Document of The World Bank IMPLEMENTATION COMPLETION REPORT (IBRD-78440) ON A LOAN IN THE AMOUNT OF MILLION (US$200 MILLION EQUIVALENT) TO THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank IMPLEMENTATION COMPLETION REPORT (IBRD-78440) ON A LOAN IN THE AMOUNT OF MILLION (US$200 MILLION EQUIVALENT) TO THE KINGDOM OF MOROCCO FOR A Report No. ICR2310 SUSTAINABLE ACCESS TO FINANCE DEVELOPMENT POLICY LOAN September 27, 2012 Finance and Private Sector Development Maghreb Department Middle East and North Africa Region

2 KINGDOM OF MOROCCO GOVERNMENT FISCAL YEAR January 1 st December 31 th CURRENCY EQUIVALENTS (Exchange Rate Effective as of September 11, 2012) Currency Unit Moroccan Dirham US$ MA WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ABB ACAPS AfDB ALM AMMC ATM BAM BCP CAM CAR CB CCG CDG CDVM CMA CPM CPS DAPS DPL EU EUR FBPMC FDI FNAM FY GCC GDP GoM IBRD ICA ICR IDA IFC IFI IFRS IMF IPO IT MAD MFI MIGA MOF MOU NBFI NPL PCG PPP Al Barid Bank Autorité de Contrôle des Assurances et de la Prévoyance Sociale African Development Bank Asset and Liability Management Autorité Marocaine des Marchés de Capitaux Automated Teller Machine Bank Al Maghrib Banque Centrale Populaire Crédit Agricole du Maroc Capital Adequacy Ratio Credit Bureau Caisse Centrale de Garantie Caisse de Dépôt et de Gestion Conseil Déontologique des Valeurs Mobilières Capital Market Authority Crédit Populaire du Maroc Country Partnership Strategy Direction des Assurances et de la Prévoyance Sociale Development Policy Loan European Union Euro Fondation des Banques Populaires pour le Microcrédit Foreign Direct Investment Fédération Nationale des Associations de Microcrédit Fiscal Year Gulf Cooperation Council Gross Domestic Product Government of Morocco International Bank for Reconstruction and Development Investment Climate Assessment Implementation Completion and Results report International Development Agency International Finance Corporation International Financial Institution International Financial Reporting Standards International Monetary Fund Initial Public Offering Information Technology Moroccan Dirham Microfinance Institution /Microcredit Association Multilateral Investment Guarantee Agency Ministry of Economy and Finance Memorandum Of Understanding Non Bank Financial Institution Non Performing Loan Partial Credit Guarantee Purchasing Power Parity

3 PSIA RBC ROSC SAP SGG SME SMS UCITS USD VAT VSB WB Poverty and Social Impact Analysis Risk-Based Capital Report on the Observance of Standards and Codes Statutory Accounting Standard Secrétariat Général du Gouvernement Small and Medium Enterprises Short Message System Undertaking in Collective Investment in Transferable Securities United States Dollar Value Added Tax Villes Sans Bidonvilles World Bank Vice President: Country Director: Sector Director: Sector Manager: Task Team Leader: Inger Andersen Simon M. Gray Loic Chiquier Simon C. Bell Cédric Mousset

4 KINGDOM OF MOROCCO SUSTAINABLE ACCESS TO FINANCE DEVELOPMENT POLICY LOAN Table of Contents DATA SHEET A. Basic Information i B. Key Dates i C. Ratings Summary i D. Sector and Theme Codes ii E. Bank Staff ii F. Results Framework Analysis ii G. Ratings of Project Performance in ISRs v H. Restructuring v 1. PROGRAM CONTEXT, DEVELOPMENT OBJECTIVES AND DESIGN 1 2. KEY FACTORS AFFECTING IMPLEMENTATION AND OUTCOMES 4 3. 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 23 Annex 1. Bank Lending and Implementation Support/Supervision Processes 24 Annex 2. Summary of Borrower's ICR and/or Comments on Draft ICR 26 Annex 3. Comments of Cofinanciers and Other Partners/Stakeholders 34 Annex 4. List of Supporting Documents 35 Annex 5. Key indicators of the Moroccan financial system 36

5 DATA SHEET A. Basic Information Country: Morocco Program Name: Morocco - Sustainable Access to Finance DPL Program ID: P L/C/TF Number(s): IBRD ICR Date: 09/27/2012 ICR Type: Core ICR Lending Instrument: DPL Borrower: Original Total Commitment: Revised Amount: USD M Implementing Agencies: Ministry of Economy and Finance Cofinanciers and Other External Partners: African Development Bank GOVERNMENT OF MOROCCO USD M Disbursed Amount: USD M B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 11/12/2009 Effectiveness: 03/04/ /04/2010 Appraisal: 11/30/2009 Restructuring(s): Approval: 01/26/2010 Mid-term Review: 12/01/2010 Closing: 06/30/ /31/2011 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Moderate Satisfactory Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Quality of Supervision: Moderately Satisfactory Implementing Agency/Agencies: Satisfactory Overall Bank Performance: Satisfactory Overall Borrower Performance: i Satisfactory

6 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Performance any) Potential Problem Program at any time (Yes/No): Problem Program at any time (Yes/No): DO rating before Closing/Inactive status: No No Satisfactory 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 Capital markets Housing finance Micro- and SME finance Non-compulsory pensions and insurance Theme Code (as % of total Bank financing) Infrastructure services for private sector development 5 5 Micro, Small and Medium Enterprise support Regulation and competition policy E. Bank Staff Positions At ICR At Approval Vice President: Inger Andersen Shamshad Akhtar Country Director: Simon M. Gray Mats Karlsson Sector Manager: Simon C. Bell Simon C. Bell Program Team Leader: Cedric Mousset Cedric Mousset ICR Team Leader: Pierre-Laurent Chatain F. Results Framework Analysis Program Development Objectives (from Project Appraisal Document) The objective of the proposed operation was to support the Government's efforts to expand further the access of households and enterprises to finance, while ensuring the stability of the financial system. ii

7 Revised Program Development Objectives (if any, as approved by original approving authority) The PDO has remained the same during the life of the operation. (a) PDO Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years The objective of the proposed operation is to support the Government's efforts to expand further the access of households and enterprises to finance, while ensuring the stability of the financial system A financial system that has made significant gains in providing better access for individuals and SMEs while strengthening its resiliency Additional gains in access for individuals and, to a lesser extent, SMEs despite a more challenging economic and political environment and while preserving financial stability Date achieved 12/31/ /31/2011 Comments (incl. % achievement) (b) Intermediate Outcome Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) iii Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1 : Increase in number of total accounts of banks and Barid Al Maghrib per population Value (quantitative or 43% 54% Qualitative) Date achieved 12/31/ /31/2011 Comments (incl. % achievement) The addition of postal accounts to accounts with other banks immediately raised the percentage of Moroccans with a bank account from 34 to 47%. It has since increased to 54% (end 2011). Indicator 2 : Increase in the number of monthly consultation on individuals to the credit bureau Value (quantitative or 1,217 73,252 Qualitative) Date achieved 11/01/ /31/2011 Comments (incl. % The number of consultations of the CB has grown significantly over the past 2 years, from 12,500 in January 2010 to more than 80,000 in January Besides,

8 achievement) consultations on individuals and companies have both increased significantly. Indicator 3 : Increase in the number of monthly consultations on companies to the credit bureau Value (quantitative or 371 6,357 Qualitative) Date achieved 01/11/ /31/2011 Comments (incl. % achievement) Same comment as above Indicator 4 : Increase in the share of SMEs in total bank lending to companies Value (quantitative or 22% 20% Qualitative) Date achieved 06/30/ /31/2011 Comments The amount of credits to SMEs as a share of GDP remained stable overall between (incl. % 2009 and 2011 (9.8%) following a decline in achievement) Indicator 5 : Decrease in the number of habitants per branches of banks and Barid Al Maghrib Value (quantitative or 6,300 6,300 Qualitative) Date achieved 12/31/ /31/2011 Comments (incl. % achievement) All postal branches were taken into account until 2008 (1762 in 2008), but only those effectively offering financial services starting in 2009 (887 in 2009). Recalculation of the baseline seems to show a constant improvement of the ratio over the period. Indicator 6 : Reduction in the NPL ratio of MFIs Value (quantitative or 12% 4.3% Qualitative) Date achieved 09/30/ /31/2011 Comments The NPL ratio for microcredit institutions has improved, moving from 12% in 2009 (incl. % to 4.3% in achievement) Indicator 7 : Increase in the average capital adequacy ratio of the banking system Value (quantitative or 11.7% 11.7% Qualitative) Date achieved 06/30/ /31/2011 Comments (incl. % achievement) As of December 2011, the CAR of banks was 11,7 %, back to the level observed in June 2009 (in a more challenging environment). Quarterly publication of the real estate price index by the Central Bank starting in the Indicator 8 : first quarter 2010 Value (quantitative or Published Qualitative) Date achieved 12/31/2011 iv

9 Comments (incl. % achievement) Indicator 9 : The real estate price index called Indice des prix des actifs immobiliers is published quarterly by BAM. The latest index was published on 17 August 2012 (2nd quarter 2012). Increase in the share of medium and long term issues in total annual government debt issues Value (quantitative or 5% 35.9% Qualitative) Date achieved 12/31/ /31/2011 Comments (incl. % achievement) Indicator 10 : Reduction of the number of lines of Treasury bills Value (quantitative or Qualitative) Date achieved 06/30/ /31/2011 Comments (incl. % achievement) Indicator 11 : Increase in the outstanding value of private fixed income instruments to GDP with an initial maturity over a year Value (quantitative or 4.6% 9.2% Qualitative) Date achieved 06/30/ /31/2011 Comments (incl. % achievement) If TCN (bills) with a maturity over 1 year are included, the percentage rises to 15.6% as of December G. Ratings of Program Performance in ISRs No. Date ISR Actual Disbursements DO IP Archived (USD millions) 1 12/01/2010 Satisfactory Satisfactory /24/2012 Moderately Satisfactory Moderately Satisfactory H. Restructuring (if any) Not Applicable v

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11 1. Program Context, Development Objectives and Design 1. The Sustainable Access to Finance Development Policy Loan (DPL) to the Kingdom of Morocco in the amount of million EUR (US $200 million equivalent) was approved on January 26, The DPL supported key components of Morocco s strategy aimed at addressing the two main challenges in the financial sector: further expanding access to underserved sectors while preserving financial stability. The DPL was fully consistent with the first pillar of the FY10-13 Country Partnership Strategy (CPS) of growth, competitiveness and employment. The operation was built on the positive experience of the Bank s past engagement in the financial sector, particularly the 2005 Financial Sector DPL that helped strengthen the legal and institutional environment for financial intermediation and risk management, and increase the private sector s participation in the provision of financial services. The DPL also drew heavily on previous World Bank work including the 2008 Financial Sector Assessment Program (FSAP) and related technical notes 1 as well as the Reports on the Observance of Standards and Codes (ROSCs) on Insolvency and Creditor Rights (2006), and Payments and Securities Clearance and Settlement Systems (2007). 2. The main objective of the DPL was to support Morocco s reform program aimed at addressing the dual objectives of access and stability. To this end, the DPL was structured around four pillars with specific actions specified under each component: (i) ensure sustainable improvements in household access to finance; (ii) ensure sustainable improvements in SME access to finance; (iii) strengthen financial regulation and supervision; and (iv) develop further capital markets and instruments. 3. The DPL consisted of two tranches. The first tranche (88.6 million EUR) was disbursed following Board approval, which was conditional on the realization of specific reforms. The second tranche (44.1 million EUR) was released upon the fulfilment of a detailed set of measures described below in section 2. At the request of the Government, this program was jointly prepared with the African Development Bank (AfDB). The AfDB provided parallel financing (162 million EUR) in two tranches with the view to support financial sector development. The two operations complemented each other through common policy objectives but with different activities. The DPL has also been consistent with IFC s long-term engagement in the financial sector of Morocco, particularly as regards support to the development of SMEs and financial services to the poorer segment of the population 2. Close collaboration between the Bank and the IMF also permitted the sharing of key data, particularly on the macroeconomic environment Context at Appraisal 4. The analysis of supporting documents for the DPL under review and outcomes of discussions with authorities show a very high degree of convergence between the operation s objectives and design on the one hand and the Government s program on the other. The Bank team s assessment of the macroeconomic framework and sector background were well articulated and relevant to the projected program. 1 The Technical Note on Increasing Access to Finance (October 2008) provided a thorough analysis on access and a description of the main financial institutions active in Morocco. The note also discussed structural and regulatory issues which have the potential to affect outreach, assessed restrictions to access to savings, checking and payment services and proposed recommendations derived from the analysis. 2 For example, IFC has worked with leading Moroccan banks to help them develop profitable SME banking operations. IFC also undertook various initiatives to develop the country s financial and credit information infrastructure, and helped establish jointly with the Central Bank a best practice private credit bureau. 1

12 Macroeconomic Framework 5. Morocco has achieved impressive macroeconomic performance over the last ten years as indicated by higher and sustained output growth, falling unemployment, rising investment ratios, and low inflation 3. The country s improved performance was largely due to sound macroeconomic policies and structural reforms. After 2005 the Government maintained very sound fiscal policies and conducted a prudent public debt management and monetary policy. Financial sector reforms supported by a Financial Sector Development Policy Loan- entailed inter alia the restructuring of state banks, stronger financial regulation and supervision, and improved financial infrastructure. At the time of the appraisal, Morocco suffered from the effects of the global financial crisis, but managed its effects well and was able to preserve a reasonable growth performance. Public finances also continued to be well managed. Sector Background 6. During the preparation of the current operation, the financial sector was characterized as follows. 7. Banks had proven resilient to the crisis 4 and continued to finance infrastructure and housing, and had expanded financing to MFIs and SMEs as well. Moreover, the Central bank had tightened regulations, including the increase of the minimum capital adequacy ratio (CAR) to 10 percent and issued new regulations to ensure that banks manage effectively new risks emerging from fast credit growth; 8. Morocco had been able to develop the insurance sector to a significant extent, but this growth had also created risk management challenges, especially in the fast growing life insurance sector. 9. On the microfinance front, the country had become a recognized leader in the region5, but shortcomings in governance and internal control had led to poor management of the rapid growth of institutions and portfolio problems (in particular NPLs) which started creating financial stress. This led to the tightening of regulation and supervision. 10. Lastly, the stock market had grown rapidly but was dominated by a handful of large companies, and private fixed income instruments remained undeveloped. 11. Despite the growth of the financial system in years leading up to this operation, there was still substantial scope for further increasing access to financial services. Morocco was above the international benchmark regarding financial depth. However, the country had much lower ratios of deposits and loans per population than would have been expected given the depth indicators. This difference suggested the potential for further and substantive gains in access. Enterprise surveys showed a similar picture. Moroccan policy-makers faced the challenge of expanding access to finance to households and enterprises, while also ensuring that these gains would be sustained Rationale for Bank Involvement 12. Against this background, the Bank prepared the current DPL to respond to Government s request for financial and technical support to i) help meet its larger borrowing requirements resulting from the global crisis, while avoiding excessive pressures on the domestic financial market; and ii) support an important reform that would contribute to growth and poverty alleviation. It was well established at the time of project preparation that access to finance helped reduce poverty and inequality and should be an 3 Economic growth rates averaged 5.1 percent over the period , almost twice as high as the average of the previous decade. 4 Non-performing Loans (NPLs) were historically low (5.5 percent of total loans in June 2009) and well provisioned, with no signs of deterioration due to the credit expansion of recent years. 5 MFIs serve 1.3 million clients and their credit portfolio reached almost one percent of GDP in

13 element of any successful economic development program, as was articulated in the program document. The DPL was designed to contribute directly to the CPS outcomes under Pillar 1 for financial sector reform. The Bank s involvement in the sector through this DPL was fully consistent with the Bank Group s 2007 Strategy for the Financial Sector that identified access to finance for the underserved as one of the two areas that will receive special attention through well-defined initiatives. The DPL provided an effective vehicle for the Bank to play a leading role in improving the country s financial sector reform Original Program Development Objectives (PDO) and Key Indicators (as approved) 13. The objective of the proposed operation was to support the Government s efforts to expand further the access of households and enterprises to finance, while ensuring the stability of the financial system. 14. Its outcomes were to be measured by the following eleven key indicators pertaining to each pillar of the program: Pillar 1: Progress in expanding access to households: (i) Increase in number of total accounts of banks and Barid Al Maghrib per population, (ii) Decrease in the number of habitants per branches of banks and Barid Al Maghrib, and (iii) Reduction in the NPL ratio of MFIs; Pillar 2: Progress in expanding access to SME: (iv) Increase in the number of monthly consultation on individuals to the credit bureau, (v) Increase in the number of monthly consultations on companies to the credit bureau and (vi) Increase in the share of SMEs (as defined by BAM prudential regulations) in total bank lending to companies; Pillar 3: Progress in strengthening the regulatory and supervisory framework: (vii) Increase in the average capital adequacy ratio of the banking system, (viii) Quarterly publication of the real estate price index by the Central Bank starting in the first quarter 2010; Pillar 4: Progress in developing capital markets: (ix) Increase in the share of medium and long term issues in total annual government debt issues, (x) Reduction of the number of lines of Treasury bills and (xi) Increase in the outstanding value of private fixed income instruments to GDP with an initial maturity over a year (including bank issues) Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification 15. No changes Original Policy Areas Supported by the Program 16. As indicated in the DPL, the operation was aimed at supporting the Government of Morocco (GoM) current financial reform program. Structured in two tranches, the program contained 4 key policy actions: (i) Ensuring Sustainable Improvements in Individuals Access to Finance, (ii) Ensuring Sustainable Improvements in SMEs access to Finance, (iii) Strengthening Financial Regulation and Supervision and (iv) Furthering the Development of Capital Markets. 3

14 1.6. Revised Policy Areas (if applicable) 17. No changes Other significant changes 18. There was only one change made to the program. The closing date of the DPL was extended from June 30, 2011 to December 31, 2011, in response to a request from the Ministry of Economy and Finance received on May 24, The extension was approved in order to allow the completion of two outstanding conditions of second tranche release 6. In a memo dated June 29, 2011, the team confirmed that the requirements of OP/BP (Closing Dates) relating to the extension of closing dates had been met. Specifically, as required under the OP (paragraph 3): (i) the project objectives continued to be achievable; (ii) the performance of the Borrower and other project implementing agencies were satisfactory; and (iii) the Borrower had prepared a specific action plan acceptable to the Bank to complete the project. 19. It is also worth noting that a new Government, appointed after the Constitution was revised and elections held in the second semester 2011, decided in early 2012 to send back all pending draft laws to the relevant line Ministries so that they could be reviewed and, where appropriate, amended to be consistent with the new Constitution and the Government s priorities. As a result, two second tranche policy actions related respectively to the adoption by the Council of government of draft laws on (i) a new insurance and pension supervisory authority («Autorité de Contrôle des Assurances et de la Prévoyance Sociale», ACAPS) and (ii) a new capital market authority («Autorité des Marchés des Capitaux», AMMC) were reversed. The latter (AMMC) was again adopted by the Council of Government on April The former (ACAPS) had not yet been transmitted to the Council of Government for its approval as of August Key Factors Affecting Implementation and Outcomes 2.1. Program Performance (supported by a table derived from a policy matrix) *For multi-tranche DPL: Tranche # Amount Expected Release Actual Release Release Date Date Tranche 1 88,6 million March 8, 2010 March 12, 2010 Regular Tranche 2 44,1 million February 18, 2011 November 2, 2011 Delayed for 6 months (Actions in bold are mandatory for tranche release under the legal agreement) Tranche 1 List conditions from Legal Agreement/ Program Document Pillar 1: Ensuring sustainable improvement in access to finance for individuals -Licensing by Bank Al Maghrib, BAM (the central bank) of Al Barid Bank (the postal Status /Prior Action 6 Condition 1 - Adoption of a draft law establishing a Capital Market Authority and Condition 2 - Adoption of a draft law establishing a new and independent insurance and pension supervisory authority. 4

15 bank). The banking license was granted on July 10, Order of the Minister of Economy and Finance related to the classification and provisioning of microcredit associations loans. In 2009, the MOF issued an order (arrêté) published in the official gazette (Bulletin officiel n 5752 of July 16, 2009) covering detailed classification and provisioning requirements for all microcredit institutions (MFIs). -Directive of Bank Al Maghrib related to the governance (including risk management and internal control) of microcredit associations. BAM issued two main texts strengthening risks management, internal control and transparency for microcredit institutions (directive n 01/G/2009 of September 16, 2009 and circular n 2/DSB/2009 of December 21, 2009). -Set up of a new housing guarantee fund, Damane Assakane, facilitating access to housing for low income households. A mortgage loan guarantee scheme Damane Assakane was set up in Pillar 2: Ensuring sustainable improvement in access to finance for SMEs -Initiation of operations of the Credit bureau, demonstrated by the receipt by the Central Bank of data from credit institutions and microcredit associations (MFI) accounting for at least 33% of MFI loans. The Credit bureau started operating on October 26, More than a third of MFIs loans were reported in January /Prior Action -Reform of the SME credit guarantee products (guarantee products based on companies life cycle and improved procedures to approve and call on the guarantee). The contemplated reform was implemented in Decree reorganizing the CCG. The Decree reorganizing the CCG was issued on May 21, 2009 (Decree no ) Pillar 3: Strengthening the financial regulatory and supervisory architecture -Completion of a crisis simulation/management exercise involving all financial sector authorities (with World Bank participation). A crisis simulation exercise was carried out in April 2009 with the technical assistance of the WB, involving all key regulatory and supervisory agencies. -Agreement on a comprehensive review of the quality of bank governance to be jointly /Prior Action 5

16 conducted with the World Bank and following international best practice. -Submission of a draft law to the General Secretariat of Government (SGG) 7 establishing a new and independent insurance and pension supervisory authority («Autorité de Contrôle des Assurances et de la Prévoyance Sociale»). A draft law aimed at creating a new authority independent from both the MOF and from the insurance industry was prepared and submitted to the SGG in Submission of draft law to the General Secretariat of Government establishing a Capital Market Authority (CMA-«Autorité des Marchés des Capitaux»). A draft law for the creation of the CMA was submitted to the SGG in September Strengthening of the governance structure of the Casablanca stock exchange. A draft was prepared to allow the opening of the capital of the stock s exchange beyond stock brokers. Pillar 4: Further Development of Capital Markets -Conclusion of a MOU between the Treasury and BAM for more active Treasury cash management that also promotes more effective debt management. A MOU was signed in July 28, 2009 between the Treasury and BAM. /Prior Action -Set up of an electronic auction system for government securities that reduces operational risks and price uncertainty for all participants. -Adoption by the Council of Government of draft law on the future market. A draft law aimed at creating a future market (Marché à Terme d Instruments Financiers) was prepared in 2010 and endorsed by the SGG. The draft law was transmitted to Parliament which had not passed it as of August Second Tranche List conditions from Legal Agreement/ Program Document Pillar 1: Ensuring sustainable improvement in access to finance for individuals -Transfer of the financial services of Barid Al Maghrib (Post Office) to Al Barid Bank (Postal bank). On December 2010, this transfer was approved by Board of Barid Al Maghrib and of ABB. On December 2010, the transfer of most financial services from Barid Al Maghrib to ABB became effective. Pillar 2: Ensuring sustainable improvement in access to finance for SMEs Status -Broadening of the Credit bureau activities, demonstrated by the receipt of data 7 In Morocco, draft laws are reviewed by the General Secretariat of Government which then sends them to the Council of Government. Under the new Constitution adopted in 2011, they are transmitted to Parliament after the Council of Government adopts the draft laws. 6

17 microcredit associations (MFI) accounting for at least 50% of MFI loans. In a letter dated July 19, 2011, BAM confirmed that 78% of microcredit loans were reported to the Credit Bureau in May It has improved further since and 90% of MFI loans were reported in February At this date, the four largest MFI with a 92% market share also started consulting information stored by the credit bureau. -On-site inspection of the Caisse Centrale de Garantie by Bank Al-Maghrib, to assess inter alia the adequacy of governance, internal controls, and risk management. An onsite inspection was carried out by BAM in A letter was sent on June 22, 2011 by the Head of bank supervision at BAM to the Managing Director of the CCG detailing key outcomes. No major weaknesses were identified. It was recommended to strengthen further the governance and risk management framework of the CCG. Pillar 3: Strengthening the financial regulatory and supervisory architecture -Establishment of a Memorandum of Understanding between the Ministry of Economy and Finance and financial sector supervisors establishing procedures and exchange of information in the event of a financial crisis. A MoU called Convention relative à la gestion des crises financières has been signed on June 21, Completion of the review of bank governance and draft action plan by the Central Bank addressing identified weaknesses. A bank governance review was completed in Its key recommendations are reflected on the draft amendments to the banking law which have been prepared by BAM and are being discussed with the Ministry of Finance. -Elaboration of a new supervisory methodology to assess banks credit risks related to real estate by taking into account new real estate price indexes published by the Central bank. -Adoption by the Council of Government of a draft law establishing a new and independent insurance and pension supervisory authority («Autorité de Contrôle des Assurances et de la Prévoyance Sociale», ACAPS). The draft law establishing the new authority was adopted by the Council of Government on August 25, After the enactment of the new constitution on July 1, 2011, and in the wake of the new free elections that gave rise to a new Government, the decision was taken by the new Prime Minister to re-submit all pending draft laws for a new round of internal review to ensure consistency with the constitution as well as with the new Government s Program. As of August 31, 2012, a revised draft law establishing a new and independent insurance and pension supervisory authority had been prepared and transmitted to the SGG but no date had yet been set for its review by the Council of Government. -Adoption by the Council of Government of a draft law establishing a Capital Market Authority («Autorité des Marchés des Capitaux», AMMC). The draft law establishing a new capital market authority with strengthened legal, operational and financial independence and enforcement powers was adopted by the Council of Government on August 25, As indicated above, it was decided in early 2012 that all draft laws would be re-submitted to ministerial review to ensure they are consistent with the new Constitution and the priorities of the newly elected Government. The draft capital market Partially 7

18 law was re-approved by the Council of government on April 19, 2012 without material changes. -Adoption by the Council of Government of the draft law allowing the opening of the capital of the Casablanca stock exchange beyond brokers. A law allowing the opening of the capital of the stock exchange was passed on July 12, 2011 and published in the official gazette on September A draft regulation ( Arrêté ) is being prepared that will determine the maximum percentage of shares that a single shareholders could hold in the stock exchange s capital. Pillar 4: Further Development of Capital Markets -Issue by the Ministry of Economy and Finance of an order ( Arrêté ) changing the reference rate of the variability of interest rates of floating rate credits from Treasury bills to a reference rate linked to short term instruments, fostering better public debt management. The Minister of Economy and Finance issued an order on March 17, 2010 modifying the reference rate for floating rate credits from Treasury bills to a reference rate linked to short term instruments. This order was published in the official gazette on May 6, Elaboration and initial implementation of a debt management strategy to build a liquid and reliable yield curve. The report on public debt management prepared by the Ministry of Finance for 2010 includes details about the strategy adopted as well as measures taken in 2010 to implement it. -Enactment of Decree implementing the amendments to securitization law that expands the range of securitizable assets and adoption of prudential regulations to ensure a sound use of these instruments. The Minister of Finance took a decree on 30 June 2010 (no ) to implement the provisions of the securitization law Submission for comments to relevant stakeholders of a draft law creating covered bonds. The MOF set up a working group gathering key stakeholders tasked with the preparation of a draft covered bond law. The draft was sent by the Head of the Treasury to the working groups for comments on June 6, The group comprises, among other authorities, the Chairman of the banking industry association, the Head of the BAM s supervisory department, the Head of the capital market supervision, the Head of the insurance supervision Major Factors Affecting Implementation 20. Several factors have contributed to the successful implementation of the program. Adequacy of Government s Commitment 21. The operation has been conducted as planned and in accordance with the conditions as outlined in the Loan Agreement. The successful implementation of the DPL is attributed to several factors: (i) a clear 8

19 commitment to the reforms by the Moroccan government, (ii) a strong sense of ownership of the program since its inception, (iii) a wide domestic consensus on the need to improve access to finance as a key element for sustainable growth and (iv) the capacity of the implementing agency (both in terms of administrative and financial management capacity) and its sound experience in dealing with prior projects. 22. This achievement has been made possible thanks to a combination of good practices. First, a consultative and participatory approach has been favored by the authorities 8. The government s use of domestic multipartite working groups as instruments for collecting views and building consensus on issues ascertained a large adherence to the objectives, reinforced internalization of the process, and thereby underpinned reform ownership. All key stakeholders were involved and consulted 9. Second, the sustained political leadership demonstrated by the Moroccan MOF, particularly its Treasury department, has supported the decision-making process and fostered a rapid engagement of the reforms. Third, the direct and constant dialogue with development partners, especially the Bank and the AfDB has been an important catalyst that ensured perfect alignment between reforms as targeted by the DPL and the overall government s strategy. 23. This commitment and strong ownership are best reflected through the actions and outputs that the GoM has taken and produced and the corresponding outcomes, as presented in Section 3.2. Soundness of Background Analysis 24. The DPL has been designed on the basis of sound analytical work. The Financial Sector Assessment Program Update of 2008 provided strong analytical underpinning to the design of the operation under review. The preparation benefited from the detailed analysis and recommendations of the FSAP on banking, insurance and capital markets, as well as on access to finance in Morocco. The Financial Sector Stability Assessment was another useful source of information. Other diagnostic works also contributed to the design of the operation, including Reports on the Observance of Standards and Codes (ROSCs) on Insolvency and Creditor Rights (2006), Payments and Securities Clearance and Settlement Systems (2007), and Investment Climate Assessment (ICA; 2007). In addition, the design was enhanced through the collection of data and information gathered from internal and external partners (e.g. IFC, IMF). Assessment of the Operation s Design 25. The operation was well prepared, clearly articulated and fully aligned with the Government priorities for the financial sector. The DPL was client-driven and designed following the same structure of the GoM reform program, consisting of 4 main pillars, all geared towards expanding access to finance while preserving stability. In particular, the Bank supported the government with a DPL for sustainable access to finance that entailed the creation of a postal bank, a credit bureau, the establishment of regulations for loan classification, provisioning and governance for microfinance institutions. Measures also included improvements in bank regulation and supervision, draft laws to improve supervision of insurance companies and capital markets as well as improvements in public debt management. Morocco s 2010 DPL focused on both problems in microfinance and access to finance which were, as noted by the 8 For example, all draft regulations targeted by the current DPL have been prepared in consultation with all relevant agencies and partners, including from the private sectors. This helped clarify and broaden the understanding of issues and legitimized the need for reforms. 8 BAM (Bank Al Maghrib), DAPS (Direction des Assurances et de la Prévoyance Sociale), CDVM (Conseil Déontologique des Valeurs Mobilières), CCG (Caisse Centrale de Garantie), among others. 9

20 IEG 10, arguably more relevant in Morocco than in any other country in the region given its large microfinance segment which had recently experienced rapid growth. 26. Overall, the objectives were also realistic and not too demanding for the implementing agencies as evidenced by the final results of the program for which all targets were met. It was also a timely intervention that came into effect at a critical moment where the financial crisis led to the emergence of new risks, particularly for the poorest segment of the population. Furthermore, this program should not be seen as a standalone product but as a natural continuation of what the Bank has already achieved with success in the financial sector. By focusing more closely on access, while strengthening further the regulatory and supervisory framework of banking, insurance, and capital markets, this DPL supports an important package of reforms that will contribute to growth and poverty alleviation. Relevance of Risks Identified 27. Three types of risk were identified during preparation of the DPL, all of which proved to be pertinent during the life of the operation and mitigations measures appeared relevant and effective: 28. Economic risk stemming from the global economic crisis was and remains relatively high in Morocco. To contain any possible deterioration that could jeopardize stability, the program set mitigation measures, notably through continued sound macroeconomic management. Morocco s strong track records in dealing with adverse conditions (as evidenced by its excellent macro economic performance 11 achieved over the last decade and despite the recent international financial turmoil) appeared to be relevant. Also, the Bank has continued monitoring and maintaining dialogue with the authorities on the overall macroeconomic context. 29. Financial risk stemming from a deterioration of the credit portfolios of some institutions was not negligible and concerns were expressed about further deterioration. The identification of this risk was pertinent as expansion of access constituted one of the two key pillars of the supported program. 30. At the time of the design of the DPL, critical implementing regulations for the new securitization law had not yet been approved by the Council of Ministers because of the opinion issued by the Auditor general emphasizing the negative role played by complex securitizations in the current global financial crisis. These concerns have been actually lifted and the identified risk has been effectively addressed by the introduction of new instruments which are simple and that can bring clear benefits to the country Monitoring and Evaluation (M&E) Design, Implementation and Utilization 31. In order to evaluate the contribution of the operation to the achievement of its long-run objectives, the team selected a number of indicators, including some indicators measuring the achievement of intermediate outcomes. The period of program evaluation began in mid-2009, as most figures were available by the time of appraisal, and ended in early In the matrix of policy actions and expected outcomes, there were enough indicators to monitor the impact. Eleven outcome indicators were established to assess impact over development objectives. Data was collected regularly and used to monitor progress towards the expected outcomes. The indicators were realistic, achievable and mostly quantitative. In addition, most of these monitoring indicators were supported by targets and baselines (10 indicators out of 11). 10 See comments on Morocco in the IEG report, November 3, 2011, The World Bank Group s Response to the Global Economic Crisis: Phase II, page 230, appendix C. 11 Economic growth rates averaged 5.1 percent over the period , almost twice as high as the average of the previous decade. 10

21 33. Responsibility for implementing policy reforms under this DPL resided with the MOF. Bank supervision was aligned with MoF s monitoring and evaluation (M&E) system. The Government took the lead in monitoring progress in implementation and in updating the program policy matrix as appropriate. The Bank performed its own monitoring duties through on-site follow up missions in Morocco, constant dialogue with the authorities as well as through desk reviews In conclusion, M&E and implementation arrangements were continuous and contributed to reforms implementation and the achievement of development objectives as observed in the table below Expected Next Phase/Follow-up Operation 35. Since the current DPL has been successful in meeting the GoM objectives and expectations, a new financial sector DPL has been requested by the MOF and is now being prepared. This new DPL is expected to be approved by the Board by FY 13. Its main objectives are to support a new phase of financial modernization, building on the achievements of the current DPL. It will: (i) pursue progress in the diversification and availability of financial services for all, with a focus on the poorest individuals and microenterprises, (ii) promote long term domestic savings to support investment and long term growth, (iii) foster the diversification of the financial sector beyond banking and (iv) continue strengthening the financial stability and regulatory architecture to make it versatile and forward-looking enough to address upcoming challenges Assessment of Outcomes 3.1. Relevance of Objectives, Design, and Implementation 36. The objectives of the DPL were highly relevant throughout the course of the project and continue to be relevant at ICR preparation: 37. The financial sector has been an area of high priority in Morocco, even before the crisis. Besides, the operation focused on longer-term issues of household and SME access to finance, two major areas that also had crisis relevance, due to rising nonperforming loans in microfinance and increased real estate exposures The supported reform program was also built on four long-run objectives as described above and all these objectives were in line with the CPS of growth, competitiveness and employment. In addition, further enhancements of corporate and bank governance are covered by the program and contribute to the CPS goal of strengthening the governance reform agenda. 39. Financial sector reforms are demonstrably linked to growth and poverty reduction. They are fundamental to reforms in other sectors, including private sector development, infrastructure, housing and social policies. 40. The DPL aims also to build a more resilient financial system through a series of key reforms that are legal, institutional or operational in nature. It paves the way to a new series of reforms that have already been planned by the MOF and that will be supported by another DPL. 12 On June 30, 2010 for example, a comprehensive matrix was prepared by the team assessing compliance with conditions for the second tranche release. In November 2010, a detailed ISR was drafted. 13 Source: Program information document (PID), concept stage, report # AB This has been acknowledged by the IEG in its report titled The World Bank Group s Response to the Global Economic Crisis: Phase II, November 3,

22 3.2. Achievement of Program Development Objectives 41. The Program s Achievement, in terms of compliance with the monitoring indicators is strong. The status of compliance with actions selected as indicators is described in details below and summarized in the following table. Pillar 1: Increased sustained access of the population to financial services 42. Three policy actions were identified to achieve this objective and have been effectively completed. (i) A postal bank (Al Barid Bank, ABB) was granted a banking license by BAM, the Central Bank, on July 10, 2009 to service households, with a particular focus on low income individuals. 43. An ambitious modernization effort of postal activities was undertaken before the license was granted. Decree no authorized the transfer of postal financial services to a fully owned subsidiary of the Post office, ABB (the transfer was completed in December 2010). 44. ABB already has a significant impact on access to finance and complements other commercial banks growth strategies. The process of financial deepening triggered by reforms implemented in the early 2000s continued in recent years in line with the DPL outcome indicator. 54% of Moroccans have a bank account in 2011, compared to 43% in 2008 and 34% in ABB customers already represent over a quarter of Moroccans with a bank account and their number is rapidly growing, especially in underserved rural areas (the number of accounts opened daily doubled since ABB was launched and three quarters of these new accounts are opened in rural areas). ABB is also expanding its product offer 15 and taking actions to complement gains in access with effective use of financial products. Low income banking (LIB) strategies implemented by other commercial banks also played a significant role in overall gains in access (LIB accounts represented 14% of total bank accounts in August 2011 compared to 6% in 2008). 45. Improved distribution channels played a key role in improving access to finance. The number of bank branches, including ABB, continued to increase rapidly in line with the DPL outcome indicator (6,300 habitants per branch in 2011 compared to 7,500 in ). Moreover, banks explored new distribution channels which helped make LIB strategies sustainable and attract low income customers (e.g. partnerships with transfer agents). ABB s network represents a fifth of all bank branches. It is the only bank in many locations 17 and its newtork is expected to double shortly, as some 800 rural postal branches are equipped with satelite connections allowing them to offer a broad range of financial services. (ii) Another policy action consisted in strengthening regulations to create a conducive environment for the microcredit sector, an industry which usefully complements other financial institutions (e.g. larger share of lending benefiting women and individuals in rural areas). 46. To this end, the DPL supported two main regulatory improvements. First, an order of the Minister of Economy and Finance nº dated December 31, 2008 established detailed classification and 15 ABB expanded its range of services by offering overdrafts (end of 1st quarter 2011), new saving products including term deposits (April 2011), mortgage loans (July 2011 (for staff) and September 2011 (for all customers) and education savings scheme (October 2011). In addition, money transfers and payment services have been reinforced and will be further expanded through mobile banking facilities. 16 When computing this ratio, BAM took all postal branches into account until 2008 (1762 in 2008). It adopted a more rigorous definition in 2009 and only took into account postal branches effectively offering financial services (887 in 2009). The corrected figure for 2008 is 7,500 habitants per branch (rather than 6,300 as indicated for the baseline outcome indicator). This ratio declined to 7,100 in 2009, 6,600 in 2010 and 6,300 in ABB is the only bank in 38% of the locations where it is present 12

23 provisioning requirements for microcredit loans. This helped improve financial reporting and ensure that bad loans were adequately identified and provisioned. This measure was complemented by the directive of the Governor of BAM nº 1/G/2009 dated Sept. 16, 2009 which introduced detailed governance requirements for microcredit associations. After a phase of rapid growth (micro loans were multiplied by six between 2004 and 2007), this helped address root causes of the 2008 crisis (weak risk management systems, insufficiently trained credit officers etc.). 47. The portfolio at risk declined significantly from the 2009 peak (12% in September 2009, 6% in 2010, 4% in 2011) in line with the DPL outcome indicator. Improvements reflect better risk management and active loan write offs (the latter explain that the industry suffered large losses in 2009 and just broke even in 2010). Microcredit loans have been stable since 2008 (4.6 billion MAD in 2011) while the number of borrowers has regularly declined (788,000 in 2011 compared to a peak of 1,350,000 in 2007), partly reflecting stricter loan origination processes and a lower number of customers borrowing from multiple MFIs. (iii) A third action covered an improved partial credit guarantee (PCG) scheme supporting access to housing finance for creditworthy low income individuals. 48. For this purpose, the DPL supported the launch of a new housing guarantee fund called Damane Assakane that was set up in This initiative was completed as planned and appears to be an important reform component. Damane Assakane got increased resources 18 to expand further access to housing finance. The Fund, managed by the Caisse Centrale de Garantie -CCG 19 - is a state-backed guarantee program that provides 80% coverage of the principal and interest on bank housing loans 20 for applicants with low, irregular or informal sources of income. Although eligible beneficiaries include middle class customers, poor people are expected to remain the main beneficiaries of this scheme, including slums households for which a specific guarantee scheme has been designed (FOGARIM- VSB 21 ). In recent years, the program experienced some problems like high delinquency (especially after 3 and 6 months, less afterwards) or insufficient targeting There was no specific outcome indicator for this particular segment of the DPL but anecdotal evidence show that the Fund ultimately caught on and led to a significant increase in the number of housing loans being made by banks 23 to the target population with higher competition on interest rates 24 and services. In effect, statistics from the MOF indicate that the cumulative number of guarantees of Damane Assakane increased by 37 % since its launch, reaching over 74,109 beneficiaries in 2011, versus 63,065 in 2010 and 54,000 in 2009 and totalling MAD 10,8 billion in 2011 (9,1 billion in 2010 and 7.8 billion in 2009). In 2011, 97% of guarantees were related to housing purchase and only 3% to construction. In terms of geographic distribution, FOGARIM products have been distributed across the country, in 126 cities. 18 thanks to the merger of previous funds, FOGARIM (600 million MAD endowment) and FOGALOGE-public (350 million MAD). 19 a public agency under the purview of the Ministry of Finance and Privatization. 20 The loans are given with a fixed interest rates and a maturity of 2-30 years (in practice an average of 20 years). 21 Launched in July of 2004, the national Moroccan program Villes sans Bidonvilles (VSB, or literally, Cities Without Slums ) evolves from the wide sweeping goal of eradicating all slums by 2012 through making home ownership affordable for the urban poor. 22 For example the use of FOGARIM-guaranteed credits for the acquisition of parcels of land, rather than for complete housing units for which they are intended. 23 Four banks (CIH, BMCE, Wafa Immobilier, and Banque Populaire) are providing the bulk of Fogarim loans, with CIH alone representing 44% of the total amount. 24 Interest rates applicable FOGARIM loans have decreased from 7,1% en 2004 to 5,3% in 2010 and went up again in 2011 and 2012 (around 6%) due to pressure on mortgage loans. 13

24 Pillar 2: Ensuring sustainable improvement in access to finance for Small and Medium Enterprises (SME) 50. Two policy actions were targeted under this second pillar of the DPL. (i) The first policy action was designed to increase outreach, reduce risk and cost in lending to SMEs, as well as individuals, through improvements in the credit information infrastructure. 51. To this end, the program supported the launch of a new Credit bureau collecting data from a broad range of financial institutions, including some MFIs, followed by an expansion of the coverage of MFIs. The first Moroccan Credit bureau, a subsidiary of Experian, a leading global information services company, started operating on October 26, 2009 by delegation from BAM. 52. The rapid pick up of the Credit bureau has been facilitated by the fact that BAM required all credit institutions to report and consult it. Such requirements aim to promote further sound gains in access to finance by ensuring credit institutions can and do access relevant information to identify creditworthy borrowers, monitor the quality of their portfolio and take prompt action when a borrower s risk profile deteriorates. Circular 02/G/2010 issued on April 5, 2010 makes it compulsory for credit institutions (i.e. banks, leasing and factoring companies primarily) to report all credit exposures to the Credit bureau (positive and negative information, including guarantees received, irrespective of their amount). Circular 01/G/2010 also makes it compulsory for credit institutions to consult a solvency report, which includes all information received by the Credit bureau, before granting any new credit. This same circular includes consumer protection provisions and makes it possible for customers to request the correction of their solvency reports when it is inaccurate. All credit institutions comply with reporting and consultation requirements. 53. A few large MFIs started reporting to the credit bureau in 2009; others joined after the credit bureau agreed to offer them a reduced pricing in All MFIs signed contracts in 2011 with the credit bureau which reflect this reduced pricing and committed to report information. At the end of 2011, all MFIs are reporting to the credit bureau. Almost 90% of microloans (by value) appear in the credit bureau database, which exceeds by far the 50% target set in the DPL. Moreover, four large MFIs with a combined market share of 92% are consulting the credit bureau as of February 2012 (with more expected to join in 2012). The credit bureau already played a positive role in helping MFIs reduce their portfolio at risk and limiting the number of clients who unduly borrow from different MFIs. It is expected to provide increasingly relevant risk management information going forward. 54. Monthly consultations to the credit bureau have been trending upward and far exceed the DPL baseline indicators. Monthly consultations on individuals reached 76,086 in June 2011 and 73,082 in December 2011, exceeding the DPL baseline (1,217 in November 2009). Monthly consultations on companies reached 6,436 in June 2011 and 5,357 in December 2011, exceeding the DPL baseline (371 in November 2009). Declines observed between June and December 2011 primarily reflects seasonal factors. (ii) The second policy action covered a reform of the SME Partial Credit Guarantee (PCG) scheme to strengthen its sustainability and efficiency. 55. It included new guarantee products focused on SMEs and designed to better match their financial needs according to their life cycle (investment loans, working capital and restructuring primarily). The parameters of the guarantee products have been adjusted in line with international best practices (equity allocations to cover expected losses, fees, simplification and harmonization of eligibility criteria, claims 14

25 payment etc.). This helped streamline and strenghten the national PCG scheme, which was previously too complex and fragmented. 56. The new PCG scheme proved attractive enough for banks to have a positive impact while remaining targeted. It is now guaranteeing about 2 billion worth of credit each year which benefits to over a throusand companies. It remains targeted as only a small share of SME loans benefit from such a guarantee (total SME loans reached 79 billion MAD in December 2011). It proved flexible enough to provide an effective countercyclical tool when banks became more reluctant to provide working capital to exporters in 2009, due to impact of the global economic crisis. A new guarantee product addressing this constraint was promptly launched and actively taken up by banks. The flexibility of the scheme was again illustrated when a new product ( Damane Express ) was launched in May 2012 to target loans to microenterprises, an underserved segment which banks want to better address. 57. Available information point to a positive impact of the PCG scheme on making credit available to creditworthy borrowers who would otherwise be credit constrained. The preliminary results of an impact study undertaken by a Consultancy show that almost three quarters of loans with a CCG guarantee would not have otherwise been granted and that collateral generally covers less than 50 % of the value of the loans it guarantees (compared to average collateral requirements for SMEs closer to 150%). The relatively high share of female entrepreneurs in the loan portfolio guaranteed by the CCG also tends to confirm additionality (30% of SMEs with a credit guaranteed by the CCG are owned by women, compared to an estimated 12% of all companies owned by women). 58. As contemplated by a DPL policy measure, Bank Al Maghrib carried out in 2011 an on-site inspection of the CCG, which did not identify major weaknesses. BAM focused on the governance, internal control and risk management frameworks and made several recommendations to strengthen them further, which the CCG intends to implement. The low default rate experienced so far across the different guarantee products launched in 2009 also point to a prudent management of risks. 59. In a challenging economic environment, the share of SME loans in bank corporate loans slightly declined from 22% in June 2009 to 20% in June 2010 and remained stable since. It is worth observing that this 20-22% share remains high compared to other MENA or emerging countries (e.g. 13% in non GCC MENA countries, including Morocco, in 2009). As a share of GDP, SME loans declined from 9.8% in 2009 to 9.2% in 2010 before recovering to 9.8% in Available information do not make it possible to differentiate between lower demand from SMEs and reduced willingness by banks to lend to them to explain these trends. New initiatives have been taken recently to support SME finance (e.g. new partial credit products targeting microenterprises and working capital, new refinancing scheme targeting SME finance launched by BAM etc.). Pillar 3: Strengthening the regulatory and supervisory architecture 60. Four policy actions were contemplated under this objective: (i) The first action consisted in strengthening the coordination among financial sector authorities and the effectiveness of crises response mechanisms. 61. The authorities, with the assistance of the World Bank, undertook and completed a crisis simulation/crisis management exercise involving all financial sector authorities (the Treasury, BAM, as well as the insurance and capital market regulators). In the wake of this exercise 25, a Memorandum of 25 Morocco was the first MENA country to carry out a crisis preparedness and crisis management exercise in April This is a recognized best practice in the field of financial stability. 15

26 Understanding 26 was elaborated involving the Ministry of Economy and Finance and the relevant financial sector supervisors (BAM, CDVM and DAPS) establishing procedures and exchange of information in the event of a financial crisis. This agreement was signed on June 21, (ii) The second action consisted of a comprehensive review of bank corporate governance. 62. The review aimed at assessing banks internal capacity to manage their risks, following rapid gains in bank intermediation and a diversification of their risk profiles. This review looked at system wide issues and did not assess banks individually. It was carried out by a World Bank team in 2010 and its key conclusions were discussed in June 2010 during a workshop organized by BAM with banks and other stakeholders. The review identified areas where further progress would be welcome (e.g. elevation of the role of the Board, including by setting up specific committees to support its work and ensuring the presence of independent directors, further strengthening of the risk management and internal control functions, specific attention to financial conglomerates etc.). In line with the DPL policy matrix, BAM prepared proposals to implement key recommendations of the bank governance reviews through amendments of the banking law (which as of July 2012 were being finalized at a technical level with the Ministry of Finance). 63. Moreover, BAM strengthened its capacity to oversee real estate risks, which represent about a third of banks assets (mortgage and developers loans). A real estate price index was launched in 2010 and published quarterly since, in line with a DPL outcome indicator. Since 2010, it has been broadened, with further improvements contemplated. The index dramatically improves transparency on this major asset class. It has been used by BAM in its supervisory activities. Most recently, it helped calibrate new stress testing requirements which banks have to perform to assess their resiliency and report to BAM Overall, better risk management capacity and more thorough internal capital adequacy assessment processes at banks, coupled with enhanced supervision by BAM, were expected to lead to the pursuit of the observed trend towards higher capital buffers system wide. The baseline average capital adequacy ratio (CAR) on an individual basis at June 2009 was 11.7% 28 (significantly above the international minimum CAR of 8% and Moroccan minimum CAR of 10%). Further progress was observed at the end of 2009 (11.8%) and 2010 (12.3%), with most of the capital remaining in the form of Tier 1 capital (average Tier 1 capital ratio of 9.7% in 2010) figures show a slight decrease of the average in a more difficult environment. The CAR stands at 11.7% in December 2011, back to the level observed in June BAM issued new regulations (circulaires 5/G/12, 6/G/12 and 7/G/12) on April 19, 2012 which require all credit institutions to meet a minimum CAR of 12% by June 2013 (and a minimum Tier 1 ratio of 9% by the same date). (iii) The third action intended to strengthen the independence and capacity of the insurance and pension supervisor. 65. It aims at ensuring a sound development of the insurance and pension sectors through the establishment of a new independent Insurance and Pension Supervisory Authority («Autorité de Contrôle des Assurances et de la Prévoyance Sociale», ACAPS) taking over the current department of the MOF responsible for such regulation and supervision (DAPS). A draft law was submitted to the 26 A copy of the MOU has been shared with the ICR team. 27 A guidance note issued by BAM in April 2012 (notice technique 1/DSB/2012) sets parameters banks have to use to carry out stress tests mandated by BAM Directive 2/G/2010 (i.e. types of parameters and minimum stress to be applied). Stress tests are undertaken at solo and consolidated levels. A specific real estate stress tests needs to be performed with the following assumptions: 15% of high risks loans to real estate developers (e.g. those with a low internal rating) become non-performing, 15% of high risks mortgage loans (e.g. those with a high debt to income ratios) become non performing, collateral value declines by 10% and interest rates increase by 100 basis points. 28 Average consolidated CAR were 12% in 2009, 12.7% respectively in 2010 and 12.4% in

27 General Secretariat of Government (SGG) on 29 July Following comments received as part of an active consultative process involving all stakeholders and taking account of a new context (including the appointment of a new Head of DAPS who suggested improvements to the initial draft law), the draft law was revised to strengthen further the governance of the contemplated authority and broaden its responsibilities (pension sector in particular). This draft law was adopted by the Council of Government on 25 August The new Government appointed after the Constitution was revised and elections were held in the second semester 2011 decided in early 2012 to send back all pending draft laws to the relevant Ministries so that they could be reviewed and, where appropriate, amended to be consistent with the new Constitution and the Government s priorities. The team was informed in August 2012 that no material inconsistency was identified and that the revised draft law was with the SGG which is responsible for putting it on the agenda of the Council of Government. No date for the review of the draft law by the Council of Government has yet been set. (iv) The fourth policy action intends to strengthen the independence and enforcement powers of the capital markets supervisor in order to ensure sound capital market development. 67. A draft law to set up a new capital market authority ( Autorité Marocaine des Marchés de Capitaux, AMMC) was submitted to the SGG on November 12, 2009 and adopted by the Council of Government on August 25, As for the ACAPS draft law, the AMMC draft law was sent back for review by the MOF in early It has since been transmitted back to the SGG and approved again by the Council of Government on April 19, The DPL also planned the strengthening of the governance structure of the Casablanca stock exchange which was made possible with the amendment of its by-laws dated 3 April 2009 authorizing the set up of a Board of Directors and General Management («Direction Générale»). Pillar 4: Further strengthening the development of capital markets 69. The development of capital markets as foreseen under this pillar has been achieved through three policy actions: 70. (i)the first action intended to strengthen public debt management to help establish a liquid and reliable yield curve and the creation of conditions for effective pricing and sound development of fixed income instruments. To achieve this goal, several initiatives have been carried out. A Memorandum of Understanding dated July 28, 2009 was signed between the Treasury and BAM for a more active Treasury cash management. On July 1, 2009, an electronic auction system for government securities was set up that reduces operational risk and price uncertainty for all participants. In addition, the Ministry of Economy and Finance issued an order changing the reference rate of floating rate credits from Treasury bills to a reference rate linked to short term instruments, fostering better public debt management. 71. (ii) Further development and development of private fixed income instruments is another policy action under objective 4. It has been completed through the enactment of the Decree implementing the amendments to securitization law nº approved in November A bank securitized part of its mortgage portfolio in 2012 and other financial and non financial corporations are preparing similar operations. The Ministry of Economy and Finance also submitted for comments to relevant stakeholders a draft law creating covered bonds. Following further consultations, the technical preparation of this draft law is now almost complete. 17

28 72. (iii) Lastly, the legal conditions for the set up of a sound and liquid future market to enable effective risk management is included as a third action under this pillar. A draft law on the future market was adopted on 9 July 2009 by the Council of Government Justification of Overall Outcome Rating Rating: Satisfactory 73. The overall outcome rating for this DPL is satisfactory. It reflects the high relevance of the development objectives and the achievement of the program. Planned reforms were implemented according to the timeline and are achieving their key objectives of expanding access to households and SMEs, strengthening the regulatory and supervisory framework and making progress in developing capital markets. Significant institutional reforms have been conducted under the present DPL. While the government is pursuing its reform agenda, the impact of the measures taken under this DPL is noticeable: 74. On the inclusion front, the percentage of Moroccans with a bank account reached 54% in 2011, which is a major step forward in comparison to the situation prevailing before (34%). SMEs are also getting better access to credit as evidenced by the number of consultations on companies in the new credit bureau and the stabilization of the share of SME loans in credits to companies despite a more challenging environment. Improvements in the quality of portfolios in the microfinance sector have also observed with a drop in NPLs over the last years. 75. The supervisory and regulatory framework is getting more robust than it was before the reforms were launched. New laws and regulations are being introduced that will improve oversight of banks, insurance and capital markets and make banks more resilient in case of crisis. Active operational preparation for the set up of the new capital market and insurance and pension authorities expected to foster a swift implementation of the two related laws once they are adopted (after some delays as explained in section 3.2). Lastly, thanks to a series of initiatives, the country has started to make its stock market more appealing to investors with the view to turn Morocco into a regional player Overarching Themes, Other Outcomes, and Impacts Poverty Impacts, Gender Aspects, and Social Development 76. Although the DPL did not have a specific poverty focus, in the medium to long term, the program supported measures that will enhance competitiveness and growth, access to finance, and financial stability, all of which contribute to positive social outcomes. Indeed, this operation, by strengthening the supervisory and regulatory framework for banks and other financial institutions is expected to favor poverty reduction in the medium-term through: 77. Helping household and SMEs to better access financial services at lower rates and providing banks with more information through the credit bureau, thus preventing over indebtedness. Better risk management techniques, reduced name lending and an over reliance on real estate collateral are expected to foster access to finance for underserved creditworthy borrowers (e.g. among women and young people or in rural areas); 78. Increasing the capacity of the financial authorities to anticipate risks in the banking sector and limit future systemic crisis that could be very costly to depositors; 79. Enhancing the capacity of the financial authorities to deal with major financial crisis and thus help preserve taxpayers money. 18

29 (b) Institutional Change/Strengthening 80. The set up of a new postal bank, an improved partial credit guarantee scheme, a new credit bureau, enhanced crisis management arrangements with new coordination mechanisms and a new framework for securitization are significant institutional changes. They are expected to foster sound gains in access to finance for individuals and crporates. Going forward, when passed by Parliament, the draft laws establishing a new and independent insurance and pension supervisory authority as well as a Capital Market Authority are also expected to bring significant improvements to the financial sector s institutional environment. (c) Other Unintended Outcomes and Impacts 81. No unintended outcomes and impacts were identified Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 82. Not applicable. 4. Assessment of Risk to Development Outcome Rating: Moderate. 83. The four risks identified during the DPL preparation remain moderate: (i) Timing and speed of the recovery from the global crisis. 84. As observed in 2009 at the time of the preparation of the DPL, Morocco weathered the effects of the 2008 global financial crisis from a position of relative economic strength having improved its public finance and fostered growth over the past decade. Because of a weak integration into international financial markets, Morocco s financial sector has been immune from the worst immediate effects of the financial contagion and was therefore able to help smooth the adverse effects of the economic slowdown. 85. It should be noted that the Euro zone crisis that emerged in 2010 and the Arab Spring that swept through the region in 2011 created new risks and challenges. Government faced significant pressure to respond to popular demands and absorb new shocks. In addition to the implementing a public wage rise in early 2011, the government increased subsidy expenditures due to high world prices for food and fuel (between 2010 and 2011 they increased by 80 percent). Public finances deteriorated sharply while exports suffered from the economic slowdown in Europe as well as from a lack of competitiveness. Although Government took steps in 2012 to reign in subsidies, receipts from foreign direct investments, remittances and tourism did not recover fully and, most recently, even declined. As a result, foreign exchange reserves fell at a rapid pace in BAM recently stepped up its efforts to inject liquidity in the banking system to avoid any financial retrenchment. This has so far helped avoid any marked deterioration in the access to finance for individuals and MSMEs or threats to financial stability. Going forward, a continued deterioration of the macroeconomic situation would compromise the achievements of the Program. It would in particular further strain Morocco's financial sector capacities and deteriorate the creditworthiness of households and MSMEs. 19

30 (ii) A deterioration of the credit portfolios of some institutions could jeopardize expected improvements in access. 87. The March 2012 ICR on-site mission was provided with data showing improvements in NPLs in the microcredit industry (as discussed above) but further deterioration cannot be ruled out. However, the Government has shown strong commitment to handle the situation and has taken measures to strengthen the capacity of the microcredit institutions to grow in a sustainable way. In this respect, BAM closely monitors the micro-finance sector. The Moroccan Government has been very active in fostering the microfinance industry through key initiatives, in particular with the financial support of the United States. The Agency of Partnership for Progress (Agence du Partenariat pour le Progrès) under the umbrella of the Prime Minister was especially set up for that purpose and was granted a budget of 46.2 Million USD for 5 years to promote new financial products (e.g. Islamic finance, micro-insurance products, microsaving services) for low-income households via AMCs 29. Likewise, the slowdown of non-agriculture output may put some stress in bank portfolios, but BAM has also taken measures to strengthen the banks solvency by increasing the CAR- and their capacity to manage new risks, in particular in the real estate sector. (iii) The resumption of long-term Treasury bill issues may imply some increase in the reference rate for existing mortgage holders. 88. Existing mortgage holders may experience some increase in mortgage payments as long-term Treasury bill issues resume, but the impact is likely to be moderate 30. (iv) The Government may experience difficulties in having specific capital market reforms approved. 89. At the time of the DPL preparation, critical implementing regulations for the new securitization law had not yet been approved by the Council of Ministers because of the opinion issued by the Auditor general ( Cour des comptes ) emphasizing the negative role played by complex securitizations in the current global financial crisis. Since then, the country passed a law on securitization along with implementing regulations and one operation of securitization has been launched by a domestic bank. Efforts are been initiated to ensure risks linked to such operations are adequately assessed, calibrated and disclosed and that roper incentives for a sound development of securitization are in place. 5. Assessment of Bank and Borrower Performance 5.1. Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory 90. The project team performance during identification, preparation and appraisal is rated highly satisfactory. The Financial Sector DPL s strategic relevance was based on the Moroccan Government s priorities for the financial sector. The design of the DPL also profited from ongoing financial sector dialogue between the government and the Bank as well as wide consultations with the Moroccan authorities and third parties, including, but not limited to, banks, AMCs and other non-bank financial 29 This project called financial services also intends to reinforce AMCs by promoting internal control systems, risks management and debt collection mechanisms. 30 First, floating mortgages account for less than half of total mortgages. Second, long-term rates have declined significantly relative to crisis levels. Third, the average ratio of debt service to income is moderate. Finally, low income mortgage holders have benefitted from fixed rate mortgages covered by the housing subsidy scheme (floating rate mortgages are not eligible to this scheme). 20

31 institutions. The Loan identification and design were consistent with the FY CPS. Findings from the FSAP update (2008) and related ROSCs were very useful in project preparation as well as a close coordination with the IMF and the country office. Importantly, the Bank closely coordinated with the AfDB, which also supported financial sector reforms in Morocco, during project preparation. Key risks that could derail implementation were adequately identified. The team also set clear indicators that helped to follow and measure program s implementation. (b) Quality of Supervision (Including M&E arrangements) Rating: Moderately Satisfactory 91. The Bank regularly visited the country throughout a two-year period, focusing on progress made in the implementation of the reforms and also organized regular conference calls to monitor progress. A detailed memorandum was drafted in 2010 confirming that all prior actions required for the release of the second tranche of the program had been met by the borrower as outlined in the Loan Agreement. Compliance with all prior actions was verified by the Bank supervision missions. The Memorandum was supplemented by all supporting documents. The DPL team also prepared and delivered two detailed ISR in 2011 and However, the first ISR was not field immediately after Board approval and there was a 19 month lapse between the filing of the two ISR. ss part of its supervisory duties, the DPL team maintained a close dialogue with the Moroccan authorities (mostly with the MOF and BAM) as well as with the country management unit and country office in Rabat. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory 92. The overall Bank performance is rated satisfactory. The DPL adequately supported the Government s priorities to further modernise the financial sector to provide better access to both individuals and MSMEs while preserving financial stability to ensure such gains are sustainable. As a result the financial sector played a welcome countercyclical role in a more challenging environment and played a key role in supporting investment and access to housing. Moreover, the DPL provided welcome budget support which helped preserve macroeconomic stability. This DPL helped to (i) accelerate the pace of reforms, (ii) create more convergence between the authorities and the other partners and (iii) support Governments strategy vis-à-vis the financial sector. Close supervision helped oversee the timely implementation of the reform agenda and ensure a dialogue could promptly take place when delays were observed. This proved useful for two key measures for which significant delays occurred. 93. In light of the above, the overall Bank performance should be rated satisfactory Borrower Performance (a) Government Performance Rating: Satisfactory 94. The GoM provided strong support to the program. The authorities were actively engaged in the design of the operation and in its implementation. It is noteworthy that this DPL was actually initiated by the authorities themselves. Morocco was extremely pro-active and committed to its successful implementation. Ownership of government was from the start a pre-condition to the success and has remained unconditional till the end. 21

32 (b) Implementing Agency or Agencies Performance Rating: Satisfactory 95. Several agencies, under the leadership of the MOF were engaged since the inception of the program and remained involved in the dialogue. They demonstrated drive for results as evidenced by the completion of the objectives. The Ministry of Finance together with BAM are the two agencies responsible for the design and overall implementation of the operation. As discussed above in this report, the Treasury along with the Central bank (BAM) were the driving force for this operation. Constant dialogue was maintained between these two agencies on the one hand and between these agencies and the DPL team on the other. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory 96. Overall Borrower Performance is rated Satisfactory, based on ratings for Government Performance and Implementing Agencies performance as described above. 6. Lessons Learned 97. Consultation with the stakeholders was a recipe for success. Indeed, as explained above, reforms have been undertaken after a process of close and continuous consultation with all stakeholders. This ensured a clear understanding of the multiple issues at stake from all parties involved (including representatives of civil society 31 ) and also an adherence to the overarching goals of the DPL. Ultimately, it helped mitigate scepticism or even opposition to certain reforms. The reforms engaged in the financial sector through this program would not have been achieved without support from all stakeholders. 98. Clear objectives and realistic development indicators are also critical to success. The DPL contained achievable policy actions that were very focused and easy to measure. Also, choosing only actions critical for achieving results as conditions for disbursement proved to be pertinent. The policy actions were maintained at a modest number but with sufficient critical mass, focusing on those that are considered crucial in improving household and SME access, strengthening financial stability arrangements and developing capital markets. 99. Stronger coordination among government ministries could have been useful to help move the reform process forward more quickly given the multi-sector nature of the program. For any future Financial Sector DPL, given the multifaceted nature of the reform program, it would be useful to set up a steering committee to oversee the program from design to completion. Such a committee could be led by the MOF and comprise representatives from the different agencies and convene on a regular basis to monitor status of implementation, address any difficulty that may arise and give further guidance to the implementing agencies The implementation of two key measures related to the setup of new supervisory authorities for the capital market and insurance sectors required more time than initially expected. The initial adoption by the Council of Government of these two draft laws took longer than expected and required a six month postponement of the closing date of the DPL. This was largely due to a demanding consultation process involving all key stakeholders. The fact such measures were included as second tranche measures played 31 E.g. microcredit associations, associations representing customers, young entrepreneurs etc. 22

33 a positive role by helping maintain the momentum for their adoption. Going forward, a more conservative timeframe could be adopted for the most ambitious reforms, which are technically challenging and involve multiple stakeholders. As mentioned earlier, additional delays occurred in 2012 as a newly elected government requested that all pending draft laws be revisited by line Ministries before being reexamined by the Council of Government. This is to a large extent a unique situation related to the democratic transition Morocco is experiencing. Such risk should nonetheless inform the preparation of future operations Technical assistance needs to accompany the DPL program to strengthen capacity. Eventually, the Bank did provide significant technical assistance for some of the most challenging components of the reform agenda 32 but this should be considered in a more structured and deliberate way at the outset of any future DPL. This would ensure that the country benefits from outside expertise with the view to accompany the reforms in a more coherent way to ensure sustainability. This was clearly expressed by the authorities during the ICR mission. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies 102. The Moroccan Government praised the Bank s operation in supporting the government in implementing its ambitious financial sector reform program. Regarding borrower s performance, the operation witnessed a series of reform measures that aimed at further developing a sound financial sector. The Government also acclaimed the team s remarkable deal of diligence and technical support throughout the operation, in addition to the close coordination and dialogue. (b) Donors and Cofinanciers 103. The operation was prepared through joint missions between the AfDB and the World Bank. The two institutions consulted on the contemplated reform agenda and supported through two distinct operations consistent and largely common reform measures. Supervision was undertaken through some joint missions and information collected as well mission outcomes were regularly shared to ensure effective coordination. (c) Other partners and stakeholders 104. Not applicable. 32 E.g. bank governance review, crisis simulation exercise, preparation of a draft covered bond law and support to prepare a strategy and develop instruments to establish a benchmark yield curve. 23

34 Annex 1. Bank Lending and Implementation Support/Supervision Processes a) Task Team members Lending Names Title Unit Responsibility/Specialty Cédric Mousset Sr financial sector specialist MNSED TTL, financial stability Roberto Rocha Sr Advisor MNSED Advisor, pension, SME finance Anderson Caputo da Silva Sr securities market specialist FCMSM Capital markets, public debt management Loic Chiquier Manager FCMNB Housing finance Laurent Gonnet Sr financial sector specialist MNSED Banking Xavier Reille Lead microfinance specialist CGAP Microfinance Douglas Pearce Sr private sector specialist MNSED Microfinance, SME finance Alejandro S. Alvarez de la Campa Sr private sector specialist CIC Creditors rights Raha Shahidsaless Private sector development specialist CIC Creditors rights Rodney Lester Consultant MNSED Insurance, Pension Patrick Simonnet Consultant MNSED Capital markets Andrea Corcoran Consultant MNSED Capital markets Stefano Paternostro Sector manager AFTSW Macroeconomic environment Youssef Saadani Hassani Economist MNSED SME finance David C. Freese Senior Finance Officer CTRFC Disbursement Jean-Charles de Daruvar Sr Counsel LEGAM Legal Eavan O Halloran Sr Country Officer MNC01 Operation Steve Wan Yan Lun Operations analyst MNSED Operation Khalid Alouane Language program assistant MNSED Operation Subika Farazi Research analyst MNSED Data collection and analysis Supervision Cédric Mousset Sr financial sector specialist MNSF1 TTL, Banking Anderson Caputo da Silva Lead securities market specialist FCMSM Capital markets, public debt management Loic Chiquier Director FCMDR /MNSFR Housing finance 24

35 Rodney Lester Consultant MNSF1 Insurance, pension Olivier Hassler Consultant MNSF1 Housing finance Yann Christin Consultant MNSF1 Capital markets Youssef Saadani Hassani Economist MNSF1 SME finance, systemic liquidity Teymour Abdel Aziz Economist MNSF1 SME finance. Access for individuals Michel Noel Manager FCMNB Capital markets Miquel Dijkman Sr financial sector specialist FFSAB Financial stability Stefano Paternostro Sector manager AFTSW Macroeconomic environment Kahlid El Massnaoui Sr Economist MNSED Macroeconomic environment Jean-Charles de Daruvar Sr Counsel LEGAM Legal Eavan O Halloran Sr Country Officer MNC01 Operation Steve Wan Yan Lun Operations analyst MNSF1 Operation Khalid Alouane Language program assistant INTSC Operation (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage USD Thousands (including travel No. of staff weeks and consultant costs) Lending FY ,316 FY ,026 Total: ,342 Supervision/ICR FY ,684 FY ,612 FY ,241 FY ,267 Total: ,804 25

36 Annex 2. Summary of Borrower's ICR and/or Comments on Draft ICR 26

37 27

38 28