IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-48270) ON A LOAN IN THE AMOUNT OF US$150 MILLION UKRAINE FOR THE

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-48270) ON A LOAN IN THE AMOUNT OF US$150 MILLION TO UKRAINE FOR THE ACCESS TO FINANCIAL SERVICES PROJECT JUNE 22, 2010 Private and Financial Sector Development Department ECCU2 Unit Europe and Central Asia Region

2 APL AFSP BSMC CAS CPS DPL ECSSD ECSPF EDP FDI FIL FM FMR GDP ICR ISR IT/MIS MoF NBFI NBU NPL OM PAD PDO PB PMU PPF QER RSME SCRFSM SCSSM SLA SME SMI SNG TA TOR UAH CURRENCY EQUIVALENTS Currency Unit = Ukrainian Hryvnia (UAH) Exchange Rate at ICR, April 12, 2010 US$1= UAH Exchange Rate at Appraisal, February 8, 2006 US$1= UAH 5.05 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS Adaptable Program Loan Access to Financial Services Project Bank Selection and Monitoring Commission Country Assistance Strategy Country Partnership Strategy Development Policy Loan ECA Environmentally and Socially Sustainable Development Unit ECA Private and Financial Sector Development Unit Export Development Project Foreign Direct Investment Financial Intermediary Loans Financial Management Financial Management Report Gross Domestic Product Implementation Completion and Results Report Implementation Status Report Information Technology/Management Information Systems Ministry of Finance Non-Bank Financial Institutions National Bank of Ukraine Non Performing Loan Operations Manual Project Appraisal Document Project Development Objective Participating Bank Project Management Unit Project Preparation Facility Quality Enhancement Review Rural and Small and Medium-Size Enterprises State Commission for Regulation of Financial Services Markets State Commission for Securities and Stock Market Subsidiary Loan Agreement Small and Medium-Size Enterprises State Mortgage Institution Sub-national Government Technical Assistance Terms of Reference Ukrainian Hryvnia (currency) At ICR Time Vice President: Philippe H. Le Houerou Country Director: Martin Raiser Sector Manager: Lalit Raina Project Team Leader: Alexander Pankov ICR Team Leader: Marius Vismantas ICR Primary Author: Vinod K. Goel At Project Approval Shigeo Katsu Paul G. Bermingham Gerardo Corrochano Hormoz Aghdaey

3 UKRAINE Access to Financial Services Project CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph A. Basic Information... i B. Key Dates... i C. Ratings Summary... i D. Sector and Theme Codes... E. Bank Staff... F. Results Framework Analysis... G. Ratings of Project Performance in ISRs... H. Restructuring (if any)... I. Disbursement Profile Project Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3. Economic and Financial Analysis Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. Beneficiary Survey Results Annex 6. Stakeholder Workshop Report and Results Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 8. Comments of Co-financiers and Other Partners/Stakeholders Annex 9. Financial Performance of Participating Banks Annex 10. Distribution of Loans by Region, Sector, and Loan & RSME Size Annex 11. List of Supporting Documents MAP... 38

4 A. Basic Information Country: Ukraine Project Name: Access to Financial Services Project Project ID: P L/C/TF Number(s): IBRD ICR Date: 08/16/2010 ICR Type: Core ICR Lending Instrument: APL Borrower: UKRAINE Original Total Commitment: USD 150.0M Disbursed Amount: USD 17.4M Revised Amount: USD 17.4M Environmental Category: F Implementing Agencies: Ministry of Finance Ministry of Finance Cofinanciers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 06/06/2002 Effectiveness: 07/12/ /12/2007 Appraisal: 01/31/2006 Restructuring(s): Approval: 06/22/2006 Mid-term Review: 04/30/2009 Closing: 06/30/ /30/2010 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Unsatisfactory High Moderately Unsatisfactory Moderately Unsatisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Unsatisfactory Government: Moderately Satisfactory Quality of Supervision: Satisfactory Implementing Moderately Agency/Agencies: Unsatisfactory Overall Bank Performance: Moderately Unsatisfactory Overall Borrower Performance: Moderately Unsatisfactory i

5 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project No at any time (Yes/No): Problem Project at any No time (Yes/No): DO rating before Closing/Inactive status: Moderately Unsatisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Banking Central government administration 1 1 Non-compulsory pensions, insurance and contractual savings 1 1 Sub-national government administration 3 3 Theme Code (as % of total Bank financing) Regulation and competition policy Rural markets Small and medium enterprise support E. Bank Staff Positions At ICR At Approval Vice President: Philippe H. Le Houerou Shigeo Katsu Country Director: Martin Raiser Paul G. Bermingham Sector Manager: Lalit Raina Gerardo M. Corrochano Project Team Leader: Marius Vismantas Hormoz Aghdaey ICR Team Leader: Marius Vismantas ICR Primary Author: Vinod K. Goel F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The objective of the APL program is to help increase the contribution of financial markets to economic growth through the prov ision of limited long term finance for rural small and medium enterprises (RSMEs); and institu tional development finance that can ii

6 play a catalyst ro le in develop ment of skills, s ervices and re spective marke t infrastructure. This project (APL1) aim s to increase access to financial services in rural areas, specifically for RSMEs. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Indicator 1 : Percentage increase in the number of RSME clients of PBs Value quantitative or Qualitative) 4,500 10,000 Date achieved 12/31/ /30/2010 Comments (incl. % achievement) Actual Value Achieved at Completion or Target Years (b) Intermediate Outcome Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1 : Increase in total volume of longer-term finance extended by PBs to RSMEs Value (quantitative or Qualitative) US$450 million US$825 million Date achieved 12/31/ /30/2010 Comments (incl. % achievement) Indicator 2 : Legislation for new financial services introduced Value 8 (one per year (quantitative on) or Qualitative) Date achieved 12/30/ /30/2010 Comments (incl. % achievement) iii

7 G. Ratings of Project Performance in ISRs No. Actual Date ISR DO IP Disbursements Archived (USD millions) 1 04/28/2007 Satisfactory Satisfactory /27/2007 Unsatisfactory Unsatisfactory /14/2008 Unsatisfactory Moderately Unsatisfactory /30/2009 Moderately Unsatisfactory Moderately Unsatisfactory H. Restructuring (if any) Not Applicable I. Disbursement Profile iv

8 1.1 Context at Appraisal 1. Project Context, Development Objectives and Design Country and Sector Background. Ukraine enjoyed a high GDP growth of 50 percent from 1999 through At 12.1 percent in 2004, GDP growth was the highest in Europe. About 5.6 million people were employed in the agricultural sector, representing almost 20 percent of the labor force. Agricultural production was contributing to nearly 12 percent of GDP. Almost 60 percent of agricultural production was attributed to households, and the remaining 40 percent was being produced by the agricultural enterprises. The small and medium enterprises (SMEs with employees) were contributing significantly to employment and GDP, and provided the only employment and income source to many poor households. The share of the SME sector in GDP was only 8 percent at the time of appraisal, but it employed 21 percent of the labor force. Attention to their development was therefore essential for economic growth and poverty reduction. At the lower end of the SME sector was a mixture of the self-employed and micro enterprises, with less than 10 employees. A significant proportion of these enterprises were found in the informal sector. The 2002 reform of state collective farms resulted in the reorganization and/or liquidation of almost 15,000 large public agricultural production enterprises and led to the creation of about 45,000 new farmer enterprises as well as the growth of rural SMEs. Many of these new enterprises required significant funding to purchase production equipment and replace obsolete machinery. Overall limited access to credit of the newly established enterprises had significantly hampered the performance and growth of the rural SMEs. As agriculture and the rural economy made up a significant proportion of GDP, addressing the impediments to the growth of the sector was high on the Government s reform agenda. The rural economy was largely underdeveloped and suffered from limited access to finance, obsolete technologies, underdeveloped infrastructure as well as declining or aging population. Despite serious efforts of the Government in creating modern legislation and enabling business environment, significant constraints to the development of the private sector remained. The growth had been concentrated in large financial-industrial groups that were able to take advantage of growth opportunities in the domestic and export markets due to their integration with the banking sector. In contrast, the rural, and small and medium enterprises (RSMEs) had limited access to credit, restricting the extent to which they could contribute to GDP growth and benefit from increasing business opportunities domestically or in foreign markets. Similarly, sub-national governments (SNGs), including utilities, had limited access to long-term finance to meet their capital investment needs. Only the largest cities had at that time been able to attract longer term finance from issuing municipal bonds while other local governments were constrained by the deficient legal framework and limited skills in the area of financial planning and project management. This situation hindered the ability of the central government to decentralize important parts of local public service delivery. Furthermore, the lack of access to financial services limited the provision and coverage of local services that SNGs provide, since they were unable to finance the capital costs required to upgrade or expand infrastructure networks. The financial sector of Ukraine had developed significantly over the several years prior to the appraisal time, with total assets reaching nearly 55 percent of GDP by the end of However, the quality, variety and accessibility of the financial services, especially in rural areas, were still 1

9 inadequate. The financial sector was dominated by banks (which accounted for over 85 percent of the sector s total assets). Non-bank financial institutions (NBFIs) were seriously underdeveloped. The insurance industry, the largest segment of the NBFI market, has been growing rapidly. Gross premium income was about 4 percent of GDP in Pension funds, credit unions, leasing and factoring companies were negligible, with their assets accounting for less than 1 percent of GDP. The securities market was shallow, illiquid and non-transparent. Rationale for Bank Assistance. The Bank was well positioned to add value in supporting the Ukraine authorities in the development and implementation of the program, including providing technical assistance and advice on a broad range of policy issues relating to the financial sector in general, as well as access to finance for RSMEs and SNGs. Throughout the period of , the Bank had played an important role in supporting the Government s priorities in these areas. In addition to lending operations and economic and sector work, the Bank had an active policy dialogue supporting, inter alia, Ukraine s efforts to strengthen banking supervision, bank restructuring and financial market development. As part of project preparation, the Bank had helped the Government develop its vision to increase access to credit markets by RSMEs and SNGs, identify benchmarks and milestones to reach the intended objectives, and obtain the required technical assistance either directly or through grants from donors. The project was consistent with the Country Assistance Strategy (CAS) for , and the CAS Progress Report (June 13, 2005). The CAS supported the aspirations of Ukraine to join the European Union by continuing to facilitate institutional developments that were expected to lead to a business-friendly environment and a more inclusive and responsive government. The CAS was built around seven broad objectives, including three relating to the proposed project: (a) sustainable economic growth, with particular emphasis on the environment for private sector development; (b) poverty reduction and strengthening of the middle class; and (c) reducing regional imbalances. The Access to Financial Services Project (AFSP) was expected contribute to each of these objectives by jump-starting RSMEs and SNGs access to credit markets. This in turn was hoped to lead, in the medium term, to employment generation and hence poverty reduction. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) The AFSP was the first phase of a planned vertical Adaptable Program Loan (APL) series. The objective of the APL program (potentially totaling US$300 million) was to help increase the contribution of financial markets to economic growth through the provision of limited longer term finance for RSMEs and institutional development finance that can play a catalyst role in development of skills, services and respective market infrastructure of rural finance market. Depending upon the outcome of the APL1, the APL2 would have built upon the institutional development of AFSP (APL1). Consequently, it was expected that APL2 would maintain a credit line component, with the participation of a broader scope of financial intermediaries (such as credit unions and leasing companies) and more extensive lending to SNGs. It would have focused mainly on second generation financial sector issues, including risk-based financial sector supervision (e.g., Basle II) and credit scoring systems to further facilitate RSMEs access to credit, development of sophisticated risk management instruments for the productive sector. The Project Development Objective (PDO) of the AFSP was to increase access to financial services in rural areas, specifically for RSMEs. The Project designed the following key indicators: 2

10 increase in the number of RSME clients of the participating banks (PBs), increase in the volume of longer term finance extended by the PBs to RSMEs, and legislation enacted related to new financial services and improved infrastructure, and legislation to support financial services. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification The PDO did not change during the project implementation. 1.4 Main Beneficiaries The main beneficiaries of the AFSP were RSMEs, PBs, SNGs, and the overall financial sector. The RSMEs was to benefit from the provision of medium- and long-term working capital and investment finance to make productive investments and thereby facilitate improvement in their performance and growth. The SNGs were to benefit by having access to long term credit to finance their investments in infrastructure and services, and thereby were expected to facilitate improvement in their finances and service delivery (lending to SNGs was contingent on having proper legislative framework in place). The participating banks were to benefit from access to long-term funding to help them expand their business in term lending, especially in rural areas. The PBs were also expected to get access to technical assistance (TA) funding to improve their institutional capabilities. The financial sector was to benefit from the TA (consulting services and information technology/management information systems- IT/MIS) in support of institutional development as well as training of the Ministry of Finance (MoF) and selected beneficiary institutions to address the legislative and institutional constraints. The ultimate objective was to strengthen and improve the ability of the financial sector to provide medium- and long-term financial resources to the enterprise sector. 1.5 Original Components (as approved) The Project, a US$150 million Variable Spread Loan with a maturity of 20 years including 5 years grace on annuity basis of repayment, consisted of three components: Component A: Access to Finance (US$140 million) with two sub-components: (A1) Line of Credit (US$125 million) to be on-lent by the Ministry of Finance through eligible commercial banks (PBs) to provide long-term sub-loans (for investments, working capital or financial leases) through to eligible RSMEs, agricultural enterprises and SNGs. (Three PBs - Privat Bank, Nadra Bank and Kreditprombank - were pre-selected based on agreed criteria.) Eligible RSMEs and agricultural enterprises were expected to be private sector legal entities, as well as micro-enterprises and entrepreneurs. The maximum size of sub-loans for RSMEs and agricultural enterprises was limited to US$1.5 million for investment and US$300,000 for working capital; for micro sub-loans the limit was UAH 250,000 (about $50,000 at the exchange rate of the time). Lending to SNGs, on a pilot basis, was to be considered, if satisfactory legislation on the SNG borrowing and guarantees was put in place during project implementation. (A2) Institutional Development for Participating Banks (US$15 million) to finance PBs institutional development and IT upgrading needs. PBs were to have the option of shifting all or 3

11 part of this allocation to the line of credit, should they decide during implementation that they prefer to use their own funds for their institutional/it development needs. Component B: Enabling Environment for Financial Intermediation (US$8.025 million) to finance institutional development (consulting services and IT/MIS) as well as training of the MoF and selected beneficiary institutions (including the State Commission for Regulation of Financial Services Markets (SCRFSM), State Commission for Securities and Stock Market (SCCSM), State Mortgage Institution (SMI), Credit Bureau, etc.) to address the legislative and institutional constraints which were impeding the expansion of financial intermediation, through the strengthening of the regulatory capacity and financial market legislation; enhancing financial sector and credit market infrastructure and improving the framework for borrowing by SNGs. Component C: Project Management and Monitoring (US$1.6 million) to finance the PMU staffing and MoF incremental expenditures for project implementation, monitoring and evaluation, as well as annual audit of the Project accounts. 1.6 Revised Components No Change 1.7 Other significant changes The Project had a long history of problems and difficulties. The Project was initiated in 2000 (the Concept Review meeting took place on June 6, 2002). From the start of the preparation process, the Project suffered from multiple delays due to many changes in the project design and implementation arrangements. This included a decision made, for country programming reasons, during the Quality Enhancement Review (QER) meeting in February 2005, to combine the proposed Access to Finance for RSMEs project, and the proposed Municipal Finance project (for SNGs) under one umbrella. This resulted in putting two very different clients in the same basket; also, the project changed sectors moving from the ECSSD to the ECSPF Department. After prolonged preparation period the Project was approved by the Board on June 22, 2006 and the Loan Agreement was signed on June 23, The situation was exacerbated by volatile political situation in Ukraine with frequent changes of government counterparts. The deadline for the effectiveness was extended six times as the Borrower was having difficulty to comply with the conditions of effectiveness (including dealing with the Project specific conditions by the MoF). The long delays in effectiveness were related to the generally slow government procedures for processing loans and political reasons in Ukraine. As a result, the Project was classified by the Bank as a problem project even before it became effective. The Loan became effective on July 12, 2007 a full year after Board approval. During most of the preparation period, the Borrower had access to the Project Preparation Facility (PPF, US$1.822 million, Letter-Agreement No. P UA) as well as some other sources of funding (including Japanese PHRD Grants TF025816, TF and PPF P04050); some of these funds were utilized for the preparation of the Rural Finance Project and the Municipal Finance Project, which were subsequently merged as AFSP. The Project also went through some changes during implementation (some with formal amendments to the Loan Agreement). The changes included (i) in order to improve project implementation, in April 2007, the responsibility for the technical aspects of the credit line component was transferred from the MoF to the National Bank of Ukraine (NBU); (ii) in November 2007, the responsibility for holding the Special Account was assigned to the (NBU); and (ii) in response to the increase in prices since project appraisal, in October 2008, the commercial practices threshold for procurement was increased from US$2 million to US$3 4

12 million, and maximum RSMEs sub-loan size for investments was increased from US$1.5 million to US$2 million and for working capital from US$0.3 million to US$0.5 million. The Project disbursed only US$ million before it was cancelled in October 2009 (see Table 1 and section 2.2). Table 1 Details of Loan Utilization (US$ million) Original Amount Amount Used Percentage Component A A1. Line of credit A2. TA for PBs Component B. TA for Financial Sector Component C. Project Management, etc Project Preparation Facility Advance a Front End Fees TOTAL a During Appraisal, Project Preparation Facility was included in Components B and C. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry The project s preparation, design, and quality at entry were based on the following: (i) Consistency with Bank and Government priorities. The project s design to fill the gap for RSMEs in accessing credit facilities fitted closely the CAS objectives of sustainable economic growth, poverty reduction and reducing regional imbalances. The Project supported the Government s reform agenda for addressing the impediments to the growth of the agriculture and the rural economy and improving the financial sector. (ii) Incorporation of lessons learned in the other projects. Important lessons incorporated in the Project were (i) project design should be kept flexible with minimum statutory requirements; (ii) use sensible financial indicators for the selection of the PBs in line with established market practices; (iii) avoid restrictive procurement requirements unsuitable for private sector borrowers, proven to be a hindrance to expeditious project implementation; and (iv) pre-commit PBs to borrowing a certain part of a credit line as an incentive to be quick and effective in finding and financing eligible sub-projects, thus leading to quicker disbursement of the Bank loan. However, the Project did not absorb some key lessons of experience from successful lines of credit (including in Ukraine, as Second Export Development Project, EDP2 was being processed at the same time with the Ukrainian Exim Bank as the borrower and apex credit institution). The Bank team did consider having the NBU as the borrower and implementing agency since the NBU has a proven record in managing lines of credit and, as the regulator, has a close relationship with the banks. This option was not supported by the MoF as it wished to play a more central role in the preparation and implementation of the operation, and use the opportunity to build capacity in the Ministry. In Ukraine, the learning curve on Bank requirements and procedures was about two years - reflected in implementation delays and bottlenecks after Board approval. (iii) An appropriate policy, institutional, and legal framework is a precondition for the healthy growth of financial intermediation. The shortcomings of the legal and institutional framework in Ukraine were contributing to the high cost and risks of lending and possible adverse selection, leading to low levels of intermediation particularly to the APL target groups. The Project aimed at 5

13 reducing these costs and risks through Component B, including support from the PHRD Grant and the PPF during preparation of this operation. (vi) Identification of risks and associated mitigation measures. The Project properly identified potential risks and put in place mitigation measures. The risks included (i) political risks in implementing measures to improve the legislative and institutional framework (ii) bureaucratic/legalistic approach of the MoF in implementation, (iii) quality and interest of PBs to lend project funds, (iv) political interference in credit decisions, (v) lack of demand for credit due to complex procedures, and (vi) for Component B, PMU s inability to carry out its role in a timely manner. Mitigation measures included the Government s (and Opposition parties) commitment to project objectives, pursuant of EU related reform agenda, and Bank s DPL program. At the Project level, banks showed strong interest in the Project demonstrated by the pre-selection of 3 PBs, preparation of Operations Manual with detailed procedures and responsibilities for the MoF, PMU and PBs (credit decisions to be made by PBs taking credit risk), developing streamlined procedures for PMU, provision of funds to hire short-term technical experts to complement PMU staff skills, etc. 2.2 Implementation Three PBs - Privat bank, Bank Nadra and Kreditprombank - were pre-selected prior to Board approval of the Project allocating US$51 million, US$46 million and US$43 million, respectively, the entire Component A (both the line of credit and PBs TA) of US$140 million. In July 2007, the MoF signed subsidiary loan agreements (SLAs) with the Bank Nadra and Kreditprombank (signing of SLAs with at least two PBs was one of conditions of effectiveness); Privat dropped out of the Project. Later, three more PBs were selected Ukrprombank and Forum bank signed SLAs (for US$20 million each) in July 2008, and Imex bank signed later for US$11 million-- committing the entire line of credit. However, Imex bank and Forum bank did not make any disbursements from the Project due to the start of banking crisis in Ukraine in fall The Project was subject to intensive supervision after it was declared effective in July Bank missions visited Ukraine on average every three months, and made a habit of agreeing upon specific time-bound actions plans with the MoF, in an effort to speed up project implementation, but progress was sketchy. The MoF established a fully-staffed PIU generally compliant with World Bank's standard financial management (FM) and procurement requirements, and conducted the long-overdue audit of the PPF. In order to improve project implementation, the responsibility for managing the credit line was transferred to the National Bank of Ukraine from the MoF. By summer 2008, the MoF has entered into SLAs with five locally-owned commercial banks, dividing between them the entire amount of credit line component. The banks had been selected on the basis of their interest and compliance with financial eligibility criteria stipulated in the Loan Agreement. The Bank team and the PMU-NBU conducted extensive training for PBs on how to prepare sub-loans. These efforts resulted in a growing flow of sub-loan applications from PBs, and the first disbursements took place in the summer of 2008 under the Line of Credit component. The Bank also initiated discussions with the MoF and designated beneficiaries on the plans for utilization of TA Component, and the draft Terms of Reference (ToRs) had been prepared by twinning programs for the capital market and NBFI regulators. However, despite an earnest effort made by the Bank team and the MoF, the Project implementation was still not fully underway by the time when financial crisis hit Ukraine in fall Most tellingly, the sub-loan applications approved under the line of credit component totaled less than US$25 million, and the disbursement stood only at US$16.2 million by February Unfortunately, MoF s cumbersome and time-consuming internal procedures for approval of 6

14 sub-loan applications and processing of payments to PBs proved to be a serious constraint, as is the case of most other investment projects in Bank s Ukraine portfolio. Although Nadra Bank and Kreditprombank have both signed SLAs in June 2007, the first sub-loans were approved only in early 2008, and the first disbursement did not take place until mid Given the turmoil in the global financial markets and the growing Ukrainian economy, this low level of utilization of the credit line by PBs was not consistent with expected demand at that time. The implementation of the Component B was also moving very slowly due to the uncertain interest of component beneficiaries and the weak capacity of the MoF and other beneficiaries to use Bank procurement rules, especially for larger assignments. By January 2009, only two procurement processes were launched under Component B, to look for long-term twinning partners for the State Commission for Regulation of Financial Services Markets (SCRFMS), and the State Commission for Securities and Stock Market (SCSSM). Primary cause of the delays with disbursement appears to lie with the lack of experience and cumbersome internal procedures used by the MoF for approval and payment of sub-loans. For example, in the processing of micro-credits from Bank Nadra, the delays occurred due to the MoF desire to conduct additional reviews and request more information about each individual microcredit (e.g. copy of original credit agreement, statutory documents of beneficiary, description of sub-project, and proof of funds being used for investment purposes). Clearly, such requirements, which may be considered normal in Ukraine government practices, were not consistent with the simplified application procedures described in the Project documents, and defeated the whole purpose of setting aside micro-credits as a separate product financed under AFSP. Given the large number of micro-credits, a random post review of a number of them by MoF and Bank would have represented a more practical and efficient mechanism for ensuring compliance with Project criteria by PBs. Further, finalization of collateral agreement with Kreditprombank also took long and protracted negotiations as the MoF required sub-loan specific collaterals, instead of other legitimate type of collateral from PBs. Impact of the financial crisis. By late 2008, the financial and economic crisis in Ukraine had severely jeopardized the prospects for achieving PDOs. Existing vulnerabilities in the banking system were compounded by a sharp downturn in economic activity and rapid devaluation of the domestic currency since October The disappearance of most external financing sources and the outflow of deposits led to growing illiquidity in the banking system. At the same time, credit defaults were also on the rise due to the large credit portfolio extended by banks in foreign currencies to un-hedged borrowers and due to the general economic recession. This had resulted in severe shortage of capital in most Ukrainian banks (UAH 25 billion only in the 17 largest (1 st Group) banks) and several banks were put under receivership or liquidation. Banks participating in the AFSP were among the hardest hit by the turmoil since (with one minor exception) they do not have foreign shareholders who could provide liquidity support or participate in recapitalization. By February 2009, two out of five PBs (Nadra Bank and Ukrprombank) have been placed under temporary administration by the NBU after they failed to comply with prudential norms and were suspended by MoF from participation in the Project. Bank Forum was also suspended since it failed to comply with the minimum financial eligibility criteria. The future of the remaining two banks (Kreditprombank and Imexbank) was uncertain in 7

15 view of the large recapitalization needs (especially in former case) 1 /. Therefore, no new sub-loan applications were submitted by the banks since the beginning of Given the above situation, in December 2008, the Bank proposed to the Borrower to consider cancellation of the Project in order to re-direct the resources to more productive use. During the Joint Portfolio Review held in February 2009, given the deteriorating situation in the banking system, and continuing implementation difficulties, the Bank has reiterated its proposal to cancel the Project, and consider possible additional financing for the ongoing Second Export Development Project (EDP2) implemented by the Exim Bank of Ukraine. In May 2009, following intensive internal discussions, the Government agreed with the Bank and requested to cancel the Project. As a result, US$ million was cancelled in June Some funds were still kept available for a few months in order to pay for the outstanding contracts and complete the Project audit. In October 2009, the remaining amount of US$3.198 million was cancelled and the Project was closed (8 months ahead of the original Closing Date of June 30, 2010.). Only US$ million (or 11.6 percent) was utilized out of the total Loan amount of US$150 million US$ for sub-loans to RSMEs (Component A1) and US$1.320 million for project management (Component C) - no funds were utilized for the technical assistance purpose in Component A2 or Component B. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization The Project had a good monitoring and evaluation framework, with the original set of indicators including baseline benchmarks and targets, to track performance. The indicators were monitored during implementation. PMU collected relevant information from PBs and submitted timely reports to the Bank. However, during later stage of the Project, due to problems with some banks, it became difficult to collect some data such as performance of PBs and final beneficiaries. 2.4 Safeguard and Fiduciary Compliance As the Project's focus was on a credit line for RSMEs, the majority of sub-loans were not expected to produce any major environmental impact. However, given the rural nature of the project, agricultural sub-projects which involve application of pesticides and agricultural chemicals could trigger the safeguard policy on pest management. In order to minimize the risks to human health and environment and to mitigate potential negative consequences, a pest management plan for such sub-projects was developed and included in the environmental guidelines manual. Procurement, financial management practices, and environmental review process for the Project were supported by the Operations Manual with guidance for the MoF, the NBU and PBs. Implementation capacity was strengthened with the hiring of qualified FM, procurement specialists, and part-time environmental specialist to assist PBs and PMU-NBU with safeguards compliance. The FMRs were submitted regularly and the FM arrangements were acceptable to the Bank. The Project audits (including for PPF) have been completed and found acceptable by 1 / By April 2010, Bank Forum had resolved its shareholder dispute and was on the way towards achieving compliance with the NBU regulations, including on recapitalization. Imexbank and Kreditprombank had undergone capital increases in accordance to schedules established by the NBU. 8

16 the Bank. Environmental safeguards procedures were properly implemented at the NBU and PBs as designed in the Operations Manual. All approved sub-loans were classified as having either insignificant or negligible environmental impact with no sub-loan in Category C. 2.5 Post-completion Operation/Next Phase The Project was the first phase of an APL series. The objective of the APL program was to help increase the contribution of financial markets to economic growth through the provision of limited longer term finance for RSMEs and institutional development finance that can play a catalyst role in development of skills, services and respective market infrastructure of rural finance market. The APL2 was to build upon the institutional development of AFSP. Unfortunately, the AFSP did not achieve its objectives fully and triggers for the APL2 were not met. Therefore, the APL2 was not pursued. But, the resources saved from the cancellation of the AFSP are being redeployed by providing additional finance for the ongoing EDP2. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The objectives and design of the Project remain highly relevant with Ukraine s and the Bank s development agenda. As stated in the FY04-07 CAS, important objectives included sustainable economic growth, poverty reduction and reducing regional imbalances. The Project supported the Government s reform agenda for addressing the impediments to the growth of the agriculture and the rural economy and improving the financial sector. The updated CPS for FY08-11 aims to improve the business climate and identifies export growth and stability of financial markets as key outcomes. The new (2010) Government s priorities include stabilization of the financial system for the revival of growth and development. 3.2 Achievement of Project Development Objectives The PDOs were not achieved and the Project was closed ahead of time with a major portion (88 percent) of the Loan cancelled. Two PDO indicators were partially achieved, but could not be sustained, and one indicator showed no results (see Annex 2). The institution building component did not achieve any results. The participating banks did quite well initially in expanding their RSME clientele and even ran special promotions to attract rural clients. In that respect, Project PDO of expanding access to financial services for RSMEs was partially achieved although by not using Project line of credit due to difficulties with MoF procedures and later due to the banking crisis. The rapid growth in RSME lending was not sustainable - Bank Nadra ran into liquidity problems in late 2008, and was placed under temporary administration in February The credit line provided only US$ million from the Project making six sub-loans totaling US$8.220 million to RSMEs. Bank Nadra made two sub-loans (US$3.0 million), Kreditprombank made three (US$4.1 million), and Ukrprombank made one (US$1.1 million). The sub-loans were made for investments by the agro-processing, fish production and agricultural enterprises in five regions with maturity of between 34 and 120 months - no working capital subloans were made. The sub-loan amounts were between US$1.1 million and US$1.5 million, with average size of US$1.37 million. In terms of the size of the RSME beneficiaries, three sub-loans were made to firms over 100 employees, two to firms with employees between 5- and 100 and one to a company with less than 20 employees. In addition, some 516 sub-loans totaling US$7.897 million were made to micro-enterprises (with up to 10 employees) in some 19 regions 9

17 by Bank Nadra (US$1.016 million) and Kreditprombank (US$6.881 million) with average size of US$15,300. See Annex 10 for more details on sub-loans. Table 2 Details of Sub-Loans Financed Sub-loans to RSMEs Sub-loans to Microenterprises Participating Bank Number Amount (US$ million) As % of Credit Line Used Number Amount (US$ million) Bank Nadra Kreditprombank Ukrprombank Total Table 3 Profile of Sub-Loans to RSMEs Economic Sector Agro-processing, fish production and agricultural enterprises Sub-loan Maturity From 34 to 120 months Sub-loan Amounts US$1.1 million to US$1.5 million Average Sub-loan Size US$1.37 million Number of Sub-loans by Size of RSMEs >100 employees employees 2 <20 employees 1 Some of the six RSMEs sub-borrowers were classified as non-performing. By the end of 2009, due to the difficult economic situation in the country, two sub-borrowers were on the edge of bankruptcy due to under-financing and problems in the banking sector, the other sub-borrowers were straining to keep afloat; one sub-borrower prepaid its sub-loan (breakdown of NPL ratios by PBs is given in Annex 9.) In 2009, three PBs were not in compliance with the Project s financial requirements. The PBs were among the hardest hit by the turmoil since (with the exception of Bank Forum) they did not have foreign shareholders who could provide liquidity support or participate in recapitalization. By February 2009, two out of five PBs (Nadra Bank and Ukrprombank) have been placed under temporary administration by the NBU after they failed to comply with prudential norms and were suspended by MoF from participation in the Project; Ukrprombank has since been liquidated - but the MoF was able to protect its interest and was able to get paid its outstanding loan in full. Bank Forum was also suspended since it failed to comply with the minimum financial eligibility criteria (this bank since has received capital infusion from another bank which was its shareholder). The remaining two banks (Kreditprombank and Imexbank) needed large infusion of capital - Kreditprombank has since been restructured and is now operating normally. The following describes Project achievements (based on the data provided by the MoF). Increase in the number of RSME clients of the participating banks. The number of RSME clients of the participating banks has increased from the base indicator (for 2006) of 20,333 to 49,568 (for end 2009) against a target of 32,168. This data is based on two PBs (Nadra Bank and Kreditprombank), and that the figures for Nadra Bank for 2009 were not available, so a 2008 figure is used in the calculation of the final count of RSMEs. However, the rapid growth in RSME lending was not sustainable - Bank Nadra ran into liquidity problems in late 2008, and was placed under temporary administration in February Increase in the volume of longer term finance extended by the PBs to RSMEs. The volume of longer term finance extended by the PBs to RSMEs has increased from the base indicator (for 2006) of US$450 million to US$910 (for end 2009) against a target of US$1,249 million. This 10

18 data is also based on two PBs (Nadra Bank and Kreditprombank), as figures for Nadra Bank for 2009 were not available, so a 2008 figure is used in the calculation of the final count of the volume of long-term financing. However, as explained above, the rapid growth in RSME lending was not sustainable - Bank Nadra ran into liquidity problems in late 2008, and was placed under temporary administration in February Also, as result of the sharp devaluation of UAH, these figures may have come down but specific data is not available. Legislation enacted related to new financial services and improved infrastructure, and legislation to support financial services. No new legislations were passed during the Project. The legislation on the local government borrowing did not give the local governments proper unambiguous powers to borrow funds for a period of more than a year for investment needs or use assets and revenues from payments as collateral. The legislation also did not guarantee creditors appropriate protection in the event of local governments` default on their loan obligations. Since legislation that would satisfy the Bank is essential for commercial banks` prudent lending to local governments, lending to these SNGs could not be considered under this Project. 3.3 Efficiency The Project was not quite efficient in terms of providing access to credit to RSMEs, in creating employment or generating income as well as in enacting required legislations for the strengthening of the financial sector (see section 3.2 and Annex 2). 3.4 Justification of Overall Outcome Rating Rating: Unsatisfactory The Project did not achieve its Development Objectives - some indicators were achieved partially (but not sustainable), while others were not achieved at all. The Project had tremendous difficulties in implementation. In addition, the financial performance of several PBs deteriorated significantly that they had to be suspended from participating in the Project. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The Project s impact on poverty was positive as it helped some 516 micro-enterprises get access to credit thus helping them grow and create employment. The PBs expanded their RSME clientele. This also had a positive social impact by improving their incomes. At the macroeconomic level, the Project did not have much positive impact to the financial sector, which contributes to economic growth, creating (and preserving) employment and social development. (b) Institutional Change/Strengthening The Project did help somewhat in improving credit appraisal procedures among the PBs. Some PBs indicated that Project s credit appraisal and documentation, and monitoring requirements helped them improve their lending and monitoring practices including environmental review procedures. It also helped build some capacity in the MoF (and the NBU) in terms of following Bank s FM, procurement, environmental and project monitoring procedures. (c) Other Unintended Outcomes and Impacts (positive or negative) 11

19 The Project did not have any significant unintended outcomes or impacts. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not Applicable 4. Assessment of Risk to Development Outcome Rating: High Risks to the Project outcomes encompassed general country risks, risks to financial intermediation, economic performance and project specific risks. General risks included political and governance problems, global economic crisis, financial sector turmoil and macro-economic mismanagement. The project aimed to improve the domestic financial sector, but otherwise these factors were beyond the control of the project. Project specific risks include the performance of PBs and sub-borrowers. As mentioned earlier, the Ukrainian banking sector including some of the PBs, was hit hard by the global economic crisis. PB s financial performance deteriorated and was put under receivership by the NBU one was later liquidated. In PBs, lending volumes declined and NPL ratios increased. Decline in economic growth also had adverse affect on the PBs as well on the RSMEs. Annex 9 provides additional information on the financial performance of PBs. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase) Rating: Unsatisfactory The Project s identification and design were compatible with the CAS and the Project was consistent with the Government s priorities for the sector as noted in section 2.1. The Project built on the several lessons learned during projects in other countries. Clear eligibility criteria for PBs were identified, and baseline benchmarks and targets for performance indicators were established in the PAD. Further, three PBs were pre-selected before Board approval in order to speed up implementation. However, important lessons of experience from successful lines of credit (including in Ukraine, as Second Export Development Project, EDP2 was being processed at the same time with the Exim Bank as the apex credit institution) were not absorbed in design and preparation. Apart from locating the Project in the Ministry of Finance (due to country sensitivities), for country programming reasons different objectives of finance for rural SMEs and sub-national governments were merged and only disentangled with some effort. The new Project Team helped simplify the Project, although the TA component still showed some complexity involving several unrelated (and not committed) agencies. While the Bank Team did consider having the National Bank of Ukraine as the borrower and implementing agency, this could not be done. The decision to locate such a Project in the MoF, did not mean that it had the capacity (in terms of streamlined procedures and approval requirements) to implement it efficiently, as is needed for the efficient administration of credit 12

20 lines intermediated through the private commercial banks. Such lines of credit (especially when banks are taking credit risks) require full delegation to banks for decision making with respect to the selection, evaluation and monitoring of sub-borrowers without any interference and second guessing by the government agencies. Moreover, it should have been anticipated that having the Minister of Finance himself as Project Coordinator (with signing authority for most project related documents, including withdrawal applications), would also contribute to delays given the Minister s busy schedules and political role. It is interesting to note that the above issues (e.g. inclusion of SNGs, project complexity, and MoF capacity/procedures) were indentified during the QER of the Project. (b) Quality of Supervision Rating: Satisfactory Bank management and staff were very responsive to help turn the project around. The Project was subject to intense supervision after effectiveness. Bank missions visited Ukraine on average every three months and agreeing upon time-bound actions plans with the MoF, in an effort to speed up project implementation. The Bank team (with the NBU) conducted extensive training for PBs staff on Bank procedures and preparing sub-loans. These efforts resulted in improvements in Project implementation, and positive trend in disbursements in spring/summer However, the financial crisis which hit Ukraine in the fall 2008 undermined whatever progress had been achieved by that point. Under the circumstances, the Bank provided right advice to the Borrower to cancel the Loan and provide additional financing under the well-functioning EDP2. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Unsatisfactory Based on the above, the overall Bank performance in quality at entry and quality of supervision is Moderately Unsatisfactory. 5.2 Borrower Performance (a) Government Performance Rating: Moderately Satisfactory The Government s performance as a Borrower needs to be viewed in the context of prevailing difficult political conditions in the country with many changes in the Government, ministries and counterparts. The Government made sincere efforts to formulate and implement economic reforms including in the financial sector. It gave priority to the revival of the rural economy in order to improve social conditions and reduce poverty. But due the reasons of political economy, it was not able to made adequate progress on various reforms and legislations supported by the Project. On the top of this already difficult situation, the country was hit hard by the global economic crisis which resulted in sharp decline in the economic activity and severe crisis in the banking sector. (b) Implementing Agency or Agencies Performance Rating: Moderately Unsatisfactory Ukraine's learning experience with Bank projects is gradual. The Bank portfolio in Ukraine generally has experienced problems, including delays in effectiveness and in making any significant changes in project design or implementation arrangements during implementation due 13

21 to lengthy procedures including requiring Parliament approval in many cases. The governmentwide prevailing bureaucratic procedures and control oriented culture, and slow decision making further contributes to this situation. By the time borrowers and implementing agencies become familiar with Bank procedures and requirements, and the initial delays of loan ratification are overcome, a significant of time would easily have passed. The MoF made earnest efforts to implement the Project effectively. A MoF team was dedicated to this Project with fully staffed PMU and the PMU expertise was supplemented by hiring technical experts. However, the MoF was unable to streamline implementation/disbursements procedures given its internal practices and requirements. The coordination between the MoF, NBU and PBs was also not smooth. Even when the responsibility of managing the credit line was transferred to the NBU, the MoF put in-charge a deputed unit of seven staff and continued to review sub-loan applications and documentation. The Ministry was also slow in handling requests from the beneficiary agencies for the processing of technical assistance and training procurement. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Unsatisfactory Based on the above, the overall Borrower performance is rated Moderately Unsatisfactory. 6. Lessons Learned Preparing a project with simple and non-complex design to suit the absorptive capacity of the Borrower and implementing and beneficiary agencies in critical. In particular, in politically complex environments such as Ukraine, apparent synergies across sectors and agencies may well convert into significant implementation problems. In addition to simplicity, selectivity among target sectors, implementation agencies, beneficiaries is of key importance. Choosing carefully the key agency for project implementation and learning from lessons of experience is important. Apex structures for credit lines where decision-taking is slow due to over-formalized processes are not appropriate. At times, rather than persisting against the odds, it may be better for the Bank and the country to accept that an attempt to reach worthwhile development objectives is not working (say after the second or third extension of effectiveness) and discuss alternative ways of achieving the objectives. Decisions to discontinue protracted preparation of proposed projects or to cancel slow-moving existing projects (potentially reallocating the cancelled loan amount to a related similar project) should be taken sooner rather than later, so as to free up financial and human resources on both the Bank and the client sides, improve disbursement, and reprogram in order to set and pursue more likely achievable development objectives. Ukraine's learning experience with Bank projects is gradual and enough time needs to be built into any project. In projects with ex-ante established capacity building needs, the process should be clearly outlined at the start, and milestones established to track capacity transfer so as to arrive at the start of the project with capacity fully ready for implementation. Bank teams' persistent efforts may simply be overwhelmed by country circumstances, in which case the way out of a difficult situation usually requires offering an alternative which is acceptable to the country authorities and helps resolve the problem efficiently. Reprogramming a cancelled loan amount to a related similar project is one such 14

22 alternative which can be practical in agreeing with a potentially reluctant Borrower on eventual closure of problem projects. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies The Borrower ICR input is included in Annex 7. (b) Cofinanciers Not applicable. (c) Other partners and stakeholders Not applicable. 15

23 Annex 1. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Appraisal Actual/Latest Percentage of Components Estimate Estimate Appraisal Component A: Access to Finance A1. Line of Credit A2. Institutional Development for PBs Component B: Enabling Environment for Financial Intermediation Component C: Project Management and Monitoring Total Baseline Cost Physical Contingencies Price Contingencies Total Project Costs Project Preparation Facility Front-end fee IBRD Total Financing Required The Project Preparation Facility at Appraisal stage was included in the costs of Components B and C. 2 Contribution from sub-borrowers is excluded. (b) Financing (USD million) Source of Funds Appraisal Estimate Actual/Latest Estimate Borrower IBRD Sub-Borrowers N/A N/A 3 Data on Actual/Latest Estimate is not available. Percentage of Appraisal 16

24 Annex 2. Outputs by Component PDO Outcome Indicators Use of Outcome Information Increased access to finance by RSMEs through financial intermediaries under sound commercial practices. Intermediate Results One per Component Component A: RSMEs have better access to funds Component B: A clear increase in the number of RSME clients of the PBs. Target: Increase from 20,333 to 32,168.* Actual: 49,586 ** Results Indicators for Each Component Component A: Increase in total volume of longer term finance extended by PBs to RSMEs. Target: Increase from US$383 million to US$1,249 million.* Actual: US$916 million ** Component B: Monitor rural finance strategy (including creation of proper infrastructure and legal framework) to make adjustments, if necessary. Feed into the strategy for mainstreaming program and preparation of APL2. Analysis of Outcome Monitoring Component А: While the banks did well initially in increasing lending to RSMEsthe rapid growth was not sustainable. The low credit line use was mainly due to the lengthy procedures at the MoF and some passivity of PBs, particularly at the initial stage. Since late 2008, due to the crisis in the banking sector, lending to PBs was sharply reduced. Component B: Infrastructure and legal framework for credit market expansion established Component C: Legislation for new financial services introduced Target: from 4 to 8, at rate of 1 per year Actual: No legislation enacted Improved infrastructure and legislation to support financial services. Actual: No legislation enacted Component C: No relevant legislations were undertaken during the implementation stage Component C: PMU capacity to monitor and Target: Two surveys completed evaluate project progress Actual: No survey done *The targets were informally revised after the Project has become effective. **The initial targets were estimated at the exchange rate of (2007) 5.05 UAH/US$ while the actual results received are calculated at the exchange rate of (2008) 7.7 UAH/US$. This significantly affects the data and results measured. Additionally, since actual figures for 2009 for Bank Nadra are not available, the actuals incorporate the end result as of 2008 for Nadra Bank and the 2009 figures for Kreditprombank. Further, as explained above, the rapid growth in RSME lending was not sustainable-- Bank Nadra ran into liquidity problems in late 2008, and was placed under temporary administration in February Also, as result of the sharp devaluation of UAH in 2009, these figures may have come down but specific data is not available. The data in Annex 2 is based on latest figures provided by the MoF (April 2010) -- thus there may be some discrepancy in the data in this Annex and Annex 7 (Borrower ICR input). 17

25 Annex 3. Economic and Financial Analysis Not Applicable 18

26 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Lending Prior to July 2005: 19 Responsibility/ Specialty Rodrigo A. Chaves Lead Economist ECSPE Task Team Leader Lawrence Hannah Lead Economist ECSPE Lead Economist Angela Prigozhina Senior Operations Officer ECSPF Operations Officer Aleksander Kaliberda Senior Projects Officer ECSSD Projects Officer Signe Zeikate Consultant ECSPE Olha Nychay Consultant ECSPE Vitaly Kazakov Financial Management Specialist ECSPS Financial Mangmt Spec. Richard Gargrave Senior Procurement Officer ECSPS Procurement Officer Ahmed A. R. Eiweida Senior Urban Management Specialist MNSIF Urban Mngt Specialist Radhika Srinivasan Senior Social Scientist ECSSD Social Scientist Steven Weisbrod Consultant ECSPE Katerina Petrina Operations Officer ECSPE Operations Officer Irina Shmeliova Procurement Assistant ECSPS Procurement Assistant Since July 2005 (following the merger of the Rural Finance and Municipal Finance Projects) Hormoz Aghdaey Lead Financial Sector Specialist ECSPF TTL until August 2007 Angela Prigozhina Senior Operations Officer ECSPF Operations Officer Rochelle Hilton Consultant ECSPF PSD Specialist Martin Slough Senior Financial Specialist ECSPF Financial Specialist James Lacey Banking Consultant ECSPF Banking Consultant Anna Wielogorska Procurement Specialist ECSPS Procurement Irina Babich Financial Management Specialist ECSPF Financial Mgmt Spec. Galina Kuznetsova Financial Management Specialist ECSPS Financial Mgmt Spec. Irina Shmeliova Procurement Assistant ECSPS Procurement Assistant Daria Goldstein Lawyer LEGEC Lawyer Alexei Slenzak Environmental Specialist ECSSD Environmental Specialist Andrina Ambrose Senior Finance Specialist LOAG1 Finance Specialist Supervision/ICR Marius Vismantas Country Sector Coordinator ESCF1 ICR Team Leader since January 2010 Alex Pankov Senior Private Sector Development ECSF1 Specialist TTL since August 2007 Alexei Slenzak Senior Operations Officer ECSS3 Sr. Operations Officer Isfandyar Zaman Khan Financial Sector Specialist ECSF1 Financial Sector Spec. Anna L Wielogorska Senior Procurement Specialist EAPPR Sr. Procurement Spec. Irina Babich Financial Management Specialist ECSC3 Financial Mgmt Spec. Vitaliy Petrovich Bigdai Consultant ECSPF Vinod K. Goel Consultant ECSPF ICR Preparation Alina Tourkova Consultant ECSF1 Assist. ICR preparation Hannah M. Koilpillai Senior Finance Officer CTRFC Finance Officer Cheikh Amadou Gamal Mbaye Finance Analyst CTRDM Finance Analyst Angela Gurieva Finance Assistant CTRDM Finance Assistant

27 Jorge O. Pena Portfolio Officer CTRCF Loan Accounting Officer (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY FY FY FY FY Total Supervision/ICR FY FY FY FY Total

28 Annex 5. Beneficiary Survey Results Not Applicable 21

29 Annex 6. Stakeholder Workshop Report and Results Not Applicable 22

30 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Borrower Input (Unofficial translation) І. Appraisal of Objectives, Development, Implementation and Outcomes of the Project 1. The high goals whose achievement the Project helped Implementation of the Project was aimed at achieving high goals by creating conditions for promotion of a private sector capable to meet competition on the international arena. It supported the government priority program of development of financial markets infrastructure, regional economies, rural, and municipal credit markets. Ways of achieving the objectives were mapped out: (a) speed up the economic restructuring through increasing the flow of credit supply to the sectors excluded from the financial markets on the whole, (b) increase the contribution of rural small- and medium-sized businesses to the economy by facilitating their access to financial services, (c) upgrade the quality of local public utility services through improving conditions and investing into local infrastructure. The adaptable program loan (APL) provided for implementation of the Project was supposed to give an external impulse to access to credit markets for rural small- and medium-sized businesses and local governments. In the medium term, this would result in creation of new jobs and hence in poverty alleviation. The said goals remain relevant for Ukraine and call for further efforts to achieve them. 2. Project mission and stages Throughout Stage I, beginning with the effective date of the Loan Agreement, the Ukrainian enterprises were to be provided under the Project with mid- and long-term funding in the form of credit line through intermediaries, whose roles were played by acceptable commercial banks (the first selection was done in 2005 and the second in 2007). Also, it was planned to provide funds for institutional capacity building of banks and technical assistance to promote an environment conducive to financial intermediation. The purpose of the program was to help enhance the financial markets` contribution to economic growth through providing limited funding to rural small- and medium-sized businesses for a longer period and by providing funds for institutional capacity building to accelerate the development of skills, services and respective infrastructure of the rural financing market in Ukraine. Stage I of the Loan (totaling USD 150 million 2 that was provided by the Bank) outlined the overall program, defining the basis necessary for the Project to continue for a long period. Stage I supported, inter alia, the following: (a) granting of loans to rural small- and medium-sized businesses, particularly farm businesses; (b) granting of loans to enhance financial intermediaries` lending skills; (c) provision of technical assistance to strengthen credit market infrastructure and the legal framework which will expand the access of rural small- and medium-sized businesses 2 Inclusive of a commitment fee of USD 37 5,

31 and local governments to financial services. It was planned to arrange pilot lending for local governments under the Project as soon as the suitable base for this was provided. 3 The outcomes that would have ensured the transfer from Stage I to Stage II and the actual state of affairs: Reasons for Transfer to Stage II State of Affairs as of End of 2009 at least 60 percent of credit line used a mere 11 percent of credit line used under the Project less than 5 percent of regular subloans some 30 percent of granted subloans categorized as nonperforming (doubtful or bad) categorized as nonperforming (doubtful or bad) while fully granted fair legal framework for leasing, factoring and no substantial improvement of legislation credit unions (if these institutions are included in APL 2) in place fair basis provided for debt financing of local no substantial improvement of legislation governments, including enactment of law on local government borrowing, which will be acceptable for the Bank the government refrained from providing credit lines (and/or guarantees) on nonmarket terms no loans (and/or guarantees) provided by the government on nonmarket terms that could considerably harm the APL goals It was planned that APL Stage II would be based on the institutional development initiated in the implementation of Stage I. If Stage I was successfully carried out the APL would retain in its structure the component that provided for extension of the credit line, increasing qualitatively and quantitatively the list of financial intermediaries (such as credit unions and leasing companies) and ultimate beneficiaries (such as local governments). However, the situation that had developed in Ukraine`s financial sector in 2009 rendered implementation of APL Stage I impossible. An almost two-fold devaluation of the Hryvnia to the dollar, the panicky behavior of the population and political instability were responsible for a crisis in the banking sector, the banks involved in the Project violated, starting in Q4 of 2008, the established criteria of the Project. Part of the beneficiaries who had received currency loans under the Project faced severe problems. The Ministry of Finance (MoF) had to suspend the funding of the subprojects as the eligibility criteria set out in the LA were being violated. 3. Key indicators of reaching the Project goal The Project was designed for expanding access to financial services in rural areas, particularly for rural small- and medium-sized businesses. Therefore, one of the quantitative indexes was a continued increase throughout the Project in the number of such businesses, farm businesses and agro-industrial enterprises as clients of financial intermediaries. The main indicator was an increase in long-term lending to rural small- and medium-sized businesses (clients) on the part of banks participating in the Project, compared to The GoU`s economic reform program requires large investments in rural and urban infrastructures, housing and public utility services. These investments are impossible to make without enacting legislation on debt obligations of local governments and without reforming the municipal financing system and laying the groundwork for development of vigorous mortgage and housing financing markets. 24

32 4. Components of the Project The Access to Financial Services Project comprised three components: Component А. Access to Finance (USD140 mln, nearly 93% of Loan). The Component had two subcomponents. (1) Credit line (USD125 mln) for granting long-term loans (for investments, current capital and leasing) through the participating banks to the following clients: (i) eligible rural small- and medium-sized businesses, and (ii) eligible farm businesses. Three eligible participating banks (Privatbank, bank Nadra and Kredytprombank) were selected at the end of 2005 on the basis of agreed criteria, including, in particular, the requirement that they operated on a sound commercial basis, met the minimum standards of financial operations and prudential corporate governance and complied with the NBU prudential requirements. Due to the refusal of one of the banks (Privatbank) to participate in the Project in late 2007, an additional selection of banks was announced, whereupon three more banks were selected (Ukrprombank, Forum, Imexbank). In total, five commercial banks acted as financial intermediaries under the Project. Private sector legal entities as well as micro businesses and entrepreneurs were considered as eligible rural small- and medium-sized businesses under the Project. The maximum amount of subloan for rural small- and medium-sized businesses and farm businesses was USD 1.5 mln; in October 2008, at the request of the Ministry of Finance of Ukraine (MoF), the Bank endorsed an increase in the limit to USD 2 mln The maximum amount of subloans to replenish current capital was USD 300, 0 00; in October 2008 the limit was increased to USD 500, 000. The amount of the microloans was not more than the equivalent of USD 50, 000. Since no adequate legislation on local government borrowing and respective guarantees was enacted throughout the Project period the funding of local governments was not carried out. (2) Institutional Development of Participating Banks (USD 15 mln). Some 10 percent of Component А was envisioned for the participating banks` investment into their own institutional development and renewal of the IT that supported achievement of Project outcomes. The participating banks could at their discretion transfer all the amount under the Component or part of it to the funds they were providing under the credit line program. Component B. Environment Conducive to Financial Intermediation (USD8.4 mln, or nearly 6% of Loan). It was planned under this Component to finance institutional development (consulting services and ІТ/information management systems) as well as staff training for the MoF and selected beneficiary institutions (including the State Commission for Regulation of Financial Services Markets of Ukraine, Credit Bureau, State Mortgage Agency, Ministry of Agrarian Policy and the Securities and Stock Market State Commission of Ukraine). The training was to address ways of overcoming legal and institutional restrictions getting in the way of financial intermediation promotion. Under the Component, the World Bank in 2008 proposed implementation of two twinning programs for the two respective state commissions that were Project beneficiaries. In this connection, the Borrower revised the procurement plan, whose new version was agreed with the Bank in September 2008 and posted on the Bank`s website. After that, the MoF started the process of selection of consultants legal firms or regulators to carry out the proposed twinning programs. At the bid evaluation stage, though, the selection process was suspended pending the final decision on the Project`s future. Component С. Project Management and Monitoring (nearly USD1.6 mln, or up to 1.0% of Loan). At APL Stage I, staffing of the MoF Project Management Unit was financed as well as the 25

33 MoF`s total costs on the preparation, implementation, monitoring and appraisal of the Project (including the advance for Project preparation and a front-end fee of USD375, 000). Also, the annual audit of Project accounts was financed out of Project funds. 5. Organizational structure and implementation activities The Project preparation was carried out by using funds of the Bank`s advance loan for the preparation of two independent projects: The Rural Finance Project (RFP), whose preparation was carried out in line with the letter agreement on advance loan (#Р4020-UA of ) and the letter of amendments thereto of ; The Municipal Development Fund Project (MDFP), whose preparation was carried out in line with the letter agreement on advance loan for MDFP preparation (Municipal Credit Market Development Program) (#P4050-UA of ) and which was closed in October Also, to implement activities on the preparation of the MDFP, the Government of Ukraine (GoU) on March 6, 2000 obtained from Japan`s Policy and Human Resources Development Fund a grant (#TF025816) totaling USD432,150 that was administered by the Bank (of which USD 413, was disbursed; the grant was closed on December 31, 2002). The grant was largely used to prepare and establish the Municipal Development Fund. Given that the content and technology of implementation of the MDFP were similar to the RFP and consisted in providing: a) a credit line for municipal development through authorized participating banks, b) technical assistance to municipalities on a nonrepayable basis, the Bank by its letter of proposed joining the MDFP to the RFP, which was renamed the Access to Financial Services Markets Project (AFSMP). In doing that, the Bank argued that the join-up would save funds due to the use of a single system of management and implementation of the AFSMP. As a result of the joint-up, the Project mission was supplemented with the following text: expansion of access of enterprises, businesspeople and population in rural areas and municipalities and utilities to financial services and lending resources. The MoF bears general responsibility for the Project implementation. At the preparatory stage, the Project was carried out with the help of Project Management Unit (PMU), formed in late 2003 at the MoF. The finance minister was the Project coordinator and the principal partner under the Project. He authorized a deputy minister to control and supervise the PMU. The MoF PMU was responsible for general organization of activities under the Project, coordination of efforts with the beneficiaries and reporting to the Bank. The MoF PMU worked till mid In early 2007, the organizational structure of implementation of Component A of the Project was changed. In order to insure proper management of Project funds, the MoF and the National Bank of Ukraine (NBU) concluded an agency agreement (# /43 dated ). According to it, the NBU`s International Credit Lines Projects Management Group (NBU PMU) ensured on behalf of the MoF the performance of functions related to maintaining and monitoring the credit line under Component A. The conclusion of the said agreement was agreed with the Bank during the preparation mission`s visit to Ukraine between Nov. 29 and Dec. 7, Under the agency agreement, the general responsibilities of the NBU PMU included: 26

34 - verification of the Ukrainian banks` compliance with the eligibility criteria through obtaining and reviewing periodic reports and reporting any breach of the criteria to the NBU; - assistance and advise to the Ukrainian banks and beneficiaries in respect of aspects of implementation of Component А, including the timeframe and terms and conditions of the loans, disbursements and environmental procedures; - submission of requests to the Bank for approval, with the copy to the MoF, regarding any subprojects that exceed the lending ceiling set in the LA; - calculation of regular repayment amounts of the principal sum on the granted subloans, interest and other payments that are to be made by the Ukrainian banks, and notifying the Ukrainian banks accordingly; - monitoring the process of repayment by the Ukrainian banks of the principal sum on granted subloans, interest and other payments of Ukrainian banks; - preparation and submission to the MoF of the financial information necessary for compilation of a consolidated report on financial monitoring; - monitoring the utilization of proceeds and compliance of the subloans and financial leasing with eligibility criteria through on-site visits to the Ukrainian banks and beneficiaries and document verifications; - preparation and submission to the MoF and the Bank of quarterly reports on credit line utilization. Funds for Component A were provided by the MoF to the preselected participating banks under credit agreements whose contents were agreed with the Bank. The conclusion of two credit agreements between the MoF and the participating banks selected in 2005 took place on June 22, 2007 and was a condition of Project effectiveness. For purposes of Component A, a Committee for Selection of Banks for the AFSP and Monitoring of Eligibility Compliance by Banks (CSBCM) was appointed pursuant to the Regulation approved by MoF Order #659 dated Sept. 26, The CSBCM included representatives of the MoF and the NBU. Based on approved selection criteria, the CSBCM conducted preselection and additional selection of banks. The Bank sent its no-objection letters with respect to five selected banks. Throughout 2008, the MoF concluded three more credit agreements with additionally selected participating banks. The CSBCM worked within the entire period of Project implementation, so as to help confirm the participating banks` permanent eligibility compliance. The participating banks played a key role in the implementation of Component А. Subloans were granted to the ultimate beneficiaries on commercial terms in accordance with the participating banks` policies and procedures. The participating banks assumed a commercial risk and were responsible for the evaluation of the subprojects and all lending decisions. Subloans were granted to rural small and medium businesses by the participating banks in US dollars or hryvnia. Microlending was in hryvnias. Thus, currency risks were assumed by either participating banks or ultimate beneficiaries. All subloans that were funded under the Project were first examined by the Bank. Prior to loan applications being filed with the Bank, the NBU PMU examined them and made its own recommendations noting whether or not the subloans met the eligibility criteria. 27

35 Only two participating banks (Nadra and Ukrprombank) planned in the short term to utilize the funds of Subcomponent А2 for their own institutional development and IT needs. These activities were consistent with the general business strategy and planning and were discussed with the Bank throughout Funding under Subcomponent А2 did not start by 2009 and thereafter could not be carried out due to the financial condition of the participating banks concerned. Ukrainian legislation on local government borrowing did not give the local governments proper unambiguous powers to borrow funds for a period more than a year for investment needs or use assets and revenues from payments as collateral. Nor did the legislation guarantee creditors appropriate protection in the event of local government`s default on their loan obligations. Since legislation that would satisfy the Bank is essential for commercial banks` prudent lending to local governments, lending to these governments could not be considered under this Project. The MoF arranged and managed funds and activities under Components В and С. To comply with the Bank`s requirement that staff have specialized knowledge of financial management and disbursement of funds, procurement, and environmental impact assessment, the MoF in 2008, using Component C funds, hired the required professionals (financial manager, procurement consultant and environmental consultant). These specialists worked as part of the PMU of the Access to Financial Services Markets Project and reported to the Project coordinator appointed by the MoF`s order. 6. Monitoring and appraisal of outcomes Successes in the attainment of objectives of the program were measured by a system of monitoring and appraisal based on the methods specified in the Project Appraisal Document. The monitoring and appraisal system produced information about specific quantitative targets according to key performance indicators (see Annex 1) on the basis of data gathered from the participating banks and beneficiaries. The participating banks and beneficiaries, throughout the Project and the period of the subloan agreements, maintained the records needed for measuring efficiency and viability of their operations associated with the Project. The Project`s social and economic impact on the real sector of the economy and the financial sector was not significant because the credit line (Subcomponent А.1) was funded on a small scale (11.5% of planned target) for one year, from March 2008 till March The funding of institutional development (Subcomponent А.2) did not start at all, the amounts of the applications filed by two authorized banks in the process of Project implementation were small. The Project`s overall impact on the financial market`s institutional development can be regarded as small. Because it is only at the preparatory stage of the Project that activities on improvement of lending relations (assistance in setting up the State Mortgage Agency of level two and the All- Ukrainian Credit Bureau) were implemented. ІІ. Appraisal of MOF Performance in the Project Generation and Implementation Achievement of objectives: outcomes and lessons learned The key targets of the Advance for the Rural Finance Project preparation included: - establishment of a credit bureau for rural economy development; 28

36 - development of financial sector and local governments, management of a financial services markets project; - institutional development of financial intermediaries. As part of the series of preparatory activities undertaken under the Advance for the AFSMP, consulting technical assistance was given to its beneficiaries the State Committee for Regulation of Financial Services Markets, NBU, Ministry of Agrarian Policy and other agencies in establishing the First All-Ukrainian Credit Bureau and the State Mortgage Agency (the required documents were developed draft business plan and development strategy -- and analytical research was conducted for creating the State Mortgage Agency, a financial institution of level two), reviewing and improving legal and regulatory documents on insurance, cooperative lending (the State Committee for Regulation of Financial Services Markets received consulting services for preparing a concept paper of cooperative lending development in Ukraine), prudential supervision in the nonbank financial sector, minimizing risks in the agricultural sector, etc. Also, within the framework of the Advance for the AFSMP, the MoF arranged a competitive selection of authorized banks that acted as financial intermediaries in implementing the credit line. Therefore, at the stage of LA signing, the Project`s viability was deemed sufficient, the objectives and ways of their attainment seemed to be clearly defined and the implementing entity`s organizational structure looked adequate. During the Project implementation, the authorized banks indicated in their applications for refinancing out of Loan proceeds 24 loans that had been granted by them to rural small and medium businesses, amounting to USD 23.1 mln Of the applications filed, seven (amounting to USD 5 mln) were rejected on account of eligibility noncompliance and the rest were approved by the Bank. In actual fact, the banks received refinancing under the Project for six beneficiaries, amounting to USD 8.21 mln Given the opportunities afforded by the Project, the authorized banks provided 1,268 microloans amounting to USD15.15 mln to rural private entrepreneurs. Most of the microloans were indicated by the banks in applications for refinancing out of Loan proceeds. In reality, the banks received refinancing under the Project (which could later be used to expand work with rural small and medium businesses) totaling USD7.89. The progress of Component А was slowed down above all by the lengthy review of the banks` applications for funds at all stages of approval, beginning with the procedure of review of documents at the NBU PMU and ending with the procedure of receipt of funds from the MoF against already approved applications. Due to this factor, authorized banks were not in a position to effectively plan approval and provision of new subloans and submit new subprojects for consideration and approval under the Project. The risk, an important one and underestimated at the beginning of the Project, that hindered the Project`s progress, was the MoF`s lack of experience to manage a project under which funds are lent to the real sector of the economy through financial intermediaries. It is for closing this gap that a decision was made in 2007 to involve the NBU PMU in the implementation of Component A of the Project. What was unpredictable at the stage of Project preparation and implementation was the impact of the global financial crisis on Ukraine`s banking system and this factor stalled the implementation of Component A. 29

37 The participating banks were selected according to clear-cut eligibility criteria for the Bank and the MoF to be able to satisfy themselves that the banks were financially safe, well managed, had a strong strategy, proper procedures and business processes. To enhance accountability, the MoF introduced a procedure under which the participating banks were to confirm on a monthly basis their eligibility compliance under the Project, the NBU was to confirm on a quarterly basis the participating banks` financial standing, and acceptable independent auditors were to confirm on a yearly basis the participating banks` eligibility compliance. Also the Borrower (MoF) applied safeguards against the violation by the participating banks of their obligations, specifically signed with the banks contracts for security against property rights and sovereign bonds. In 2009, a situation had developed in which the probability of liquidation of Ukrprombank was very high which, in turn, prevented the authorized bank from duly fulfilling its obligations under the subloan agreement. The MoF, to protect state interests and prevent any violation of current legislation, sent a letter of claim to Ukrprombank to demand that the whole amount of the loan, interest and other payments under it in US dollars or in the national currency be reimbursed. On October 5, 2009, the MoF and Ukrprombank, under an out-of-court procedure, signed a Document on enforcement of a security and transfer of title thereto. In accordance with the Document, Ukrprombank transferred to the MoF the ownership of 9,347 sovereign bonds amounting to UAH 9.347mln, that were used as security under Contract for Security Against Sovereign Bonds # /139 dated Thus, as of Oct. 5, 2009, Ukrprombank`s debt totaling USD 1,166, (UAH 9,346, at the NBU rate of UAH 8.01/USD) was repaid in full. The situation that had developed with the financial intermediaries at the Project proved that government securities are least exposed to risks and are the most liquid collateral in the MoF`s schemes of lending to commercial banks. ІІІ. Appraisal of the World Bank`s Performance Considering the Project`s complexity and scale, the Bank`s work on the Project preparation and implementation, which included monitoring and support to the Borrower in resolving problems that might affect the Project, can be described as satisfactory. The Bank`s experts provided considerable assistance in preparing the Project Operations Manual (POM) which fact largely contributed to the earliest effectiveness of the Loan Agreement. The practical experience of implementation of the Project necessitated making amendments to the POM. The update of the POM proceeded in close cooperation among the Bank, MOF and the NBU PMU. The Bank provided consulting support in the pre-selection and additional selection of banks participating in the Project. This Project is classified as FI. Environmental assessment (OP/BP 4.01) policies were applied to the Project, including the subprojects. To ensure compliance with respective environmental legislation and the Bank`s environmental regulations, the participating banks` staff responsible for handling loan proceeds examined the potential environmental impact of the proposed subprojects. This staff did not include environmental specialists but, with the assistance of the Bank`s experts, the selection of the subprojects based on environmental assessment was carried out satisfactorily. To monitor the Project`s progress, the Bank`s missions visited Ukraine on a permanent basis which facilitated the prompt resolution of problems and sped up the Project implementation. 30

38 Annex 1. Structure and Monitoring of Outcomes ACCESS TO FINANCIAL SERVICES MARKETS PROJECT Purpose of Project Generation Outcomes Analysis of Information on Outcomes Expanded access to financial services for rural small- and medium-sized businesses through financial intermediaries who use sound commercial practices Obvious increase in the number of rural small- and medium-sized businesses in participating banks` constituency Existing system of client base registration in Ukrainian banks provided no way of separating clients by their place of business and therefore analysis of client base trend was made by size of enterprises (small and medium) Enhanced legal and institutional framework for financial intermediation that will serve rural small- and medium-sized businesses and local governments Milestones. One per Component Component А. Access to funds improved for rural small- and medium-sized businesses Component B. Infrastructure and legal framework for credit market expansion created Component С. Borrower`s capacity for monitoring and outcome appraisal under the Project Approval of agreed legal and regulatory framework Outcome Indicators for each Component Component А. Increase in total long-term loans provided by participating banks to rural small- and medium-sized businesses. Component B. Legislation for provision of new financial services put in place Infrastructure and legal framework for financial services support improved Component С. Beneficiaries` reviews At the preparation stage of the Project, certain outcomes were achieved; at the implementation stage, no activities were carried out to impact institutional development of financial market Analysis of Outcome Monitoring Component А. Low indicator of credit line utilization was proof of lengthy procedures of approval of subprojects and certain passivity of participating banks, particularly at the initial stage. Since late 2008, due to the crisis in banking sector, NBU carried out rigid regulation of active bank transactions which sharply reduced the capacity of participating banks to submit acceptable subprojects for consideration Component B. No activities undertaken at the implementation stage Component С. Given a multi-component project, monitoring and outcome appraisal require involvement of respective expert at the implementation stage which was not envisioned by the Project 31

39 Outcome indicators of Component A Increase in the number of rural small- and mediumsized businesses who are participating banks` clients Kredytprombank Quantitative increase (thousand persons) Percentage increase Nadra Bank Quantitative increase (thousand persons) Base indicator (December 2006) 1,773-18,560 - Year 0 FPP Base indicator Base indicator Base indicator Year Year Outcome Monitoring Activities Target Variable Year Frequency and reporting plan actual plan actual plan actual Year 0 + % Year 1 + % Year 2 + % NBU quarterly bulletins 3, ,34 % 21,340 14,98 % 3,804 5 % 25,910 21,42 % 4,105 13,30 % 45, ,65 % 3,918 3 % 28,250 9,03 % 4,206 2,5 % Data not furnished NBU PMU quarterly reports Quarterly, semiannual and annual reports and financial statements of participating banks Data Collection and Reporting Data gathering tools IFC business reviews Banks` reports to NBU Regular reports of Project beneficiaries Responsible for data gathering PMU PMU, subborrowers and other Project beneficiaries Percentage increase Increase in total long-term loans provided by participating banks to rural small- and medium-sized businesses Kredytprombank Quantitative increase (UAH mln and USD mln) Percentage increase Nadra Bank Quantitative increase (UAH mln and USD mln) 1070 ($ 212)* 861 ($ 171)* Base indicator Base indicator Base indicator Year 0 + % Year 1 + % Year 2 + % NBU bulletins (quarterly and annual) ($ 545)* 157,57 % 2024 ($ 401)* 135,08 % ($ 624)* 14,59 % ($ 501)* 25,00 % ($ 502)** 40,35 % (-7.8%) ($ 421)** 60,28 % ($ 643)* 3,01 % ($ 606)* 21,00 % ($ 495)*** 2,22 % (-1.4%) Data not furnished Quarterly, semiannual and annual reports and financial statements of participating banks Reviews NBU data PMU data Participating banks/ PMU Percentage increase (5 %) *Plan s quantitative increase in USD for all years exchange rate (2007) 5.05 UAH/USD $ ** actual s quantitative in USD - exchange rate (2008) 7.7 UAH/USD $ *** actual s quantitative in USD - exchange rate (2009) UAH/USD $ 32

40 Annex 8. Comments of Co-financiers and Other Partners/Stakeholders Not Applicable 33

41 Annex 9. Financial Performance of Participating Banks Kreditprombank Capital adequacy ratio Equity/assets Return on equity Return on assets Gross NPLs/ Total loans Total Assets (USD million) Loans (USD million) Equity (USD million) Bank Nadra ** 2009 ** Capital adequacy ratio N/A Equity/assets Return on equity Return on assets Gross NPLs/ Total loans N/A N/A N/A Total Assets (USD million) Loans (USD million) Equity (USD million) Ukrprombank ** 2009 ** Capital adequacy ratio N/A N/A Equity/assets N/A Return on equity N/A Return on assets N/A Gross NPLs/ Total loans N/A Total Assets (USD million) N/A Loans (USD million) N/A Equity (USD million) N/A Forum Capital adequacy ratio N/A Equity/assets Return on equity Return on assets Gross NPLs/ Total loans N/A Total Assets (USD million) Loans (USD million) Equity (USD million) Imexbank Capital adequacy ratio Equity/assets Return on equity Return on assets Gross NPLs/ Total loans Total Assets (USD million) Loans (USD million) Equity (USD million) ** The bank is either under temporary administration or in liquidation. Data for some banks is not available. Source: MoF 34

42 Credit to Private Sector (Real Sector) 1/ Amounts (US$ million) As % of total credit OJSC Kreditprombank JSC Bank Nadra Ukrprombank Forum Imexbank Excluding credit extended to financial institutions, and consumer loans and credit card receivables. Source: MoF Participating Bank Number of Sub- Loans Details of Sub-Loans Financed Amount Amount Amount Approved Repaid (US$ Outstanding (US$ million) (US$ million) million) Amount in Default (US$ million) Sub-loans to RSMEs Bank Nadra Kreditprombank Ukrprombank Total Sub-loans to Microenterprises Bank Nadra Kreditprombank Ukrprombank Total / NPL data not available Source: All data in Annex 9 was provided by MoF- data for some banks is not available. NPL Ratio (%) 1/ 35

43 Annex 10. Distribution of Loans by Region, Sector, and Loan & RSME Size SECTOR Amount Number of Sub-Loans US$ million Share (%) Count Share (%) Egg processing industry Fish production Hothouse Growing of crops Transshipment of crops Micro-Loans TOTAL REGION Amount Number of Sub-Loans US$ million Share (%) Count Share (%) Kyiv Region Cherkasy Region Crimea Volyn Region Odessa Region Kherson Region Vinnytsa Region Donetsk Region Dnipropetrovsk Region L viv Region Kharkiv Region Poltava Region Zaporizhiya Region Mykolayv Region Lugansk Region Sumy Region Khmel nytskiy Region Ternopil Region Kirovograd Region TOTAL Amount Number of Sub-Loans SUB-LOAN SIZE* US$ million Share (%) Count Share (%) < US$ US$ US$ US$ US$ > US$ TOTAL EMPLOYMENT SIZE * Amount Number of RSME Beneficiaries US$ million Share (%) Count Share (%) > TOTAL Source: MoF 36

44 Annex 11. List of Supporting Documents 1. Access to Financial Service Project (AFSP) Project Appraisal Document, Report No: UA, May Independent Evaluation Group (2006), World Bank Lending for Lines of Credit: An IEG Evaluation, The World Bank, Washington, D.C. 3. Project Aide Memoires, ISRs, FMRs and various other documents. 4. Operations Manual. 5. Financial Reports for PBs, Subsidiary Loan Agreements, MoU between the MoF and the NBU. 6. Financial Management Assessment and Procurement Assessments Reports. 7. QAG Disbursement Learning Review Assessment Report, October

45