1 is targeted to last 6-8 months, starting in the second quarter of 1993, and partiallyfinanced under the Project's PPF. This phase ends with the completion of the Pilot project whichconstitutes the replacement of the outdated mainframe for accounting and personnel systems. Fortechnical reasons, the pilot project must be completed in time for the start of the new fiscal year January1, 1994, as this is the scheduled date for the implementation of the new accounting plan. In early 1994the Information Technology Plan should be finalized, based on the action plans of the various departmentsand functions and taking into account the experiences of the Pilot project. The objectives and expectedoutputs of Phase 1 are outlined in Table I below.
10. To achieve the objectives of Phase 1, the Project will provide the following resources:
(a) Project Assistanc. Of the time allocated under 'Project Management Assistance', somewill be spent on the planning mechanisms and the implementation of the pilot system.
(b) Security. 3 months of technical Assistance in the form of a senior information securityspecialist to develop and implement a security strategy, as well as a security manual.
Annex 4Page 3 of 5
(c) Methods. 2.5 months of technical assistance in the form of a senior informaticsspecialist to produce a systems development manual, and train staff in modern systemdevelopment methods.
(d) Technology. 15 microcomputers and accessories, and 1 microcomputer server, or amini-computer used as server.
Table 1: Objectives and Outputs of Phase I
Objectives Outputs
1. Create an effective mechanism for 1.1 Strategic planning organization inplanning and follow-up: place;
1.2 Annual planning procedureimplemented;
1.3 Training seminars.
2. Formulate and implement a security 2.1 Secuity strategy;strategy: 2.2 Security manual;
2.3 Model for crisis management;2.4 Training seminars.
3. Implement modern systems 3.1 System Development Manual;development methods: 32. Training seminars.
4. Implement the pilot system: 4.1 Implemented pilot system;4.2 Review of strategy and plan;4.3 Reduced risk of hardware failure.
Phase 2 - Information Systems Imniementation
11. Once an adequate Information Technology Plan hu been developed, all further activities willproceed under the guidance of that plan. As priorities are unknown at this stage, only a general outlinethe type of assistance that can be given is attached below:
(a) up to 6 months of technical assistance involving systems analysts/ programmers workingon the additions or modifications to selected software, and on the development ofinformation systems;
(b) training as follows: (i) DOI management courses; (ii) personal computing courses forselect BCRM staff; (iii) microcomputer user support courses; (iv) courses for DOI staffon new data base/programming languages; and (vi) special telecommunications courses;
Page 4 of 5
(c) computers and their operating software as follows: (i) microcomputers and acceuories;(ii) microcomputer servers or small mini-computers;
(b) software licenses to ensure that BCRM owns the latest version of the microcomputersoftware it uses, and that it gets access to proper documentation and technical support.
Implementation Guidelines
12. The following guidelines should be observed during the project implementation:
(a) Project resources need to be matched by adequate BCRM resources if the progrm is tosucceed. In particular, for every month of expatriate consultant time funded by heproject, approximately two months of staff time are needed. This counterpart afon Isneeded both to complete project activities and to obtain effective transfer of todniciskills. While this is clearly within current BCRM staff capacity it will only be possiblethrough careful work planning;
(b) Hardware, application software and technical usistance funds under the program shouldbe mutually fungible to accommodate the strategy and priorities decided upon during theimplementation of the Information Technology Strategy;
(c) Training should be followed within two months by on-the-job application of the subjectslearned;
(d) The functional characteristics and throughput requirements of computer hardware andsoftware needed should be defined during the preparation of the Infomation TechnologyPlan, and submitted as the technical basis of standard bidding documents. Tho biddersshould be allowed to propose the technical sepecifications of the equipmont which wouldmeet these requirements. Care should be exercised in the bid evaluation methodologyto weigh heavily the quality and reliability of after-sale maintenance and technical supportservice in Antananarivo;
(e) Computer equipment should be scheduled for delivery only after utilization plans arecompleted and application software is ready for use. Consequently, application softwareshould be developed in advance of equipment purchass using the computer(s) of DOI.
Annex 4Page 5 of 5
13. The following is an indicative guideline on the contracts in BCRM Informatics program duringphase 1:
Contract No. Amount Description
1. $60,000 Training in SystemsDevelopment Methods
2. $60,000 Support in HardwareAcquisition
3. $60,000 Security
4. 125,000 Pilot systems micro-computer equipments
5. $150,000 Pilot system Applicationsoftware
14. Overall direction of the BCRM informatics program will be exercised by the InformaticsCommittee already established in the BCRM. Senior informatics management experts will be contractedto give 20 months of support during the project.
15. A yearly informatics plan and budget will be prepared as part of the annual planning process, andsubmitted for approval by the BCRM Informatics Committee and the World Bank.
Aknx 5Page I d 3
MDAGASCARFINANCIAL INSTffUT1NS DEVELOPMENT TECHNICAL ASSISTANCE PROJECT
0 2 0 3 0 4[ 1 0 2 0 3 I 4 O 1 0 2 o 3 0 4 O 1 0 2A. BCRM ORGANIZATION
ConsultingAdvisory support to thc general management
B. RESEARCH FUNCTIONS
ConsultingAdviser to the general management -Improve ptblished informationImprove data collection and clasificationStrengthen capa city to formulate monetary policy
Training
C. OPEN MARKET OPERATIONS
ConsultingAastance to improve money market auction operationsAssitanuc to develop reerve requirements U UAs to improve the utilkation of information to perniitbetter liquidity nmg
Training
D. FOREX OPERATIONS
ConsultingActive mgt of forex & supervision of intetbank marketUImprowe forecasting and analsis of foreign currencies
Training
E. EXTERNAL DEBT MNGT.
ConsultingImprove forecastig and anablsis of cxternal debtImprove planning in finaneing public debt m E
Training
1
STRENGHTENING BCRM | I 9 9 3 |1 4|t S| 1 9 9 4
STRENGHTENINGBCRMI O Q 2 3 0 1 01.0-I 2 0 3 O 1,41 010 2 0 ':O 410 2
F. CIRC. OF BANKNOTES
Eq ipmcestS9Z4l euip-t
ConaltiagFosmmN g a1baukne rsqukuineatIotc i note an coin mawem ut1inroft HO and age" cnmmunaiomRem of deqarhibaned on ccange doifi_St lrat rmemity indiamutioa d otesand m:om:
Training
G. ACCOUNTING
ConsultingExternal auditEvaluaion of the ct ingaccountinsg stem-
Axa. to introduc an impnmd accuntiw rstemAdapt dcrt of acootnm A eiointe an am manualAu. to establish a modern azhMn sItm
Training
H. INTERNAL AUDIT
EquipmentA"dit equqinent
ConsultingDefintimon structure 0f the internal audit unitImplemeiiation methods for intenal audit unit
Asa to develop an intnal audit wokplan for 1994
limpiementationof audit progpmm & procedures.Develop tinin progms for staff
Triaiaig
STRENGHTENING BCRM I [ 99S |101
1. INFORMATION SYSTEMS
EquipmentCompute hdware and ftwre -mConsultingFinaize & implemat the Inf. Tachnoly StmtegyDevelop and impemeit an Inf. TechnokU PlanImplemenation ofs trm devlopment method&Implemitation of Secuity Strateg E u -_An in procuemient of hardwareAmL to design and impL the pilot inomfation stutem
Training
J. HUMAN RESOURCES
EquipmcntTftin* equipment
ConsultingImplement an imprmd psonnA policyReviw peasonnel reqmna & tining for re-deployLDefine amining modulca for oocuputional m
Training
L- PROJECT MGNT ASSISTANCE
ConsultingAm to the poj cordinautor odthe BCRM -Training
3
2. STRENGMENING OCBEF | I 3 | I * * | I 9 9 51 9 9 *
2.0 2 E 1 2 2 1 031 Q 2 0 3 0 4 O 1 0
EquipmentCompucr hard and ftwre. -
Vehicuk to ficilitate on site inspection.
ConsultingDeveop taininD progqn for affDevelop and impL the Info. Thhnol Sategy 0
Dewep and Imp1ement Info. Tb onnkUy PanAs in procurment of hardwae
Training
3. IMIPROVING THE ACCOUNTING 1 9 9 3 1 9 9 4 1 9 9 s I 9 9 6
Consultinghdoc hastance on valution audis A placing
Solid bar indicates concentrated asoistance (short- and long- term consulting services and procur-nnt of goods)
Shaded bar indicates non-conc-ntrated assistance (impleognting agency efforts vith occasional training
and ad hoc concultancies).
4
Page 1 of 3
MADAGASCAR
FINANCIAL INSTITUT'ONS DEVELOPMENT TECHICMAL ASSISTANCE PROJECT
Monitorable Actions Under the Project
1993
May 1993: Adoption of new statutes for BCRM
June 1993: Adoption of the new chart of accounts (NPCB) by CCBEFin agreement with banks
July 1993: Recruitment of external advisor for CCBEF
September 1993: Completion of first external audit of BCRM byindependent auditors
September 1993: Recruitment of external advisor for ResearchDepartment, BCRM
September 1993: Recruitment of external consultants for the internal auditand inspection Department of BCRM
October 1993: Completion of annual work plans and budgets forimplementation of Strategic Development Plans forBCRM and CCBEF in 1994
October 1993: Creation of an independent internal audit unit in BCRMand presentation of annual work program for 1994
December 1993: Completion of all staff redeployment and recruitment andother measures necessary to place primary responsibilityfor all bank supervision functions in CCBEF
December 1993: Recruitment of consultant and initiation of work forstrengthening accounting regulatory framework
124
January 1994: Introduction of new uniform chart of accounts for banks
January 1994: Publication by CCBEF of revised prudential supervisorynorms and ratios for commercial banks as required
February 1994: Progress report by Ministry of Finance and BCRM oncompletion of privatization of BTM and BFV
Annex 8Page 2 of 3
April 1994: Initiation of study on training requirements foraccountants and auditors to enable conformity tointernational standards in accounting and auditing ofcommercial banks
June 1994: Publication of first annual report of BCRM with auditedannual accounts
July 1994: Completion of action plans for all departments of BCRMin preparation for second phase of informatics programand implementation of the human resources developmentplan for the different departments of the bank
August 1994: Completion of first round of annual on-site inspectionsof commercial banks
September 1994: Completion of an information plan defining newinformation systems for all BCRM departments andCCBEF and streamlining data requests from all BCRMdepartments and CCBEF to financial and otherinstitutions
October 1994: Completion by BCRM and CCBEF of annual work plansand budgets for implementation of StrategicDevelopment Plans in 1995 and 1996
Other actions to be completed by end-1994:
...... Completion of human resource development action planfor BCRM covering training program for 1994-96 andidentification of new occupational streams
Specification of membership criteria, preparation anddiffusion to members of both internal rules ofprocedures, including ethical standards, and professionalstandards by Ordre des Experts Comptables etComptables Agr6es
Preparation and initiation of a training program forprepare accountants and auditors to ensure accountingand audit practices in commercial banks in conformitywith internationally accepted standards
...... Completion of first phase of informatics program ofBCRM including the pilot project (new accountingsystem)
Annex IPage 3 of 3
* Requirement that all firms auditing commercial banks beapproved by CCBEF for their qualification to undertakenaudits in accordance with international standards,pending the adoption of acceptable national accountingstandards by the Ordre des Experts Comptables
June 1995: Publication of audited annual accounts of all commercialbanks and BCRM presented in accordance with newuniform chart of accounts
Other actions to be completed by end-1995:
...... Procurement and testing of equipment under BCRMinformatics program for priority departments andapplications
...... completion of first one-year program of basic trainingfor selected BCRM staff in different occupationalstreams and training of all senior BCRM managers in atleast one general course in central banking and monetarypolicy
Specification by the Conseil Superieur de la Comptabiliteof local Generally Accepted Accounting Practices
Completion of training of first batch of accountants andauditors in international accounting and audit practicesfor banks
Other actions to be completed by September 199C:
..... Completion of the second phase of the BCRMinformatics program, including procurement of allequipment
1. Project supervision will be carried out in accordance with the supervision plan presented in thefollowing three pages. The expected targets to monitor are presented in Annex 8. The supervision planalso reflects the implementation timetable of key project components shown in Annex 7. A total of eightmissions are foreseen during 1994-96 in addition to the project launch and mid-term implementationreview missions. Bank staff supervision input is expected to be above average during the first fifteenmonths of the project following effectiveness, until just after the mid-term implementation review iscompleted.
2. A mid-term implementation review is foreseen relatively early in the project to ensure that thereis proper co-ordination and synchronization between two project activities which cut across alldepartments of BCRM - the informatics program and the human resources development plan - and theaction plans of individual BCRM departments. Finalization of the action plans of individual BCRMdepartments and the related allocation of project funds among different departments is expected to beagreed upon during mid-term review to enable the major parts of the infornatics program and humanresources development plan to take place during 1995 and 1996. The mid-term review will also be theoccasion to finalize the new organization charts for BCRM and CCBEF, detailing the new functionalresponsibilities and staffing of various departments, based on the implementation of their strategicdevelopment plans (SDPs) during the first year of the project.
3. The implementation of the informatics program represents an especially novel and complexundertaking for BCRM and CCBEF and will therefore merit special attention during all supervisionmissions. The plan for the informatics program presented in Annex 4 will be followed but could bemodified during implementation as dictated by specific needs and capacities of BCRM and CCBEF. Thisis to ensure that the switch from the existing mainframe system to a new information system occurs withminimum disruption to existing data processing functions and that all user departments are adequatelytrained before new information systems are installed.
4. During supervision, there is expected to be close coordination with USAID and the SwissGovernment which are providing parallel financing and with the project management assistance beingfinanced by the Swedish Agency for International Technical and Economic Co-operation (BITS).Representatives of these co-financiers are expected to participate in some or all of the supervisionmissions as well as in the mid-term implementation review. A common project reporting format will beused to monitor progress in all components of the project being financed by IDA and other donors.
Amex 9Page 2 of 5
MADAGASCAR - Financial Institutions Development Technical Assistance Project
September 1993 Project launch mission: (a) Task manager; 7project launch workshop with Accounting andall key departments of BCRM informatics
Project launch and CCBEF and with Ministry specialistsmission of Finance and accounting
profession to comprehensivelyreview all projectimplementation arrangements.(b)Review progress ininformatics and humanresources components;(c)Finalize implementationmanual; (d) Reviewprocurement of computerhardware and software for pilotproject; (e) Review progress instaff recruitment andredeployment for BCRMinternal audit unit and CCBEF;(f) Review evaluation ofexisting BCRM accountingsystem and progress inimplementing new chart ofaccounts in BCRM and banks;(g) Review progress inpreparation of action plans byBCRM departments andCCBEF; (h) Finalize TORs forstudy on training requirementsof accountants and auditors
Page 3 of 5
MADAGASCAR - Financial Institutions Development Technical Assistance Project
Project Supervision Plan
APPROXIMATE KEY MISSION EXPECTED SKILL STAFFDATES OBJECTIVES AND REQUIREMENTS WEEKS
ACTIVITIES
January 1994 Surision m : (a) Task manager; 7Review introduction of new Informatics andchart of accounts in BCRM accounting
1st supervision and banks; (b) Review specialists; Trainingmission completion of measures to specialist
create internal audit unit andcompletely transfer supervisoryfunctions to CCBEF; (c)Review BCRM and CCBEFannual work plans and budgetsfor 1994; (d) Review progressin preparation of first BCRMannual report with auditedaccounts; (e) Review progressin developing BCRM trainingmodules for occupationalstreams; (f) Review completionof pilot informatics project andreplacement of mainframecomputer;
June 1994 Supervision mission: (a) Task manager; 4Review completed action plans Accounting andfor all BCRM departments and informatics
2nd supervision CCBEF; (b) Review plans for specialists; Trainingmission implementation of second specialist
phase of informatics programincluding hardware andsoftware procurement; (c)Review implementation oftraining programs; (d) Reviewpreparation of training programfor qualifying professionals ininternational accounting andaudit practices forbanks/financial institutions
A=2Pop 4 of S
MADAGASCAR - Financial Institutions Development Technical Assistance Proje
Project Supervision Plan
APPROXIMATE KEY MISSION EXPECTED SKILL STAFFDATES OBJECTIVES AND REQIRDEMENTS WEEKS
ACTIVrrTES
September 1994 Mid-term revie: Overall Task manager; 8review of project with InformaticsGovernment, BCRM, CCBEF, specialists;
Mid-term and donors including: (a) Accounting and auditimplementation Review strategic development specialistreview plans of BCRM and CCBEF
and progress inimplementation; (b) Reviewand agreement on detailedwork plans and budgets for1995 and 1996 to implementremaining BCRM and CCBEFinformatics and humanresources plans; (c) Finalizenew organization chart forBCRM based on acceptedaction plans; (d) Reviewcomputer hardware andsoftware procurement plans;(e) Review of CCBEF firstannual program of on-site bankinspections and revision ofsupervisory ratios; (f) reviewprogress in determiningmembership specifications forOrdre des Experts Comptablesand in preparing rules ofprocedure and auditingstandards; and (g) evaluatecompletion of privatization ofBTM and BFV.
January 1995 SuDervision mission: (a) Task manager; 4Review progress of informatics andspecification of Malagasy aconting specialist
3rd supervision Generally Accepted Accountingmission Practices; (b) Review progress
of BCRM and CCBEF trainingprograms; (c) Review progressof computer hardware andsoftware procurement
Annex 2Page 5 of S
MADAGASCAR - Financial Institutions Development Technical Assistance Project
Project Supervision Plan
APPROXIMATE KEY MISSION EXPECTED SKILL STAFFDATES OBJECTIVES AND REQUIREMENTS WEEKS
ACTIVITIESRest of 1995 Two supervision missions Task manager; 12
informatics and4th and 5th accounting specialistssupervisionmissions
1996 Three supervision missions Task manager; 15informatics and
6th, 7th and 8th accounting specialistssupervisionmissions
Annex 1Page I of 3
UNOFFICIAL TRANSLATION
MADAGASCAR
i1NANCIAL INSrTUIONS DEVELOPMENT TECEICAL ASSISTANCE PROJECT
CENTRAL BANK OF THE REPUBLIC OF MADAGASCAR
DRAFT TERMS OF REFERENCE FOR THE COORDINATOROF STRATEGIC PLANNING AND DEVELOPMENT
In pursuit of its key objectives of formulating and executing monetary policy in an economiccontext, the Central Bank of the Malagasy Republic (BCRM) has decided to implement a strategicdevelopment plan (SDP). The SDP is aimed at improving the BCRM's internal operation by strengtheningits organization and its human and material resources.
In this new approach of the BCRM, information technology takes on a more strategic characterand thus calls for a direct exercise of responsibility by management. The position of Coordinator ofPlanning and Strategic Development is created accordingly. This position, whose responsibilities aredescribed below, is designed to make planning and strategic development a permanent function at theBCRM.
Res2gnsibilities
1. The coordinator, carrying at least the rank of director, will report to the management of BCRMon all strategic matters concerning the bank's organization and the use of information technology.In that connection he wIll have the following responsibilities:
- At the request of management or on his own initiative, the formulation of new strategiesconcerning organization and information technology, which wIll be submitted to anddiscussed with the board of directors;
- The finalization, implementation, ongoing development and maintenance of theinformation technology strategy adopted by the bank's management;
- Introduction into the various departments of the proceu whereby the annual developmentof the information technology plan is to be carried out, coordination of those results fromdepartments, and submittal thereof to the board of directors;
- Proposal of the budget allocated to development and information technology, andmonitoring of its implementation;
- Regular monitoring of the implementation of the SDP and the information technologyplan, and submittal of the necessary modifications to the board of directors;
Annex 10Page 2 of 3
- Supervision of the operation and adjustment of the activities carried out.
2. Ia his role of coordinator of strategic matters, he will have to:
- Take the initiative in fostering discussions at different levels on the efficacious use ofinformation technology;
- Supervise and coordinate the BCRM's requests from financial institutions, ministries,etc., in order to prevent duplication of effort outside and within BCRM in an expandedframework of 'data management";
- Facilitate dialogue between the users of information technology and the Direction del'Organisation et de l'Informatique (Organization and Information Technology Office);
- Take part in negotiations with hardware and software providers;
= Follow the technical evolution of information technology practices in Madagascar andabroad.
3. As pt of his responsibility for information technology security, the coordinator will ensureompliance with the bank's information technology strategy by taking appropriate steps as neededto correct any departure from the security regulations.
ROLE IN THE FINANCIAL INSTITUTON DEVELOPMENT PROJECT (PRODIF)
1. 11T Sneral responsibilities described above will go hand-in-band with specific responsibilitiesbt coordinating the implementation of PRODIF, which is designed to further the implementationof 1k SDP;
* Ensure consistency among all the subprojects financed by PRODIF;
- Prepare the project progress reports to IDA;
- Take part in all IDA follow-up or supervision missions;
- Ensure compliance with the rules concerning contracts;
- Ensure the financial monitoring of the project;
* Act as BCRM's main contact with external technical assistance sources in connection withproject management.
Annex 1Page 3 of 3
PROFILE
The importance of this position makes it necessary for the applicant to meet the followingminimum criteria:
At least ten years of experience as a director in the financial sector in Madagascar,preferably in BCRM;
At least five years of experience in project management;
Ability to reconcile the needs of the different information technology users and thetechnical responsibilities of the Direction de l'Organisation et de l'Informatique, basedon knowledge of (i) the core functions of a bank or a financial establishment, preferablyBCRM, and (ii) the technical constraints of information technology;
Ability to present complex matters to management and obtain concrete results pertainingto project coordination and execution;
Ability to bring a comprehensive view of organizational and information technologyproblems to bear on BCRM's overall operation;
Ability to ensure close collaboration among the various BCRM departments in connectionwith the planning of information technology projects.
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