IN THE AMOUNT OF SDR 10.0 MILLION (US$lS.O MILLION EQUIVALENT)

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL FINANCING CREDIT IN THE AMOUNT OF SDR 10.0 MILLION (US$lS.O MILLION EQUIVALENT) TO THE PEOPLE S REPUBLIC OF BANGLADESH FOR A Report No: BD SECOND POVERTY ALLEVIATION MICROFINANCE PROJECT April 29,2007 Finance & Private Sector Development Unit South Asia Region 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.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective April 24, 2007) CurrencyUnit = BDT BDT 1.00 = US$ US$1.OO = BDT FISCAL YEAR July June 3 0 ABBREVIATIONS AND ACRONYMS CAS DCA DTCB FBS FI FMR HDRC IC IDA ISR LOCS MFIs NCB NGOs NMT NS PDO PIP PKSF POS PRSP RNPPO SDR SOE sss Country Assistance Strategy Development Credit Agreement Dhaka Transport Coordination Board Fixed-Budget Financial Intermediary Financial Management Report Human Development Research Centre individual consultant International Development Association Implementation Support Report Lines of Credit Microfinance Institutions National Competitive Bidding Non-Government Organizations Non-Motorized Transport National Shopping Project Development Objectives Project Implementation Plan Palli Karma-Sahayak Foundation Partner Organizations Poverty Reduction Strategy Paper Rehabilitation of Non-motorized Transport Pullers and Poor Owners Special Drawing Rights Statement of Expenses Single source

3 BANGLADESH FOR OFFICIAL USE ONLY SECOND POVERTY ALLEVIATION MICROFINANCE PROJECT TABLE OF CONTENTS PAGE Project Paper Data Sheet......l I. Introduction Background and Rationale for Additional Financing Proposed Changes IV. Consistency with Country Assistance Strategy (CAS)....7 V. Appraisal of Restructured or Scaled-up Project Activities VI. Expected Outcomes VII. Benefits and Risks VIII. Financial Terms and Conditions for the Additional Financing Annex: Withdrawal of the Proceeds of the Credit This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

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5 INTERNATIONAL DEVELOPMENT ASSOCIATION PEOPLE'S REPUBLIC OF BANGLADESH SECOND POVERTY ALLEVIATION MICROFINANCE PROJECT PROJECT PAPER DATA SHEET Date: April 29,2007 Country: Bangladesh Project Name: Second Poverty Alleviation Microfinance Project Project ID: P Borrower: People's Republic of Bangladesh Team Leader: Shamsuddin Ahmad Sector Manager: Simon C. Bell Country Director: Xian Zhu Environmental Category: F FY Current closing date: 06/30/2007 Revised project development objectivedoutcomes [If applicable] The Project Development Objective would remain the same as the original Project. The proposed additional credit would help finance the costs associated with scaling up the Urban Microcredit component of the project to reach a hitherto underserved segment of the urban poor, which are the poor rickshaw-pullers displaced by a ban on Non-Motorized Transport (NMT) in certain Dhaka roads. Does the scaled-up or restructured project trigger any new safeguard policies? No. - c For Additional Financing [I Loan [ XI Credit [I Grant - For Loans/Credits/Grants: Total Bank financing: SDR 10 million (USD 15.0 million equivalent) Proposed terms: Standard'Credit

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7 I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide an additional Credit in an amount of SDR 10 million (US815 million equivalent) to the Peoples Republic of Bangladesh for the Second Poverty Alleviation Microfinance (Microfinance 11) Project (Cr BD). 2. The proposed additional credit would help finance the costs associated with scaling up the Urban Microcredit component of the project to reach a hitherto underserved segment of the urban poor, which are the poor rickshaw-pullers affected by a ban on Non-Motorized Transport (NMT) in certain Dhaka roads. The proposed additional loan will be passed-on by the Government as a grant to the apex microfinance institution called the Palli Karma-Sahayak Foundation (PKSF) for implementation of the expanded activities that will scale up the project s impact and development effectiveness. 3. There will be no change to the Project Development Objectives (PDO), project components, implementation arrangements, and safeguard requirements. The additional funds will be added to two existing components: Mainstream Urban Microcredit and Institutional Strengthening of PKSF, POs and the borrowers. Funds added to the Urban Microcredit component will be used by PKSF to create a revolving fund for financing the microcredit loans of the POs to the target borrowers. Apart from direct microcredit loans, the borrowers will also be provided with training in technical skills to facilitate career change. The funds for institutional strengthening will finance the cost of technical skill training of the borrowers, logistical support to the implementing POs and PKSF and monitoring, evaluation, learning and feedback. 4. It is expected that about 40,500 of the adversely affected NMT pullers and poor rickshaw owners, their family members, those pullers that would like to give up rickshaw-pulling in favor of a new career, and identified poor and vulnerable groups as defined under Microfinance I1 by PKSF would be provided with microcredit and other services by a maximum of 15 POs selected by PKSF. As the NMT ban is extended to other roads in Dhaka more of the affected NMT pullers will be covered under this program at that time. With the help of the microfinancial services offered to the affected NMT pullers, it is expected that they and their families would be able to restore their livelihood at least to the level before the ban came into effect. 5. Partnership arrangements: As with the original project, no other multi- or bi-lateral agencies would be cofinancing the project. The added components will require total financing of US$17.00 million, of which US$l5.0 million is proposed as IDA Credit. The remaining US$2.00 million will be shared between the implementing agency and its selected POs. 11. Background and Rationale for Additional Financing in the amount of $15 million 6. Original Project Design: The Second Poverty Alleviation Microfinance Project (Microfinance II), which was approved in January 2001, for an original credit amount of US$151 million from IDA and another US$30 million from the Government of Bangladesh, became effective in March It was based on the successful implementation of Poverty Alleviation Microfinance Project (Microfinance I), which helped to identify several issues within existing microfinance programs including the need to expand outreach to cover underserved segments of society and for a regulatory framework for MFIs operating in Bangladesh. The original objectives of this project are to continue IDA S support for poverty alleviation through microcredit by: (a) expanding outreach to reach a NMT is defined for the purpose of this document to include all kinds of transport that are not motorized including rickshaws, pushcarts and rickshaw vans. 2

8 greater number of the poor; (b) diversifying microcredit operations to reach the urban poor, and micro-entrepreneurs; (c) providing technical assistance for building sustainable institutional capacity in Bangladesh s apex microcredit wholesaler, PKSF and its partner organizations (POs); and (d) establishing a legal, regulatory and supervisory framework for non-government organizations (NGOs) and microfinance institutions (MFIs) to improve their creditworthiness as well as accelerate their integration with the formal financial market. 7. The Broad objective of continuing IDA S support for poverty alleviation through microcredit will remain unchanged. The specific objectives of the additional funds would be to diversify microcredit operations to reach a new underserved segment of the urban poor and providing them with technical skills so that they can utilize the microcredit for productive gain and improve their livelihood. The additional funds would also continue to build institutional capacity in PKSF, the participating POs and the poor borrowers. 8. The last archived ISR dated June 19, 2006, reported satisfactory achievement of outcome indicators. Three of the four PDO Indicators had surpassed the target while the fourth was close to the target, as follows: a. The target for extension of microcredit to 1.2 million new borrowers has been surpassed as microcredit has been extended to 3.5 million new borrowers of which 90 percent are women. b. The target of reaching 270,000 urban poor has been exceeded as around 335,000 urban poor were given US$2.2 million in microcredit. Under the additional financing, another 40,500 poor NMT pullers and poor rickshaw owners and their families would be targeted for microcredit. c: The target of reaching 19,500 micro enterprises has been exceeded as around 55,000 graduate borrowers have been extended up to US$0.5 million in micro enterprise loans. d. PKSF has kept its recovery rate at percent, just short of the target 98 percent, while its POs maintained their recovery rate at 95 percent in line with the target. PKSF s recovery rate has been lowered by one large PO which is restructuring its activities. PKSF has made full provision for its outstanding loans to that PO. 9. The intermediate outcome indicators also suggest that the project has been consistent with the expectations set out. With regards to strengthening the Internal Audit Cell at PKSF, it has been supported to carry out audits every quarter and in the January - March 2006 quarter, it carried out audits of the microcredit programs of 40 of its POs. In terms of developing POs capacity to monitor program s impact, some support has been provided to the POs to monitor impact on a regular basis. Progress has also been made in formulating a regulatory framework and implementation arrangements as the Microcredit Regulatory Authority Act has been passed in July 2006, and a Microcredit Regulatory Authority has been set up to ensure transparency and accountability in the activities of microfinance institutions. 10. Microfinance I1 is a well-performing project that has been consistently rated as Satisfactory. ISRs were produced regularly at six-monthly intervals, with the last two ISRs created over the most recent 12 months. Based on the progress in disbursing funds and achieving the key performance indicators, the DO and IP ratings have been satisfactory in all the IS& To date there are no unresolved fiduciary, environmental, social, or other safeguard problems with the project. The project, which had an original closing date of June 30, 2005, is currently on its fourth six-month extension up to June 30, The extensions were sought to give more time to PKSF to complete the institutional development activities. It is expected that the additional financing would be disbursed over two years starting from July 1, Hence, a further extension of the closing date to June 30,2009, would be required for the Additional Financing. 3

9 12. Reasons for Additional Financing: Following the Dhaka Transport Coordination Board s (DTCB) ban on non-motorized transport (NMT) in 2004, several thousand NMT pullers were adversely affected. An impact analysis study carried out by the Human Development Research Centre (HDRC) in Dhaka in July 2004 identified about 9,000 rickshaw pullers as being adversely affected by the ban along roughly 9 kilometers of road. The study further stipulated that the net monthly income of NMT pullers along the Mirpur Corridor decreased by about 32%. HDRC later conducted a detailed survey in September 2005 of NMT pullers in Corridor-1 and identified at least 18,846 pullers of whom 97% were already below the poverty line. The survey also found that 98.8% of the pullers expressed an interest to leave the NMT occupation if an alternative is available and 91.4% were of the opinion that micro credit is necessary to change occupations. 13. Based on the recommendation of these studies, the Government requested IDA to scale-up the Urban Microcredit component of Microfinance I1 to extend micro-financial services to the affected NMT pullers and poor rickshaw owners through PKSF and its POs. Given the successful performance of Microfinance 11, additional financing to support a rehabilitation program provides a pertinent solution. This falls in line with the project DOs which emphasize poverty alleviation through microcredit and diversifying microcredit operations to reach the urban poor and micro entrepreneurs. 14. Country Context: Bangladesh is considered the birth-place for microcredit. The successful achievements of Grameen Bank and its founder Professor Muhammad Yunus have been recognized globally and most recently they have been awarded the Nobel Peace Prize. Microcredit has been used successfully as a social assistance program for the poor and is also used to improve access to financial services by the underserved segments of the population. The Additional Financing will target one such underserved segment which are the NMT pullers and poor rickshaw owners whose livelihood have been affected by a ban on NMTs in certain Dhaka roads. 15. Sector Policy: The Bank s policy in this sector is to provide assistance for expansion of microcredit to underserved segments of the population. This includes the urban poor, the hard-core poor, and the micro-entrepreneurs. Such assistance would continue to be implemented through PKSF and its POs and hence the capacity of these institutions would also need to be strengthened further. 16. Foreseen Risk Factors: There are several risks associated with this proposal. First, a number of the affected NMT pullers listed by the survey may not be found in their given addresses. Second, some of them may have shifted to alternative careers and may require different assistance. Third, the loan repayment rate may drop because some of the borrowers may not have used a loan before. Fourth, there is a risk that alternative careers may have environmental effects. Finally, there is a risk of low impact on those that were listed as affected in the survey but have relocated to other parts of the city. Measures to mitigate these risks are discussed in Section VII. 17. Unforeseen Events: An unforeseen event would be the reversal of the ban on NMTs, which is highly unlikely Proposed Changes 18. Keeping the Development Objectives unchanged, the additional funds would increase the scope of the project by providing microcredit services to another 40,500 urban poor NMT pullers in and around the Mirpur Road area of Dhaka city. The disbursements would be made through a revolving fund. The components that would receive the additional financing are as follows: 19. Urban Microcredit: US$12.03 million; and Institutional Development: (a) Capacity Building at Borrowers Level - US$3.05 million; (b) Capacity Building and Logistic Support for POs - US$1.28 4

10 million; (c) Support for Cell at PKSF - US$0.58 million; and (d) Monitoring and Evaluation - USS0.06 million. 20. The institutional arrangements for this project remain the same with the Government of Bangladesh being the borrower and PKSF being the implementing agency with the POs disbursing the funds to the beneficiaries. PKSF will continue to supervise and assist the POs, while continuing with its existing monitoring and auditing functions under Microfinance Financial Management: Under the proposed Additional Financing, a quick assessment of financial management arrangement in PKSF for managing the additional financing as well as determining future actions was carried out. 22. The institutional arrangement in PKSF has provided a sound financial management system for all on-going projects. The core internal controls, accounting, reporting and auditing system have consistently been applied for Bank funded projects. With no PIUs, financial management functions have been managed by existing core staff. 23. PKSF has consistently been complying with all legal covenants of two on-going projects. Audit reports and FMRs have been received timely. There were no substantial audit issues as a result of which most of the audit opinions were unqualified. 24. The following actions are recommended for Additional Financing: Issues Staffing Special Account Reporting Disbursement Audit Incremental Staff Salaries and Operating costs Actions In order to assist the core finance team, which is staffed with permanent employees of PKSF, an additional post of accountant has to be created. This position will be funded from the additional financing and will continue to operate during the extended project life. No separate Special Account has to be opened for the purpose of replenishment and withdrawal of funds. The existing Special Account will be operated to carry out relevant funding activities under the project. In terms of reporting, the present format of FMRs with same periodicity shall continue. The project will be responsible to ensure that FMRs are submitted on a regular basis reflecting fund movement under the project in an accurate fashion. Even though an idea to initiate disbursement on the basis of the FMRs was considered at one point, later the idea was set aside and agreement was made to continue the SOE based withdrawal of funds from Special Account. Annual audit function has to be carried out for the additional funding. Private auditors would be engaged to conduct audit of the financial statements prepared by the finance department. For all types of incremental expenditure including staff salaries, a new category titled Incremental Staff Salaries and Operating Costs would be used. Status Agreed Agreed Agreed Agreed Agreed Agreed 5

11 Issues Review of Project Actions IDA is contemplating a thorough review of the proposed activities under the extended project. This review would evaluate the past performance under the project and assess the benefits which may be derived from the proposed future engagement. This would be done in December 2008, six months prior to Credit closing date. Alternatively an annual audit report, which may include management letter after conducting due diligence audit, may suffice. Status Agreed. 25. Disbursements will be handled under traditional procedures, with IDA requiring full documentation for prior review for those cases where contracts exceed the equivalent of (a) US$lOO,OOO for goods; (b) US$lOO,OOO for services contracts with firms; and (c) US$50,000 for individuals. Expenditures below the above thresholds and all expenditures under microcredit would be claimed on SOEs. 26. Procurement: A quick assessment of procurement arrangements for the Additional Financing under this project was carried out. 27. PKSF has decided to set up a separate cell for Rehabilitation of Non-motorized transport Pullers and Poor Owners, called the RNPPO cell, to implement the additional financing components. The additional financing directly tit in Part B (Urban Microcredit) and Part E (Institutional Development) under Schedule 2 of the DCA of this project. The procurement arrangements as agreed under Schedule 1 of the Project Agreement dated January 30, 2001, between IDA and PKSF will govern in the additional financing period between July 1,2007 and June 30, PKSF submitted a procurement and selection plan on November 2006 that covers procurement of goods (logistic support for implementing POs and RNPPO Cell) and services (capacity building of micro-credit borrowers, POs, PKSF support staff) under the additional financing. The following table summarizes issues related to procurement that is agreed with PKSF for additional financing. Components to be financed by IDA Micro-Credit Component (US$10.83 million equivalent) Procurement of Goods (logistic support to POs and setting up of RNPPO Cell, US$O. 18 million equivalent) Description The project will provide training and channel microcredit to identified affected NMT pullers and poor owners. Selected POs will ensure that the procurement is economic and efficient, following established commercial practices. PKSF will closely supervise and monitor the POs and implementation of agreed policy instruments to ensure that the microcredit is used for the intended purpose. The goods for POs comprise of 30 sets of computer and accessories, 30 motorcycles and 210 bicycles, totaling US$90,000. Support for setting RNPPO cell consists of procurement of office appliances (furniture, photocopier, cell phones, digital camera, video camera, computers and accessories) and procurement of 5 motorcycles and one 4WD Jeep, totaling US$90,000. Except the 4WD vehicle (US$43,000) which will be procured following National Competitive Bidding (NCB), all other packages will follow National Shopping (NS) procedures. The single NCB contract is subject to prior review by IDA and the remaining packages will be postreviewed. Under the existing PA aggregate NS threshold is at US$160,000, this should be increased to US$300,000 to accommodate the goods under the additional financing. 6

12 Components to be I financed by IDA Procurement of Services (Training for beneficiaries, PO staff and RNPPO Cell staff, US$3.22 million) Incremental Staff Salaries and Operating Cost (US$0.77 million equivalent) Procurement Capacity of PKSF Description There are a total of 21 service packages including training on social issues, skill development business development and refresher training for beneficiaries to be given by POs (US$3.05 million), training for PO staff on accounting, credit management and TOT on social issues (US$1 1,000) training PKSF staff including RNPPO Cell on project monitoring, evaluation, international training and study visits (US$79,000) and other services like RNPPO training need assessment, project evaluation, printed media, workshops and publications (US$80,000). The largest assignment is only about US$22,000 and consultants will be selected following fixedbudget (FBS), single source (SSS) and individual consultant (IC) selection I procedures. All service contracts are subject to post-review. I This includes salary and benefits for PO staff (US$0.56 million), supervision by POs of their branch offices (US$O.l 1 million), salary of PKSF s-rnppo staff (US$80,000) and other operating expenses (US$20,000). Existing staff from PKSF s Finance & Accounts and Administration has been successfully conducting procurement activities under this credit and the same team will continue to function for the additional financing period till credit closing date. I IV. Consistency with Country Assistance Strategy (CAS) 29. The Country Assistance Strategy for Bangladesh is aligned with the Government s PRSP, with governance as the core focus across two pillars: (i) improving the investment climate and (ii) empowering the poor. The additional financing being requested for assisting the NMT pullers directly falls in place with the second strategic pillar mentioned in the CAS. A key initiative of the CAS with regard to empowering the poor is to provide them with the infrastructural basis to hold service providers accountable and to allow local governments to respond to community priorities. The additional financing for this project specifically addresses this aspect of the CAS agenda. V. Appraisal of Restructured or Scaled-up Project Activities 30. PKSF has prepared a Project Implementation Plan (PIP) which provides details on the implementation arrangements and the costs of the scaled up project activities. Important aspects of project design under the Original Project have been maintained under the additional financing. PKSF will set up a small Cell headed by a Project Coordinator and comprising Training and Development Specialist, one Research Officer, two Monitoring Officers, two Training Officers, an Accountant, an Office Assistant, and a driver. The operating expenses of the Cell, the salary of these additional staff, furniture and equipment, workshop and studies, and staff training will be financed by IDA funds during the first two years of the project. Subsequently, PKSF will absorb these costs under their annual budget starting from the third year. 31. The total cost of US$17.00 million will be financed by IDA funds of US$l5.00 million, which the Government has agreed to pass on to PKSF as a grant, and around US$2.00 million of PKSF s and POs own funds. Of this amount, US$12.03 million will be used for creating a revolving fund for microcredit with IDA contribution of US$10.83 million and PKSF contributing US$1.20 million. The balance US$4.97 million will be used for Capacity Building of the borrowers, POs and 7

13 PKSF, including their staff, project coordination and management and Monitoring and Evaluation, with IDA contribution of US$4.17 million and PKSF and POs contributing US$0.80 million. 32. Microcredit to the identified borrowers will be provided from the revolving fund under the terms and conditions of the Original Project. Thus, PKSF will on lend the revolving fund to the eligible POs at 4.5 percent declining balance rate to be repaid in ten equal quarterly installments after a 6 months grace period. The POs, in turn, will extend the microcredit loans to the organized borrowers at maximum 12.5 percent flat rate to be repaid in one year. The margins generated under this interest rate structure will not be sufficient for the POs, at the start of the project, to cover their administrative costs, the risks of default and an expected surplus to build the POs capital base. Therefore, the Capacity Building component will provide funds to each PO for meeting a part of the expenses incurred for supervision and administrative purposes in implementing the project. The POs will be reimbursed up to 65 percent and 50 percent of the estimated supervision costs in the first and second year of operations. Thereafter, the POs will be able to bear the entire cost from the third year of operations based on their expanded scale of activities. There is no risk of the subsidy continuing beyond the second year, and the POs will continue to serve this market niche using the revolving fund created at PKSF from the IDA funds. Moreover, project funds would also be used to provide training to the staff of these POs. 33. The selection of the POs will be made by PKSF and guided by the Eligibility Criteria for FIs in OP The eligibility criteria for POs will include the following: i. 11. iii. iv. V. vi. vii. Have interest to work with identified NMT pullers and poor owners (Le. a person owning a maximum of two NMTs and comes from lower income group will be considered as poor owners); Have existing program(s) in the Dhaka city (however may or may not have microcredit program in Dhaka city); Have good track record with PKSF and have a demonstrated experience of ensuring proper utilization of loan money maintaining a high rate of recovery on a continuous basis at both PKSF and grassroots levels; Have potentiality, sufficient skill and organizational strength to organize identified NMT pullers and poor owners and to extend training and financial services to them; Have financial capabilities to cross subsidize additional expenses for the project, if needed; Have capabilities to establish a separate cell with trained and experienced staff to run the project with effective organizational network; and Have the capacity to carry out regular Monitoring and Evaluation. 34. As the lines of credit (LOCs) are for small borrowers with loan sizes not exceeding Tk 50,000 distortions in the exchange rate, inflation level, fiscal position and financial sector have little effect on the viability of their business, which would include small trading shops, small manufacturing including handicrafts, and some services. Moreover, there are no macroeconomic and sectoral framework issues that will have an impact on the LOCs. Priority will be given to building the capabilities of the POs, including the reimbursement of incremental staff salaries and operating costs. Given that the target borrowers had not, in most cases, received microcredit before, the POs will be responsible for providing general orientation training with emphasis on group activities, discipline, savings and microcredit to the potential borrowers before disbursing the first loan. 35. One of the main focuses of this project is to impart training to the poor borrowers. Four kinds of training will be financed, such as: general orientation and social issues training; skill development training; training on business development services; and refreshers and re-training. 36. In addition to the general benefits of microcredit, this project will accrue further social benefits by providing the redundant rickshaw-pullers and their families an alternative livelihood, and keeping them away from anti-social activities. 8

14 37. PKSF has developed satisfactory environmental and social policy and guidelines which will be applicable to this project. No new safeguard policies will be triggered by this additional financing project. 38. The project will comply with OP 8.30 and will be guided by the Guidance Notes on Lines of Credit in Bank Operations. VI. Expected Outcomes 39. It is expected that each PO will cover on an average 2,700 identified affected NMT pullers and poor owners for a total of 40,500 members of which 16,200 borrowers will be given microcredit in the first year and 21,870 borrowers in the second year of operations, considering 94% borrower coverage. PKSF will perform regular supervision and monitoring of the project using its existing setup. The agreed outcome indicators are as follows: a. b. C. d. e. f. Cumulative loan recovery rate maintained at 98% Microcredit amounting to US$3.87 million disbursed in the first year to 16,200 borrowers and US$8.16 million in the second year to an additional 24,300 new borrowers and 16,200 returning borrowers. Borrowers occupation changed within two-year cycle. 100% of borrowers begin personal savings. Income of at least 80% of borrowers enhanced Quality and awareness of members in health, family planning and education matters increased. 40. It is expected that the achievement of these targets and establishment of a rehabilitation program will provide a microfinance solution to NMT pullers that are displaced from other Dhaka streets. VII. Benefits and Risks 41. As it stands the project has limited risks associated with it in terms of environmental factors and PKSF has an assessment scheme by which it is able to minimize this. Because the project is essentially an urban microcredit project, the risks associated relate mostly to loan repayment and eviction risks. Additionally, there is a risk of low impact on those who were listed as affected by NMT conversion in the original DTCB surveys because they may have relocated to other parts of the city. Finally, there exists a risk that NMT pullers will utilize the microcredit to purchase their own rickshaw which would work against the ideal of the project of assisting NMT pullers to shift into other professions. 42. The loan repayment risk is mitigated through PO assessment of beneficiaries at the early stages of the program, along with provision of training in social and technical skills along with business services and refreshers programs. The emphasis on promoting a successful career change and the use of group microcredit will reduce the risk of borrowers defaulting. Additionally, suggested loan sizes will be based on borrower preferences and their own risk assessments. The selection of POs with expertise in microcredit and other services in Dhaka city will also significantly reduce the risk by effective screening of borrowers and provision of support. 43. The risk of a low impact on the originally surveyed will be controlled through carrying out a thorough resurveying of the project area at the beginning of the program; as this project will be an 9

15 ongoing program of PKSF and the POs and the overall objective is to promote effective career changes in NMT pullers and owners, the overall impact will be high. Additionally, identified poor and vulnerable groups as defined under Microfinance I1 by PKSF living in the project area can also join this program. 44. During beneficiary selection, PO assessment will take into consideration the risk of pullers buying rickshaws. POs will emphasize the goals of the project and assist beneficiaries in obtaining training and employment in other professions. 45. Unforeseen funding risks may also arise in the project, which can raise the financial needs of certain components. To balance this risk, PKSF and the POs will act accordingly communicating these changes as they come about. PKSF also has an overall Contingency Fund for all its active projects, from which it can allocate additional financial support if necessary. VIII. Financial Terms and Conditions for the Additional Financing 46. Bangladesh is eligible for IDA financing. Accordingly, the Additional Financing will take the form of an IDA Credit, with standard terms of 10 years grace and 40 year maturity. Dhaka, April 24,

16 Annex Withdrawal of the Proceeds of the Credit The table below sets forth the Categories of items to be financed out of the Credit proceeds, the allocation of the amounts of the Credit to each category and the percentage of expenditures for items to be financed in such Category: Category Allocated Reallocated Allocated % of Expenditures to be Financed (1) Microcredit (2) Goods (3) Consultants services, Training and Study Tours (4) Unallocated (5) Incremental Staff Salaries and operating Costs TOTAL Equivalent) I Equivalent) I 102,630,000 I 116,950,000 I 7,220, ,100,000 I 600,000 2,820, ,000 (US$10.83 million) 120,000 (US$O. 18 million) 11,750, ,000 (US$0.77 million) 118,300, ,300,000 Equivalent) 2,150,000 (US$3.22 million) 10,000,000 (US$l5 million) 90% 100% of foreign expenditures, 100% of local expenditures(e x-factory cost) and 70% of local expenditures for other items procured locally 100% 65% in FY08, and 50% in FY09 11

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