Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA IDA-3279A) ON A CREDIT

Transcription

1 Public Disclosure Authorized Document of The World Bank Report No: ICR Public Disclosure Authorized Public Disclosure Authorized IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA IDA-3279A) ON A CREDIT IN THE AMOUNT OF SDR 20.6 MILLION (US$ 27.5 MILLION EQUIVALENT) TO THE UNITED REPUBLIC OF TANZANIA FOR A SECOND FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT Public Disclosure Authorized June 13, 2007 Financial and Private Sector Development (FPD) Eastern Africa Country Cluster 1 Africa Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective May 25, 2007) Currency Unit = Tanzania Shilling (TZS) 1.00 = US$ US$ 1.00 = TZS 1268 FISCAL YEAR July 1 to June 30 ABBREVIATIONS AND ACRONYMS ABSA BOT CAS CEO CIB CMSA DBS DCA DFID DSE FIDP FIDP II FSAP FSP ICR IDA IMF IPO ISD IT NBC NIC NMB NPL PAD PBZ PDO PSRC PPRP TBA TIB Amalgamated Banks of South Africa Bank of Tanzania Country Assistance Strategy Chief Executive Officer Credit Information Bureau (also called Credit Reference Bureau in some of the project documents) Capital Markets Supervisory Authority Directorate of Banking Supervision at the Bank of Tanzania Development Credit Agreement Department for International Development (United Kingdom) Dar Es Salaam Stock Exchange Financial Institutions Development Project Second Financial Institutions Development Project Financial Sector Assessment Program Financial Sector Support Project Implementation Completion and Results Report International Development Association International Monetary Fund Initial Public Offering Insurance Supervisory Department Information Technology National Bank of Commerce National Insurance Corporation National Microfinance Bank Non-performing loans (here, as a percentage of total assets) Project Appraisal Document People s Bank of Zanzibar Project Development Objectives Parastatal Reform Comission Parastatal and Public Sector Reform Management Project Tanzania Bankers Association Tanzania Investment Bank

3 TPB Tanzania Postal Bank Vice President: Obiageli Katryn Ezekwesili Country Director: Judy M. O'Connor Sector Manager: Anthony Thompson Project Team Leader: John Byamukama ICR Team Leader: Connor P. Spreng

4 TANZANIA Second Financial Institutions Development Project CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project Context, Development Objectives and Design... i 2. Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3. Economic and Financial Analysis Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. Beneficiary Survey Results Annex 6. Stakeholder Workshop Report and Results Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Annex 9. List of Supporting Documents MAP

5 A. Basic Information Country: Tanzania Project Name: FIDP II Project ID: P L/C/TF Number(s): IDA-32790,IDA-3279A ICR Date: 06/14/2007 ICR Type: Core ICR Lending Instrument: SIL Borrower: Original Total Commitment: Environmental Category: C Implementing Agencies: Bank of Tanzania Cofinanciers and Other External Partners: B. Key Dates XDR 20.6M Disbursed Amount: XDR 16.8M Process Date Process Original Date Revised / Actual Date(s) Concept Review: 03/04/1998 Effectiveness: 09/06/ /06/2000 Appraisal: 05/29/1999 Restructuring(s): Approval: 08/31/1999 Mid-term Review: 02/11/2002 Closing: 12/31/ /31/2006 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Low or Negligible 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: Satisfactory Implementing Agency/Agencies: Satisfactory Overall Bank Performance: Satisfactory Overall Borrower Performance: Satisfactory C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project No at any time (Yes/No): Quality at Entry (QEA): None Rating i

6 Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: No Satisfactory Quality of Supervision (QSA): None D. Sector and Theme Codes Sector Code (as % of total Bank financing) Original Actual Banking Capital markets 4 4 Micro- and SME finance Non-compulsory pensions, insurance and contractual savings 3 3 Payment systems, securities clearance and settlement 4 5 Theme Code (Primary/Secondary) Other public sector governance Primary Primary Rural markets Secondary Secondary Small and medium enterprise support Primary Primary State enterprise/bank restructuring and privatization Primary Primary E. Bank Staff Positions At ICR At Approval Vice President: Obiageli Katryn Ezekwesili Callisto E. Madavo Country Director: Judy M. O'Connor James W. Adams Sector Manager: Antony Thompson Gerard A. Byam Project Team Leader: John P. Byamukama Antony Thompson ICR Team Leader: ICR Primary Author: Connor P. Spreng Connor P. Spreng F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The objective of the project is to increase the soundness and competitiveness of the financial sector and improve access by small savers and micro entrepreneurs to the formal financial system. This will be accomplished by: (i) restructuring and/or privatizing state-owned banks including transforming the NMB into a private microfinance bank; (ii) strengthening the supporting financial infrastructure by, inter-alia, enhancing the capacity of the central bank to supervise banks and by improving the ii

7 efficiency of the national payments system; and (iii) increasing savings and investment opportunities by promoting the development of contractual savings and capital markets. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1 : Share of deposits in private banks to total deposits Value quantitative or Qualitative) 51.5% 98% 79% Date achieved 12/31/ /01/ /31/2006 Comments (incl. % achievement) Not fully achieved. Value understates progress made. If deposits in the National Microfinance Bank (NMB), which is still 51% government-owned, are added to the deposits in private banks, the indicator value increases to 84%. Indicator 2 : Reduction in non-performing assets Value quantitative or Qualitative) 4% 2% 3% Date achieved 12/31/ /01/ /31/2006 Comments (incl. % achievement) Not fully achieved. Value understates progress made. Value remained at 1% for most of Increase during 2006 to 3% is a result of poor performance of about seven large borrowers, attributed to the drought, coupled with power shortages in Indicator 3 : Inrease in rural deposits by 14% Value Rural deposits quantitative or Not indicated increased by 14% Qualitative) Increase by more than 80% Date achieved 12/31/ /01/ /31/2006 Comments (incl. % achievement) Fully achieved and surpassed the target by far. Rural deposits are defined as deposits in banks or financial institutions and branches located in areas other than regional town centers. Indicator 4 : NMB fully recapitalized and more than 50% privately owned Value quantitative or Qualitative) NMB fully Negative net worth and recapitalized and 100% government-owned more than 50% privately owned Fully capitalized and 49% privately owned Date achieved 08/31/ /01/ /31/2006 Comments (incl. % achievement) Partially achieved. With the sale of 49% of the shares, management control was passed to the new, private owners. Also, the Government has scheduled the sale of an additional 21% of its shares for summer Indicator 5 : Increased public participation in capital markets iii

8 Value quantitative or Qualitative) Turnover of TZS 2.02 billion, market capitalization of TZS billion and 30,500 shareholders Increased public participation in capital markets In fiscal year 2005/06 turnover: TZS 15.3 billion; market capitalization: TSZ 2,887 billion; 97,000 shareholders Date achieved 06/30/ /01/ /30/2006 Comments (incl. % Fully achieved. achievement) Indicator 6 : Reduce Capital Markets Supervisory Authority (CMSA) dependency on government resources Value quantitative or Qualitative) 99% 80% 80.9% Date achieved 12/31/ /01/ /30/2006 Comments (incl. % achievement) Almost achieved. In the past the value has fluctuated: CMSA government dependency was 79% as of June The position by 30th June 2004 was 80.3%. Improving to 75.9% in June (b) Intermediate Outcome Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1 : National Bank of Commerce is more than 50% privately owned and fully recapitalized More than 50% Value Fully capitalized privately owned (quantitative 100% Government owned and 70% privately and adequately or Qualitative) owned capitalized Date achieved 06/30/ /01/ /31/2006 Comments (incl. % Fully achieved. achievement) Indicator 2 : NMB governance improved and serving the majority of the population NMB is a highly profitable bank with a vast (and Value 100% government owned, expanding) branch (quantitative and with negtive netowrth network, well over or Qualitative) 1 million depositors and over 200,000 loans. Date achieved 06/30/ /31/2006 Comments (incl. % Fully achieved. iv

9 achievement) Indicator 3 : Value (quantitative or Qualitative) People s Bank of Zanzibar (PBZ) and Tanzania Investment Bank (TIB) governance improved Majority stakes 100 % government PBZ and TIB are held by private ownership government-owned. onwer Date achieved 06/30/ /01/ /31/2006 Comments Not fully achieved. Privatization process for PBZ is ongoing, not yet finalized. (incl. % TIB to be turned into Development Finance Institution. achievement) Indicator 4 : Banking system is sound and stable Value (quantitative or Qualitative) Inadequately staffed banking supervision function; banks not examined annually. More bank examiners recruited and trained; each bank inspected once every year. Ongoing off-site surveillance Each bank and nonbank financial institution is examined on-site at least once per year. Date achieved 06/30/ /01/ /31/2006 Comments (incl. % achievement) Fully achieved. The Directorate of Banking Supervision of the Bank of Tanzania is well trained and highly respected. In addition to annual on-site examinations, monthly offsite returns are submitted and reviewed each month. Indicator 5 : Credit information on borrowers is easily available Value (quantitative or Qualitative) Bank of Tanzania setting up legal and regulatory No centralised Credit framework for information on borrowers private Credit Information Bureau and a central database Credit Information Bureau not yet established. Date achieved 06/30/ /01/ /31/2006 Comments (incl. % achievement) Not fully achieved. Credit Information Bureau not set up yet due to delays and coordination problems. Legislation amended to allow banks to disclose information on borrowers. Design for Credit Information Bureau ongoing. Indicator 6 : Contractual savings institutions are well regulated and deliver services efficiently Value (quantitative or Qualitative) Pension funds are not regulated. Insurance regulator has limited capacity. Set up Regulatory body for pension funds and Create investment guidelines Pensions: regulatory framework and investment guidelines proposed: regulator not established yet. Insurance: regulator built capacity and introduced riskbased supervision. Date achieved 06/30/ /01/ /31/2006 v

10 Comments (incl. % achievement) Partially achieved. G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 02/11/2000 Satisfactory Satisfactory /30/2000 Satisfactory Satisfactory /15/2000 Satisfactory Satisfactory /14/2000 Satisfactory Satisfactory /17/2001 Satisfactory Satisfactory /17/2001 Satisfactory Satisfactory /18/2001 Satisfactory Satisfactory /30/2002 Satisfactory Satisfactory /30/2002 Satisfactory Satisfactory /01/2002 Satisfactory Satisfactory /31/2003 Satisfactory Satisfactory /30/2003 Satisfactory Satisfactory /11/2003 Satisfactory Satisfactory /27/2004 Satisfactory Satisfactory /09/2004 Satisfactory Satisfactory /28/2005 Satisfactory Satisfactory /29/2005 Satisfactory Satisfactory /17/2006 Satisfactory Satisfactory /31/2006 Satisfactory Satisfactory H. Restructuring (if any) Not Applicable vi

11 I. Disbursement Profile vii

12 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal Financial sector reform was a crucial part of the country strategy. At appraisal, the primary objective of International Development Association s (IDA) assistance strategy to Tanzania was to reduce poverty through an acceleration of broad-based private sector growth. A new Country Assistance Strategy (CAS) for Tanzania had been finalized in The CAS emphasized the need for private sector and infrastructure development, sustainable rural development, improved social infrastructure, and public sector reform and institution building. The successful implementation of banking reforms and increased private investment in the financial sector were considered crucial for accelerating growth and required for improving broad-based access to financial services. Considerable scope for improved supply of financial services existed. A study commissioned by the Bank of Tanzania in 1997 found that the rural population, roughly 85 percent of the total population, demanded a high quality savings service for very low balance accounts with relatively few transactions. On the credit side, small loans with repayment periods adjusted to accommodate the pattern of income flows were demanded. In addition, a relatively wealthier segment of the rural population and urban microenterprises could absorb more traditional products and higher loan amounts. In terms of supply, the financial penetration in Tanzania was small at the time of appraisal, with deposits per GDP at a relatively low 15 percent and only 195 branches serving a population of 33 million. The continuation of reforms in the financial sector was essential. The Second Financial Institutions Development Project (FIDP II) was designed to: (a) complete the program of technical assistance begun under the first FIDP; and (b) finance the investments associated with the transformation of the largest state-owned savings bank to a privately owned microfinance bank. The predecessor project, FIDP, had been approved in 1995 to support the Government s financial sector development strategy. The elements of the strategy had been to: i) encourage competition in the commercial banking sector; ii) strengthen banking regulation and supervision; iii) improve the payments system nationwide; and iv) develop contractual savings and a market for government and corporate securities with the requisite regulatory structures. A parallel credit, the Parastatal and Public Sector Management Project, supported a complimentary parastatal privatization program. Bank privatization was the key element of the reform agenda. The emphasis under FIDP was on the restructuring and privatization of the largest and state-owned bank, the National Bank of Commerce (NBC). The political consensus for restructuring the original NBC took more time and resources to achieve than anticipated. After prolonged deliberations that took almost two years, the Government implemented a radical restructuring plan in October 1997, splitting the original NBC into two banks, the new NBC (1997) and the National Microfinance Bank (NMB). NBC (1997) was designed to 1

13 be a full commercial bank with business lines targeted to larger commercial enterprises. NMB was to provide nation-wide coverage with business lines targeted to small depositors. All lending products were assigned to NBC (1997). Both banks were offered for sale in August A 70 percent stake in NBC (1997) was sold to Amalgamated Banks of South Africa (ABSA) in However, the attempt to privatize NMB was not successful. The Government recognized that a successful sale would have to be preceded by a bond issue to bring the bank s net worth to zero, an agreement on donor financing for a substantial portion of the start-up costs, and recruitment of professional bankers and microfinance experts to take over the management of NMB and transform its basic business line to cater for small-scale financial services. FIDP II was designed to address this need. Building the capacity of financial regulators and strengthening the financial infrastructure had been a complementary priority of the reform agenda. Through FIDPfunded training courses and with the assistance of the International Monetary Fund (IMF), the Directorate of Banking Supervision (DBS) developed most of the basic skills for supervising banks. DBS capacity needed to be further developed, however, especially in light of the continuing bank privatizations, the increase in the number of banks, and the emerging need to supervise microfinance institutions. Other components under FIDP that remained on the reform agenda were payment systems, contractual savings, credit information, capital markets, and the restructuring of the People s Bank of Zanzibar (PBZ), a small government-owned bank (for FIDP II, two other government-owned banks, Tanzania Investment Bank (TIB) and Tanzania Postal Bank (TPB), were put on the agenda along with PBZ). These components were delayed under FIDP, partly due to the unexpected amount of resources and effort that had been required to restructure NBC. Further progress on these elements was deemed to be necessary for the success of the financial sector reforms. 1.2 Original Project Development Objectives (PDO) and Key Indicators The objective of the project is to increase the soundness and competitiveness of the financial sector and improve access by small savers and micro entrepreneurs to the formal financial system. This will be accomplished by: (i) restructuring and/or privatizing state-owned banks including transforming NMB into a private microfinance bank; (ii) strengthening the supporting financial infrastructure by, inter-alia, enhancing the capacity of the central bank to supervise banks and by improving the efficiency of the national payments system; and (iii) increasing savings and investment opportunities by promoting the development of contractual savings and capital markets. Project benefits are measured through an assessment of reduced government ownership of (as a proxy for intervention in) the banking sector, the soundness of the banking system as measured by the extent of non-performing assets in the banking system, and increased access by rural savers and micro entrepreneurs to the formal financial system. The three main PDO indicators are the following: 2

14 PDO Indicators Baseline (Dec. 1998) Target Share of deposits in private banks to total deposits 51.5% 98% Reduction in non-performing loans to total assets 4% 2% Increase in rural deposits n/a 14% At the launch of the project, the original PDO indicators were expanded to include three further indicators, previously designated as intermediate outcome targets. This refinement is why the data sheet above lists six PDO indicators, while the Project Appraisal Document (PAD) and the table of indicators in this section list only three. All the PDO indicators and all the intermediate outcome targets, as well as the degree to which the targets were achieved, are discussed below in Section Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification There are no revised PDO. 1.4 Main Beneficiaries The primary beneficiary of the project was the Government of Tanzania, as the owner of NMB. Financial and technical resources were provided to support the privatization of the government-owned bank. The Government benefited directly from the sale of NMB and will continue to benefit when the now-profitable bank will continue to deliver significant receipts in taxes and dividends. The Government of Tanzania benefited directly from the increased capacity (including IT infrastructure) at DBS, Payments Systems, Insurance Supervisory Department (ISD), and Capital Markets Supervisory Authority (CMSA). It benefited from the technical analyses of the consultancies as a means for formulating its strategy for continued financial sector reform. The secondary beneficiaries of FIDP II are rural households and small scale enterprises. The turnaround of NMB has increased the availability of financial services in rural areas and increased the quality of the available services. Finally, all actors in the financial sector, including the commercial banks and the population as a whole, have benefited from a strengthened financial sector, from the increased stability of the economy resulting from the improved supervisory capacity of regulators, and the greater diversity of available financial instruments and products. 1.5 Original Components The original components, as approved, are listed here with, in parentheses, the amount of the original allocation for total project input. This original allocation includes the Government s contributions. The specific outputs are listed in Annex 2, with general discussion of the implementation below in Section 2.2. Bank Restructuring: The World Bank s financial and technical assistance for the restructuring of the state- 3

15 owned banks is what contributed directly to the achievement of the PDO by enabling the transformation of these institutions and their integration into the market economy. NBC Privatization (US$ 1,592,147). Last remaining consultancies and audits from the NBC privatization, including retroactive financing. The sale of NBC was finalized and the management duties handed over to ABSA before FIDP II became effective. This subcomponent was peripheral to FIDP II. NMB Strengthening and Privatization (US$ 18,458,198). Consultant fees for managing NMB up to the point of sale of the bank, Information Technology (IT) investments in NMB, training of NMB staff, fees for privatization and legal advisors for the sale itself, fee for microfinance advisor at the Bank of Tanzania (BOT), subcomponent for deposit mobilization and supporting audits for NMB. In addition, the component provided funds for retrenchment of NMB staff. Privatization/Restructuring of PBZ, TPB, TIB (US$ 500,000). Fees for consultancies to do analysis and make recommendations regarding the options for privatization and/or restructuring of the three government-owned banks. Financial Infrastructure Strengthening: Strengthening the financial infrastructure contributes to the PDO by strengthening the institutions responsible for regulating financial sector institutions. Banking Supervision (US$ 3,031,272). Training for the staff of DBS and purchase of IT equipment. Payments System (US$ 950,000). Training for the staff of National Payment Systems. Credit Information Bureau (CIB) (US$ 586,000). Cost of feasibility study and start-up costs. Contractual Savings (US$ 600,000). Fees for consultants (e.g. resident advisor for ISD) and analytical work for the insurance and pension sector, training of staff, cost of privatization study of National Insurance Corporation (NIC). Capital Markets and Securities Authority (US$ 1,102,000). Salary for the CEO, training for staff, fees for consultants, cost of IT for CMSA and IT infrastructure for stock exchange. Privatization Trust (US$ 800,000). Fees for consultants to manage the Trust and operating expenses of the Privatization Trust. Project Management (US$ 390,000). Expenses for implementation and supervision of the project. The table below illustrates how the components of the predecessor project FIDP and follow-on project Financial Sector Support Project (FSP) fit together. The details to each component are discussed below; the status listed here is for illustrative purposes only. 4

16 FIDP II Components FIDP FIDP II FSP NBC Privatization almost completed completed - NMB restructuring and privatization - completed - PBZ, TIB, TPB restructuring and privatization postponed studies, delay ongoing Banking Supervision partly done partly done ongoing Payments Systems studies done partly done ongoing Credit Information Bureau postponed studies, delay ongoing Contractual Savings postponed partly done ongoing Capital Markets and Securities Authority partly done partly done ongoing Privatization Trust - cancelled Revised Components There were no revisions to the components. 1.7 Other significant changes Schedule: The closing date of the credit was extended three times. The original closing date was December 31, The project was extended to December 31, 2004, then to December 31, 2005, and finally to December 31, 2006, which is when the project closed. The reason for the extensions was delays due primarily to the resistance to the privatization of NMB from vested political interests and the Government s inability to move forward with the initially agreed-upon timeline. The first extension was authorized by the Country Director and the subsequent two extensions were authorized by the Regional Vice President. Management contract extensions for NMB strengthening: As a consequence of the delays in the privatization of NMB, the contract for the management contractors for NMB until the completion of the privatization process was extended several times. The contract extensions were approved in the regular IDA procurement process, through provision of no objection. The original contract was due to end in April It was extended to April 2002, April 2003, April 2004, April 2005, and finally to December 2005 or until privatization took place, whichever was earlier. Privatization took place in September 2005 and the contract was closed. NMB retrenchment funds: Funds that were earmarked for the retrenchment of employees of NMB were not used as very few employees were retrenched and NMB used its own funds. Instead, the funds were earmarked for retrenchment of PBZ employees. However, the deadline of March 30, 2007 agreed with the Government of Zanzibar for the sale of PBZ was missed, and the grace period for withdrawal of credit proceeds expired before the funds could be used. The amendment of the Development Credit Agreement to allow for funds to be used for the retrenchment of PBZ employees was authorized by the Country Director. Privatization Trust: The component for the Privatization Trust was dropped after the lifetime of the trust expired, though the project components were not officially revised. 5

17 The original intention of the Privatization Trust was to hold shares of privatized companies and then sell them to the broader public as a way of ensuring they participated in the privatization and become part-owners of the new companies. The Trust ended up not being used for the privatizations to the general public as the number of companies that were privatized were very few. In 2004 the funds were reallocated to the overall project. NIC Divestiture: Funds were allocated from the Unallocated Category to support the implementation of the divestiture of NIC. The divestiture process was not completed by the closing of FIDP II and outstanding activities are being funded from another IDA project. Review of the Land Act 1999: The Tanzanian Bankers Association (TBA) appealed to the Government to review the Land Act as it was a major constraint to the use of land as collateral by borrowers. The project provided funds for a consultancy to review the Land Act 1999 and make recommendations for appropriate amendments. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry Lessons of earlier operations were taken into account. FIDP II was a follow-on project to FIDP (itself a follow-on project to an earlier Financial Sector Adjustment Credit). The lessons from these previous projects and international best practice in microfinance informed the design of FIDP II. Especially noteworthy was the gradual introduction of lending products transforming NMB from a savings bank into a microfinance bank. This part of the project design was a consequence of the earlier split between NBC and NMB, under FIDP, when all lending products were transferred to NBC. The design of FIDP II reflected the World Bank s understanding and continued support of the transformation of the role of the Government in the financial sector. The role of the Government as the direct provider of services was reduced through the privatization of government-owned banks. At the same time, the role of the Government was strengthened in terms of the supervisory capacity and the publicly provided financial infrastructure. Modern financial markets require strong, capable oversight and welldeveloped financial infrastructure, such as payment systems, capital markets, and a regulatory environment conducive to contractual savings. Successful privatizations depend on these elements. In supporting financial sector reforms in this way, the design of FIDP II followed the design of its predecessor project. The support of the additional components, other than the privatizations of NBC and NMB, is continued under FSP and reflects the long-term perspective of the project design. While the overall risks were adequately identified, the timetable for implementation was ambitious and perhaps overly optimistic. The PAD rated the overall risk of the project as substantial. Three specific, substantial risks were identified, namely that (i) investors might not be interested in NMB; (ii) the Government might interfere with the operations 6

18 of NMB; or (iii) NMB might not operate according to best practices in microfinance. The risk of limited commitment by the Government, on the other hand, was judged to be only a moderate risk. It turned out that the resistance to the privatization and to the reform steps in other subcomponents was strong. The experience with the difficulty in achieving political consensus and arriving at the decision to split NBC and NMB and privatize them separately would have warranted a higher risk rating, rather than a lower rating compared to other identified risks. In order to measure and maintain the Government s commitment to the privatization, ongoing, high-level dialogue was recommended. In consideration of the earlier experiences with achieving political consensus, the timetable of the project was optimistic. Benefits of such a tight timetable are noted below in Section Implementation In general, the project s implementation was responsive to external changes. The supervision by the World Bank focused on continued discussions with the Government towards deepening the consensus around the privatization agenda. The Mid-Term Review in February 2002 in particular was held in this spirit. Similarly, the World Bank followed very closely the work of the management consultants in charge of turning NMB around and kept the Government engaged, through the Parastatal Reform Commission (PSRC), on the need to manage the consultants properly so as to get NMB in good shape before its privatization. Political difficulties in maintaining support for the reform agenda led to significant delays and adjustment in strategy for the privatization of NMB. The implementation was impacted on the Government s side by the political difficulties in maintaining the cohesive support for the privatization agenda. Especially once NMB s performance under the management contractors began to exceed expectations, the privatization of NMB lost momentum and started to become more difficult. As the profits of NMB rose, so did the voices expressing opposition to the privatization. The Government was unable to maintain support for the original plan of privatization that called for a sale of 70 percent of NMB shares to a strategic investor. At the height of the heated political debate, the Board of Directors of NMB, appointed by the President, publicly expressed its opposition to the privatization. The President responded by replacing the Board in its entirety. The result of these political challenges, apart from the delays of one and a half years in the privatization, was an amended privatization strategy, calling for a sale of only 49 percent of NMB shares to a strategic investor. A further 21 percent would be sold to Tanzanian citizens at a later date. The process of selling the 21 percent was recently initiated. The implementation of other components of the project was delayed due to a lack of political will and problems with coordination. The restructuring and privatization of PBZ, TPB, and TIB was delayed and all three banks are still owned by the Government. Setting up the CIB was delayed, when TBA s initiative stalled due to resistance of the banks against sharing data and lack of agreement on the structure of the ownership of the bureau. The project s efforts for a unified regulatory structure for pensions did not result in an implemented solution, but managed to enable a clearer understanding and an emerging consensus among the relevant political actors. These components enjoyed, in 7

19 comparison with the NMB privatization, limited attention but their delays did not impact the reform effort more broadly. The 2003 Financial Sector Assessment Program (FSAP) gave the implementation new energy. An FSAP was conducted in May The recommendations supported the reform agenda of FIDP II and thus infused the implementation with a refreshed sense of urgency, especially for the strengthening of the financial infrastructure. For example, the FSAP recommended that BOT take the lead in forming the credit bureau, rather than relying on TBA to make progress, which it hadn t done. The FSAP also emphasized specific needs in insurance regulation and supervision, which were subsequently addressed by ISD with the help of a resident advisor, hired with FIDP II funds. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization The three original PDO indicators listed in the PAD were, in principle, well chosen to assess the progress and success of the project. Rural access to financial services, government intervention in the banking sector, and the soundness of the banking system are the right constructs to measure the success of the project. However, the first and second of these measures fall a little short in terms of their exact definition or choice of specific indicator. Increased access by rural savers: When the indicator was proposed, no direct reference was made to the available data (i.e. data that the banks themselves actually can and do collect). A definition that would work in practice had yet to be established. Given the lack of data availability, the eventual definition (proportion of deposits held in branches that are not located in urban areas) rendered the indicator slightly less precise than the original M&E design had intended. It is debatable, particularly in Tanzania, whether the degree of government ownership (still) provides a sufficiently responsive proxy for government intervention in the banking sector. In the case of NMB, the Government remains the majority shareholder at 51 percent. Management control over the bank s operations, however, was passed on to Rabobank, at the time when the Rabobank consortium acquired 49 percent of NMB shares. So far, there is no evidence of government interference in the management of NMB. Thus, recording NMB as a state-owned bank, as this indicator imposes, does not adequately reflect the locus of managerial control in the banking sector. These two (limited) caveats regarding the suitability of the performance indicators notwithstanding, appropriate data was collected for all performance indicators by the BOT. The reliability of the data is high. The values of the performance indicators did not require any adjustment in the project. As mentioned above, three further indicators, were added to the PDO indicators, bringing the total number to six. The purpose of this refinement was to measure progress for the project s individual components more prominently. Beyond this, the change did not impact the monitoring of the project. In this Implementation Completion and Results Report (ICR), for the discussion of indicators, the three added PDO indicators are 8

20 discussed within the intermediate outcome targets, since they were originally designated and formulated as such. 2.4 Safeguard and Fiduciary Compliance There were no fiduciary, environmental, social or safeguard problems. The overall financial management of FIDP II is satisfactory. 2.5 Post-completion Operation/Next Phase Following the FSAP in early 2003, the Government used its recommendations to draw up a roadmap for a second generation financial sector reform program. A follow-on project to FIDP II, the FSP, is based on this roadmap and became effective on November 28, Subcomponents that have not been completed in FIDP II (pensions, PBZ privatization, CIB) are also included in this follow-on project. FSP is co-funded by the Department for International Development (DFID) and IDA and reflects the efforts towards donor harmonization and sector-wide approaches. The transition to FSP has been smooth largely because of the experience gained by BOT in managing IDA projects over the years. The main performance indicators for FSP and the most suitable measures for the longterm impact of FIDP II are: Credit extended to the private sector as a percentage of GDP Interest rate spreads (lending versus deposit rates) Proportion of adult population that uses financial services provided by formal financial service providers Proportion of financial institutions in compliance with capital adequacy ratios (commercial banks, insurance companies and pension funds) To communicate the considerable success of the NMB privatization, a case-study is being prepared to document the process, the key success factors and the main challenges of the privatization. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The development objectives of FIDP II were (and remain today) highly relevant for the country priorities and for the overall assistance strategy of the World Bank. The Government s strategy emphasized the need to attain a higher growth rate through rural development, private sector growth, and investments in infrastructure, while maintaining macroeconomic stability. The World Bank s CAS of 2000 followed the country priorities closely and outlined a broadening of the World Bank s efforts from the macroeconomic focus of earlier years. The PDO of FIDP II was directly relevant to three of the four main pillars, namely private sector development, rural development and strengthening of public institutions. 9

21 The urgent need to transform the role of the state in guiding economic development is a central theme in the country and World Bank strategies. The privatization of NMB and the concurrent strengthening of supervisory capacity and the financial infrastructure constitutes an important, timely element in the reform efforts of Tanzania. The design of the project, its scope and complexity, was ambitious but well-suited to complement the overall reforms and to increase the chances of success. The lack of progress on certain subcomponents suggests that the project may have been too broadly designed, with too many subcomponents requiring a high degree of political consensus. However, a reduction in the scope would reduce the time spent in discussion and thus in forming the needed consensus, even if the implementation is only partially completed. The ambitious timetable may have had beneficial effects. As discussed earlier, the timetable for the project was ambitious. The extension of the project by three years and the inability to complete the implementation of some of the components confirms this. Aside from this shortcoming, however, the timetable may have been well suited to provide the reformers within the Government additional incentives for maintaining the direction of the reform, when the pace of implementation lagged. By imposing a somewhat onerous process of extending the project as well as the eventual limit for doing so (no more than three times) the optimistic timetable may have contributed to the implementation of the project s main component. The implementation coordination reflected best practice. Just as with the predecessor project FIDP, the coordination of the implementation of FIDP II was mainstreamed into the activities of DBS, instead of establishing a separate Project Implementation Unit. This aspect of the project design improved the overall country ownership and indirectly strengthened the capacity and authority of DBS. 3.2 Achievement of Project Development Objectives The project development objective was achieved. Access by small savers and micro entrepreneurs to a sound and competitive financial system in Tanzania has definitely improved. The three original PDO indicators are shown in the table below: Original PDO Indicators Baseline (12/31/98) Original Target Actual (12/31/06) Share of deposits in private banks to total deposits 51.5% 98% 79% Reduction in non-performing loans to total assets 4% 2% 3% Increase in rural deposits n/a 14% > 80% According to the indicators, only one of the three main targets has been met, albeit in a dramatic fashion. The other two indicators show progress in achieving the target. The numbers in this case understate the change in the key constructs that the indicators are measuring. First, if deposits in NMB (51 percent government-owned) would be added to the deposits in private banks the indicator value would increase to 84 percent. This figure is still below the target, but it does show that considerable progress has been made. The proportion of non-performing loans is higher than the target value and this is cause for 10

22 some concern. The value has fluctuated in the last years and remained at 1 percent, well below the target value, for most of According to DBS, the increase during 2006 to 3 percent is a result of the poor performance of about seven large borrowers in five of the big banks. The poor performance can be primarily attributed to the drought, coupled with power shortages which hit the country in 2006, changes on taxation for petroleum products, and poor performance of the railway services. The increase was also marginally influenced by a stricter requirement for classifying non-performing micro loans, following the implementation of the Micro Lending Regulations of The sustained expansion of access for the rural population and the concurrent privatization of the largest state-owned banks is an exceptional and inspiring outcome of FIDP II. The restructuring and privatization of NMB is the most important output of the project, with 58 percent of the originally allocated funds dedicated to it, and it was delivered with considerable success. The technical and financial assistance from the project directly enabled the transformation of an insolvent, government-owned bank without any lending products and negative net worth, into a competitive, profitable commercial bank that caters to the rural population. Outreach to the rural population, often the prominent victim in the process of bank privatization, has increased and is continuing to increase. Outstanding NMB microfinance loans grew to TZS 117 billion (US$ 89.1 million) in September 2006 with more than 165,000 borrowers since lending started in August NMB s deposit base grew fourfold, reaching 750,000 depositors with its extensive rural branch network, which grew from 95 branches in 1997 to 115 branches in With 22 percent of assets and 16 percent of deposits of the banking system, NMB is also a major source of payments in the country and related services to all its depositors. The Government s commitment to the financial sector reform agenda more generally had been tied to the project s ability to improve access to financial services in rural areas. Since the outcome of the project has delivered improved access in such convincing fashion, the Government has committed itself to further reforms, as evidenced by the follow-on project FSP. Strong growth and deepening of the financial sector is evident in further indicators. Credit to the private sector, one of the main PDO indicators for FSP, increased from 3 percent of GDP in 1996 to 10 percent of GDP in Financial sector depth measured as M2/GDP increased from 15 percent in 1999 to close to 20 percent in These changes were driven by increased competition in the financial sector due to the improved governance in the privatized banks, the reduction in very high gross interest spreads for the largest borrowers, and increased soundness of the financial system due to strengthened capacity at DBS. Despite a mid-implementation change in privatization strategy, management control of NMB has been passed on as originally intended. The change in the privatization strategy and the sale of only 49 percent of NMB shares to a banking consortium (rather than the initially planned 70 percent) reduces the completeness of the privatization s success somewhat. However, with the sale of the shares, day-to-day management was effectively ceded to Rabobank as the leader of the banking consortium. As a result, the achievement of the project s development objectives and the probable sustainability of the reforms has 11

23 not been impacted negatively by the change in strategy. The preparations for the sale of 21 percent of the remaining shares to Tanzanian citizens illustrates the sustainability of the privatization. The achievement in terms of the additional subcomponents has been mixed. The capacity of regulators was strengthened through FIDP II. DBS, CMSA, and ISD are capable and well organized and are recognized as such. All financial institutions that fall under the purview of these institutions are currently inspected at least once a year and recommendations from inspections are enforced. Substantial improvements in the financial infrastructure, in particular the improvements in regulatory oversight, capital markets and payments system, were noted and praised by market participants. On the other hand, the restructuring and privatization of the smaller government-owned banks (PBZ, TIB, TPB) was not successful, though the process of privatizing PBZ is ongoing. The CIB and pension regulations were not implemented as designed. Due to delays, dropped components (Privatization Trust), and undisbursed funds (NMB retrenchment, for example), only US$ 22.4 million or roughly 80 percent of project funds of US$ 27.5 million were disbursed during the project. The intermediate outcome targets are (* designates outcome targets that are listed as PDO indicators in the data sheet above): Intermediate Outcome Baseline Targets (12/31/98) Bank restructuring and privatization NBC > 50 % privately 100% governmentowned owned, fully recapitalized * NMB > 50% privately owned, fully recapitalized NMB governance improved and serving the majority of the population 100% governmentowned 100% governmentowned, and with negative net worth PBZ, TIB, TPB restructuring and privatization PBZ and TIB governance 100 % government improved ownership Banking Supervision Banking system is sound and stable Inadequately staffed banking supervision; banks not examined annually Actual (12/31/06) Fully capitalized and 70% privately owned Fully capitalized and 49% privately owned NMB is a highly profitable bank with a vast (and expanding) branch network, with 750,000 depositors and over 200,000 loans. PBZ is planned for privatization, not finalized. TIB to be turned into Development Finance Institution Banking supervision is well trained and respected. Financial institutions examined at least once per year. Offsite returns submitted, reviewed each month. 12

24 Credit Information Bureau Credit information on borrowers is easily available Contractual Savings Contractual savings institutions are well regulated and deliver services efficiently No centralized credit information on borrowers Pension funds are not regulated. Insurance regulator has limited capacity Capital Markets and Securities Authority * Increased public Annual turnover: TSZ 2.02 participation in capital billion; market capitalization: markets TSZ billion, 30,500 * Reduce CMSA dependency on government resources 3.3 Efficiency shareholders CIB not set up due to delays, coordination problems; design ongoing. Legislation amended to allow banks to disclose information on borrowers. Pensions: regulatory framework and investment guidelines proposed; regulator not established yet. Insurance: regulator built capacity and introduced risk-based supervision Annual turnover: TZS 15.3 billion; market capitalization: TSZ 2,887 billion, 97,000 shareholders 99% CMSA government dependency as of June 2006 was 80.9% No Net Present Value or Economic Rate of Return was calculated for the project. FIDP II was a technical assistance project. Attempts to determine an ERR are in such cases not meaningful. 3.4 Justification of Overall Outcome Rating Rating: Satisfactory A satisfactory rating of the overall outcome is justified because the development objective was achieved and a key indicator far exceeded the set target. The central outputs of this project, the privatization of NMB and strengthening of regulatory capacity, have a high development impact. NMB s continued profitability and expansion of service provision in rural areas and for the low-income population can be directly attributed to the project. The success of this bank privatization has an important signaling effect about the potential of well-designed reforms in the financial sector, in Tanzania and beyond. In addition, commercial banks have begun to move downmarket, partly in response to NMB s success, in order to compete more effectively for this business. The risk to the long-term sustainability of this development outcome is low. Since not all target values have been reached, even after the project was extended three times, a highly satisfactory rating is not justified. However, in relation to the important primary achievement of the project and the impact that the achievement has on the development of Tanzania, the discussed shortcomings and delays in the project s other components are minor. 13