Pakistan: Rural Finance Sector Development Program

Transcription

1 Validation Report Reference Number: PCV: PAK Project Number: Loan Number: 1987-PAK, 1988-PAK November 2010 Pakistan: Rural Finance Sector Development Program Independent Evaluation Department

2 ABBREVIATIONS ADB Asian Development Bank CPS country partnership strategy IED Independent Evaluation Department IT information technology MFI microfinance institution MOF Ministry of Finance NBF New Bank Fund PCB provincial cooperative bank PCR program completion report PMU project management unit RFI rural finance institution RFRC Rural Finance Resource Center RFSDP Rural Finance Sector Development Program RRP report and recommendation of the President SBP State Bank of Pakistan ZTBL Zarai Taraqiati Bank Limited NOTE In this report, $ refers to US dollars. Key Words adb, asian development bank, pakistan, program completion report, rural finance sector development program, validation Director Team leader Team members R. B. Adhikari, Independent Evaluation Division 1 (IED1), Independent Evaluation Department (IED) H. Feig, Principal Evaluation Specialist, IED1, IED N. Gamo, Evaluation Officer, IED1, IED S. Labayen, Senior Operations Evaluation Assistant, IED1, IED In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the Independent Evaluation Department does not intend to make any judgments as to the legal or other status of any territory or area.

3 PROGRAM COMPLETION REPORT VALIDATION FORM A. Basic Program Data PCR Validation Date November 2010 Project Number: Approved Actual Loan Number: 1987-PAK, 1988-PAK Program Name: Rural Finance Sector Total Program Costs n/a Development Program ($ million): Country: Pakistan Loan ($ million): 1987-PAK 1988-PAK Sector(s): Finance Total Cofinancing ($ million): ADB Financing ADF: 0 Borrower ($ million): n/a ($ million): OCR: Beneficiaries ($ million): Cofinanciers: n/a Others ($ million): Approval Date: 20 December 2002 Effectiveness Date: 26 December December 2002 Signing Date: 23 December 2002 Closing Date: 1987-PAK 1988-PAK Program Officers: Name: A. Sharma R. Narasimham Validator: Tetsu Ito, Consultant Quality Control Reviewer/Peer Reviewer: Henrike Feig, Principal Evaluation Specialist, IED1 Location (HQ or RM): HQ HQ Director: 30 June June 2006 From Ramesh B. Adhikari, IED1 17 May July 2009 To ADB = Asian Development Bank, ADF = Asian Development Fund, HQ = ADB headquarters, IED1 = Independent Evaluation Division 1, n/a = not available, OCR = ordinary capital resources, PAK = Pakistan, PCR = program completion report, RM = resident mission. B. Program Description (Summarized from the Report and Recommendation of the President) 1 (i) Rationale The high incidence of rural poverty was a major concern in Pakistan at the time of appraisal. The limited accessibility and poor quality of rural financial services had been constraining rural growth and employment. Emphasis on support for agriculture had ignored the rural nonfarm sector, which accounted for half the rural income. The reliance of rural finance institutions (RFIs) on soft budgetary resources had reduced incentives for savings mobilization and undermined financial discipline. Overt politicization and weak governance had eroded the sustainability of rural finance institutions, which reinforced the perception of private financial institutions that rural finance was not commercially viable. As a result, weak rural financial markets in Pakistan perpetuated poverty, depressed the rate of rural economic growth, and distorted income distribution. The government, therefore, sought to develop the rural finance sector to help attain self-reliance in agricultural commodities, ensure food security, and generate employment. (ii) Impact In the main text of the report and recommendation of the President (RRP) the goal of the Rural Finance 1 ADB Report and Recommendation of the President: Proposed Loans to Pakistan for the Rural Finance Sector Development Program. Manila.

4 2 Sector Development Program (RFSDP) was stated as to enhance the outreach of rural finance services. However, other sections of the RRP presented the program goal somewhat differently and in more detail. For instance, the program framework indicated the three sector/area goals as: (i) establish a sustainable rural finance system; (ii) improve resource flow to the rural sector and equitable resource allocation through improved governance; and (iii) economic growth and poverty reduction through access to affordable rural finance services. (iii) Objectives or Expected Outcomes The RFSDP objective, as indicated in the main body of the RRP, was to establish a sustainable rural finance system that can enable the clients to benefit from economic opportunities for increasing incomes and employment. The program framework presented the RFSDP purpose as to develop the rural finance sector to efficiently provide affordable financial services for economic growth and poverty reduction, with expansion of the rural finance sector in terms of the number of RFIs, microfinance institutions (MFIs) and active participation of commercial banks and their increased outreach as the "measurable indicators." More detailed purposes included the creation of a favorable policy environment; introduction of institutional reforms and restructuring; the establishment of more MFIs; and the initiation of a crop insurance scheme. (iv) Components and/or Outputs The RFSDP comprised (i) a program loan of $225 million (to be released in 4 tranches over 3 years), and (ii) a project loan of $25 million. The specific objective of the program loan was to develop a sustainable rural finance system for providing affordable services primarily to the lower segments of the rural finance markets to significantly raise their income and reduce poverty. The project loan s specific objective was to strengthen key institutions to help them provide affordable financial services for increasing rural incomes, employment, and investments." The program loan had four components: (a) Creating a favorable policy environment through: (i) mandating an end to directed lending, interest rate ceilings, and loan waivers; (ii) supervising RFIs on par with commercial banks; (iii) State Bank of Pakistan s (SBP s) restricting itself to being a lender of last resort and not refinancing RFIs while converting its equity in Zarai Taraqiati Bank Limited (ZTBL) to subordinated debt to avoid a conflict of interest; and (iv) phasing out the magisterial powers of ZTBL (the former Agricultural Development Bank of Pakistan) for loan recovery, and replacing them with the provisions of the Banking Companies Ordinance. (b) Institutional restructuring and reforms that include: (i) transforming ZTBL into a sustainable and efficient RFI by installing a new management team, accepting portfolio audit recommendations, carrying out financial restructuring and recapitalization, streamlining its organization, adopting a code of good governance, pursuing governance reforms, conducting monitoring and evaluation based on agreed performance indicators on a regular basis, and undertaking partial privatization; (ii) encouraging commercial banks participation in rural finance by establishing a Rural Finance Resource Center (RFRC) at the National Institute for Banking and Finance; and (iii) strengthening provincial cooperative banks by developing and implementing a Credit Union Plan. (c) Establishing a New Bank Fund (NBF) at the SBP to promote the establishment of MFIs. The NBF was to provide institutional strengthening loans on soft terms not exceeding half of the initial equity investment by the promoter. (d) Promoting product and process innovations. This component aimed to develop a Pilot Insurance Plan to address the vulnerability of rural households to drought and floods. The total adjustment cost to implement the RFSDP was estimated to be $547 million, including (i) conversion of a government loan to ZTBL into ZTBL equity after settling ZTBL claims on the government ($274 million), (ii) performance-linked cash equity from the government to ZTBL (about $170 million), (iii) rightsizing of ZTBL through a voluntary golden handshake scheme funded by the

5 3 government ($84 million), (iv) NBF ($15 million), and (v) RFRC ($1 million), Credit Union Plan ($1 million), and Pilot Insurance Plan ($2 million). The project loan originally comprised the following three components: (a) Implementation of the ZTBL restructuring plan to attain (i) governance reforms, (ii) modernization of operations, (iii) efficiency gains in business processes, (iv) product and service development, (v) human resource development, and (vi) information technology (IT) development. Support was also to be given for the hiring of a management team and functional specialists, both domestic and international, and for study visits. (b) SBP institutional strengthening for rural finance regulation through (i) reviewing the prevailing supervisory and regulatory policy; (ii) upgrading the supervisory framework; (iii) assessing human resource skills and IT requirements; (iv) installing basic IT infrastructure; (v) providing training and skills development; and (vi) strengthening SBP s Agriculture Credit Department. (c) Ministry of Finance (MOF) institutional strengthening to build the capacity of the project management unit (PMU) for (i) implementing the RFSDP; and (ii) preparing and implementing the Credit Union Plan and the Pilot Insurance Plan. C. Evaluation of Design and Implementation (PCR Assessment and Validation) (i) Relevance of Design and Formulation The program completion report (PCR) 2 notes that the RFSDP was consistent with the ADB s Poverty Reduction Partnership Agreement (signed in 2002) and the Country Strategy Program ( ). However, the PCR considers that weaknesses in the assessment of the sector and the political economy, together with inadequate consideration of lessons learned, resulted in unrealistic assumptions about the political commitment for the reform agenda, an overly broad program scope, and an unsuitable program design. The PCR questions the RFSDP's focus on ZTBL restructuring and the selection of ZTBL as the implementing agency for the project loan despite its questionable solvency, high liquidity, poor profitability, inefficient intermediation, and high loan arrears at the time of appraisal. The PCR also laments the lack of loan covenants benchmarking ZTBL s expected financial performance. ADB agreed to the government s request to cancel the program loan in 2007 (with no release of the third and fourth tranches), given (i) the low likelihood of compliance with the conditions for the release of the loan s third tranche, (ii) the damage caused to ZTBL s financial condition between 2002 and 2005 by the reversal of the government s policy commitments for first tranche release (including not to allow loan waivers or introduce interest rate caps) and by ZTBL's internal mismanagement, and (iii) the poor achievement of other goals. The PCR also highlights the slow and under-utilization of the project loan. On this basis, the PCR concluded that ADB appears to have overestimated the government s resolve in commitment to prudent financial governance and in its ability to enforce the same. In retrospect, the RFSDP s design, which was partly relevant at appraisal, became irrelevant during implementation. This validation agrees with PCR observations on (i) the consistency of the expected RFSDP results with the government development strategy and the ADB s strategy and program for the country at the time of appraisal, and (ii) ADB s overestimation of the government s commitment to prudential financial governance and its ability to enforce the same. This validation considers that the RRP did identify many of the policy issues affecting rural finance in Pakistan and sought to address them, e.g., through policy dialogue on directed lending. Although compliance with a number of first tranche release conditions related to loan waivers and interest rate caps seems to indicate that adequate political support was present at the time of program appraisal, a number of policy actions were subsequently reversed, one of them prior to ADB s release of the second tranche. 2 ADB Program and Project Completion Report: Rural Finance Sector Development Program (Pakistan) (Loans 1987-PAK and 1988-PAK). Manila.

6 4 The RFSDP s focus on ZTBL restructuring would appear to have been justified in view of its predominance in the rural finance market and the significance of a number of actions taken prior to the RFSDP approval (i.e., repeal of the Agricultural Development Bank of Pakistan Ordinance, acceptance and incorporation of portfolio audit recommendations, adoption of the restructuring plan, and commencement of staff separation). However, a fundamental lesson from similar state bank restructurings, i.e., to only recapitalize banks after substantial restructuring has taken place, seems to have been ignored. The government was going to recapitalize ZTBL in 3 tranches, provided ZTBL met the performance indicators (including some financial ratios) agreed with ADB (RRP, Table A4.5), but only the conditions for the third and fourth tranche releases of the program loan were linked to the achievement of ZTBL s operational and financial performance indicators. Additional significant restructuring measures should have been required prior to first and second tranche releases. If there had been continued political commitment to fix the problem, most policy and institutional measures supported by the Program would have been relevant. The expected RFSDP outcomes and impacts remain consistent with ADB s Country Partnership Strategy for Pakistan (CPS), which prioritizes financial sector reforms (CPS, para. 68). (ii) Program and Project Outputs Program Outputs. The PCR concludes that: (i) a favorable policy environment was not created; (ii) ZTBL was not restructured as envisaged; (iii) cooperatives were not reformed and no provincial cooperative banks (PCBs) were converted into MFIs; (iv) no credit union plan was prepared; (v) no crop pilot insurance plan was prepared; (vi) the NBF was created and its rules prepared, but its funds remained undisbursed because no PCBs had been converted into MFIs, the intended NBF users; and (vii) the National Institute of Banking and Finance established the RFRC, which conducted training, but, at the time of PCR preparation had yet to (a) help banks develop demand-adapted products and services recognizing gender dimensions, (b) enhance commercial banks portfolio management capabilities, or (c) reduce their costs through new systems and procedures for rural lending. Project Outputs. The PCR concludes that ZTBL s restructuring did not materialize. ZTBL benefited only marginally from ADB s efforts to help ZTBL through a major change in project scope and implementation arrangements aimed at enhancing its IT system architecture. SBP's supervision of rural finance institutions was strengthened, albeit without using ADB loan funds. The Ministry of Finance (MOF) used ADB s loan funds for setting up its project management unit, but did not prepare the credit union or pilot insurance plans. This validation finds that the PCR discusses fairly the (i) status of key program conditions and project outputs at the time of PCR assessment, and (ii) the reasons for deviations from planned outputs. To supplement the discussions, a table on Compliance with Loan and Project Covenants (PCR, Appendix 3) was provided. However, as the Project included a program loan, the PCR would have benefited from the inclusion of an updated policy matrix to present the compliance status of individual policy actions including also non-tranche release conditions, as well as the pace of program implementation and the sequence of policy actions actually taken. In addition, an updated program framework could have been attached to (i) compare planned and actual inputs, outputs, and activities, and (ii) analyze their contributions to the actual RFSDP outcomes and impacts. (iii) Program and Project Cost, Disbursements, Borrower Contribution, and Conformance to Schedule The PCR indicates that the actual program loan amount disbursed was $150 million, consisting of $100 million in the first tranche on 26 December 2002 on loan effectiveness and $50 million in the second tranche on 6 December It also noted that the loan was closed on 17 May 2007 with no release of third and fourth tranches amounting to $75 million. Thus, the PCR provides a full and fair assessment of disbursement and the Program s conformance to schedule. However, it does not give information on the actual program cost and the borrower s contribution.

7 5 As to the project loan, the PCR notes that (i) MOF used only $0.29 million to support the PMU (for the project director s salary, acquisition of vehicles and office equipment, and administrative expenses); (ii) SBP understandably opted for its own resources and a grant from the Swiss Agency for Development Co-operation, instead of the project loan fund; and (iii) ZTBL utilized $4.73 million for domestic and international consultancy and IT system acquisition, but could not use additional funds reallocated to it prior to loan closure on 17 July The PCR further notes that the actually incurred project costs were $6.6 million (including service charges), of which ADB financed $6.56 million. $18.44 million of ADB funds remained undisbursed. Thus, the PCR provides a full and fair discussion of the topics covered under this subsection. (iv) Implementation Arrangements, Conditions and Covenants, related Technical Assistance, and Procurement and Consultant Performance The PCR does not highlight particular issues concerning the implementation arrangements except that estranged relations between MOF s PMU and ZTBL s project implementation unit at times delayed communications with ADB. The PCR discusses fairly and completely the key RFSDP covenants by stating that: the general policyrelated conditions of the program loan mandating the creation and maintenance of an enabling financial environment were relevant to the program s desired outcome. The program loan s component-specific covenants were also relevant to the successful outcome of individual components. The Borrower did not comply with the most important covenants of the program loan. By imposing an interest cap, the Borrower made ZTBL s agricultural lending unviable. The loan waiver created a moral hazard that encouraged willful default. Both measures vitiated the favorable policy environment necessary for the success of the loan. ZTBL was not restructured as envisaged. Cooperatives were not reformed, as PCBs did not transform into MFIs. NBF, although created, did not lend. The credit unions and crop insurance schemes were not established. Compliance was marginal for those covenants related to strengthening commercial banks rural operations. The PCR also highlights some achievements in the area of financial supervision: (i) SBP retained its role as lender of last resort while divesting its equity in ZTBL and ending its refinancing for ZTBL s subsidized lending; (ii) SBP s supervision of RFIs is now at par with that for commercial banks; and (iii) ZTBL s tribunal powers were ended, and the institution was brought into the ambit of the banking ordinance. The PCR provides a fair assessment of procurement performance, and discusses consultant performance in some detail, focusing on particular issues faced by ZTBL: ZTBL believed that it could hire better expertise by hiring consultants to its senior management team and that their remuneration would not be blocked by ZTBL s internal salary ceilings. Since the senior management team could not integrate seamlessly into its managerial setup, however, the hiring of consultants to its senior management (with the exception of its chief information officer) was discontinued. Complaints of deteriorating corporate governance in ZTBL were attributed to faulty selection procedures for its senior management team financed out of the ADB loans. ZTBL s staff association petitioned its board about these matters. ZTBL s management and financial restructuring envisaged under the program and project loan did not materialize. In 2007, the Government appointed a new chairperson for ZTBL who decided the costs of its senior management team would now be borne by ZTBL from its own budget. This validation considers that the PCR could have drawn relevant lessons by further elaborating on the faulty selection process for its [ZTBL s] senior management. (v) Performance of the Borrower and Executing Agency The PCR did not provide an overall rating for Government performance. It rated the performance of the government as the borrower as unsatisfactory, citing that it had reneged on commitments made in its policy letter and the loan agreement leading to the disappointing results of the RFSDP. This validation agrees with the subrating. The PCR rated the performance of the Executing Agency, MOF, partly satisfactory with the following

8 6 observations: while MOF as the executing agency was reasonably satisfactory in discharging its program and project supervision functions, MOF as the signatory to the Development Policy Letter and as an agent of the Borrower was unable to convince the Borrower to comply fully with the provisions of the loan agreement. This validation agrees with the PCR subrating. With regard to the performance of the implementing agencies, i.e., MOF, SBP and ZTBL, the PCR only rates the performance of ZTBL, which was found to be partly satisfactory despite (i) the deterioration of its financial condition and internal governance during program implementation, (ii) its inability to win staff acceptance for its proposed internal organization, and (iii) its inability to use the project loan for the upgrading of its IT system. Thus, this validation downgrades the rating for ZTBL's performance to unsatisfactory. The PCR does not rate the performance of MOF and SBP as implementing agencies. However, this validation assesses the performance of MOF as implementing agency as unsatisfactory considering the lack of progress achieved with the credit union and pilot insurance plans. SPB was the implementing agency responsible for the RFRC subcomponent and the NBF component of the program loan, and was to coordinate with the MOF on policy and regulatory reforms. Given the improvements in SPB s regulation and supervision of RFIs (as discussed in the Conditions and Covenants section above), and the establishment of the RFRC and NBF, this validation assesses the performance of SBP as satisfactory. (vi) Performance of the Asian Development Bank The PCR rated ADB s performance unsatisfactory given that (i) ADB released the second tranche of the program loan and extended the implementation period of the two loans despite the non-compliance with key program measures (including first tranche release conditions), i.e., imposition of an interest rate ceiling on ZTBL s lending and declaration of a loan waiver, which sent conflicting signals as to ADB s commitment to a prudent and enabling financial environment; and (ii) ADB failed to carry out its special financial and operational review of ZTBL at the end of the second year as required under the loan agreement. This validation agrees with the rating and analysis. D. Evaluation of Performance (PCR assessment and Validation) (i) Relevance The PCR considers that the RFSDP was partly relevant at appraisal, but became irrelevant during implementation, and on this basis, rated it irrelevant overall. The PCR adequately discusses the Program's relevance at appraisal, but does not clearly explain why the RFSDP became irrelevant over time. This validation rates the RFSDP partly relevant. The RFSDP was consistent with the country s stated development priorities and ADB s country strategy at the time of approval. While there were a number of design flaws, such as the focus on ZTBL and the sometimes unrealistic expectations placed on its capacity to reform, the Program nevertheless sought to address important policy distortions. The ADBsupported policy reform agenda generally responded to sector development needs. However, a lack of broad-based political commitment to commercializing rural lending, which was not recognized at the project design stage, subsequently derailed reform efforts. (ii) Effectiveness in Achieving Outcome The PCR rates the RFSDP less effective, as (i) none of the program loan s objectives were realized fully and satisfactorily, and (ii) realization of the project loan s objectives was only marginally better. This validation fully supports the PCR s underlying analysis, but considers that on this basis the corresponding rating should be ineffective. The validation rating also recognizes the Program's failure to

9 7 achieve its expected main outcome, i.e., expansion of the rural finance sector in terms of the number of RFIs, MFIs and active participation of commercial banks and their increased outreach. (iii) Efficiency in Achieving Outcome and Outputs The PCR rates the RFSDP less efficient, in view of (i) ZTBL s poor operational and financial performance, (ii) the little progress made with the pilot insurance and credit union plans, and (iii) the NBF s undisbursed fund. This validation finds the PCR assessment somewhat narrow in scope and downgrades the rating to inefficient considering the level of program benefits relative to the disbursed program loan amount of $150 million, and substantial delays in project implementation. (iv) Preliminary Assessment of Sustainability The PCR rates the RFSDP unlikely sustainable because the cardinal assumptions for its success were not accomplished during the program loan s life. This validation generally supports this rating given the substantial policy reversals and the Program s limited institutional outcomes, possibly with the exception of SBP capacity improvements. (v) Impact The PCR does not give a rating for this criterion, while noting that (i) the total lending by RFIs and MFIs as of 31 December 2005 was PRs73 billion against an envisaged PRs240 billion; (ii) ZTBL under RFSDP was able to reach out to 413,829 clients against a target of 600,000; and (iii) Pakistan s population below the poverty line declined from 34.5% (of the population) in 2000/2001 to 22.3% in 2005/2006, but RFSDP s target of reducing this ratio to 15% by 2011 appears unachievable. In addition, the PCR highlights the positive contributions of the RFSDP to SBP with reference to the improvements in rural finance regulation and supervision. This validation considers that (i) the RRP did not provide any baseline or target benchmarks to enable an assessment of whether the envisaged project and program impacts were actually attained; and (ii) the vast majority of envisaged program and project outcomes were not achieved, therefore making the contribution to any development impacts unlikely. On this basis, this validation rates RFSDP's impact as negligible overall, despite some success achieved with the SBP component. E. Overall Assessment, Lessons, and Recommendations (Validation of PCR Assessment) (i) Overall Assessment The PCR rates the RFSDP unsuccessful, reflecting the weighted average of the individual ratings for four core criteria; relevance (20%), effectiveness (30%), efficiency (30%), and sustainability (20%). This validation agrees with the rating. (ii) Lessons The PCR identifies the following lessons emerging from the RFSDP: (i) ADB s processing and administering of the RFSDP showed a prevalence of hope over circumstance; (ii) the sector development program strategy, particularly with its multiple goals, was not a suitable intervention mechanism for Pakistan s rural finance sector; (iii) the success of any sector development program in the financial sector of any country requires the prevalence of a favorable environment for financial markets throughout the program period, which the government was unable to ensure in this case; and (iv) any ADB intervention in the financial sector in any country needs to be based in a strong and viable financial intermediary at the outset and cannot depend on the assumption of successful policy interventions to turn around a financially troubled institution. This validation considers that ADB experience in other countries shows that sector development programs can be used to facilitate financial sector development through the complementary and mutually reinforcing use of program, TA and investment loan modalities. However, sustained political commitment is a key prerequisite for

10 8 success. Lesson (iv) would appear to apply to financial intermediation loans, which were not used in the RFSDP. This validation finds that the RFSDP experience underpins the need for realistic assessments of governments' continued compliance with tranche conditions. The RFSDP experience also illustrates inherent incentive problems associated with the restructuring and commercialization of state banks. (iii) Recommendations This validation agrees with the PCR's RFSDP-specific recommendation that ADB should continue to engage in policy dialogue with the government to (i) prevent future distortions (such as loan waivers and interest rate caps) from creeping back into bank lending, and (ii) encourage ZTBL in its own interest to improve its financial and operational performance by internal reforms. Also, this validation has no disagreement with the general recommendations that (i) for any future financial sector intervention in Pakistan (such as a credit line), ADB should select as intermediaries only institutions demonstrating by their track records that they are financially viable; and (ii) any financial performance benchmark for a financial institution should be covenanted in the loan agreement and enforced rigorously. With regard to the PCR recommendation not to have any more sector development program type interventions in Pakistan s rural finance sector, this validation would like to qualify this recommendation by adding unless (i) the government takes major steps toward creating a favorable policy environment for rural finance markets, and (ii) ZTBL demonstrates a significant improvement in its operational, financial, and portfolio performance. F. Monitoring and Evaluation Design, Implementation, and Utilization (PCR Assessment and Validation) The program goals and purposes were presented somewhat differently between the main body of the RRP and the program framework. The program framework made comparatively little use of quantifiable indicators, and when it did, it did not always include baseline data and/or meaningful targets. Moreover, the program framework did not capture some of the result indicators mentioned in the main body of the RRP. Probably related to such weaknesses, ADB review missions do not appear to have effectively used the program framework for the monitoring and evaluation of RFSDP implementation. As a result, from 26 December 2002 to 30 September 2006, ADB consistently entered into the program monitoring system a rating of either highly satisfactory or satisfactory for development objectives and satisfactory for implementation progress, despite little achievement during this period. G. Other (e.g. Safeguards, including Governance and Anticorruption Provisions; Fiduciary Aspects; Government Assessment of the Program/Project, as applicable) (PCR Assessment and Validation) This validation found no safeguard violations and fiduciary issues. The PCR noted that ZTBL did not provide ADB with its project completion report. H. Ratings PCR IED Review Reason for Disagreement/Comments Relevance Irrelevant Partly relevant This validation upgrades the rating considering the partial relevance of the program design. Ensuing changes in political commitment to reforming rural finance could not be fully foreseen at the time of RFSDP approval. Effectiveness in Achieving Outcome Efficiency in Achieving Outcome and Outputs Less effective Ineffective This validation downgrades the rating since hardly any of the intended program outcomes were achieved. Less efficient Inefficient This validation downgrades the rating considering the inadequate resource efficiencies, i.e. the lack of program achievements in relation to the amount of disbursed funds.

11 9 H. Ratings PCR IED Review Reason for Disagreement/Comments Preliminary Assessment of Sustainability Borrower and Executing Agency Unlikely Borrower: Unsatisfactory Executing Agency (MOF): Partly satisfactory Unlikely Borrower: Unsatisfactory Executing Agency (MOF): Partly satisfactory Performance of ADB Unsatisfactory Unsatisfactory Impact Not rated Negligible This rating is based on the assessment of available measurable indicators specified in the program framework. Overall Assessment Unsuccessful Unsuccessful Quality of PCR Satisfactory I. Comments on PCR Quality PCR preparation followed PAI 6.07A, 3 and this validation assesses the PCR quality to be satisfactory. The PCR's assessment of RFSDP achievements is objective, and its analysis of policy issues in the rural finance sector and ZTBL is comprehensive. The quality of the PCR could have been further enhanced by (i) supporting its effectiveness assessment with an updated policy matrix and an updated program monitoring framework, and (ii) adequately considering resource efficiencies for its efficiency rating. J. Recommendation for IED Follow-Up None. K. Data Sources for Validation RRP, mission back-to-office reports, minutes of management and board discussions, progress report for the second tranche release, PCR. 3 ADB Project Completion Report. Project Administration Instructions. PAI No. 6.07A. Manila.

12 REGIONAL DEPARTMENT S RESPONSE TO THE PROGRAM COMPLETION REPORT VALIDATION REPORT On 9 November 2010, Director, Independent Evaluation Department, Division 1 (IED1), received the following comments from the Financial Sector, Public Management and Trade Division (CWFM), Central and West Asia Department (CWRD). We have reviewed IED s draft Program Completion Report (PCR) Validation relating to Loan 1987/88-PAK: Rural Finance Sector Development Program (and Project) circulated to CWFM on 5 November CWFM concurs with IED's overall assessment of the Program as unsuccessful and the component subratings with exception of the rating for relevance. CWFM stands by its assessment on the program s irrelevant design and disagrees with IED s assessment that the program was partly relevant because: (i) IED s assumptions that a number of policy interventions were seemingly addressed and it is reasonable to assume that the government was committed to the policy agenda it signed off in its policy letter prior to loan approval were disproven empirically and (ii) IED in its evaluation noted that the program s design was only partially relevant at appraisal and became irrelevant during implementation, which was also CWFM s observation reiterated by IED. Thus in accordance with IED s guidelines, the program s design was irrelevant.