Project Name. PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB4439 Access to Finance for Small and Medium Enterprises

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB4439 Access to Finance for Small and Medium Enterprises Region EUROPE AND CENTRAL ASIA Sector Micro- and SME finance (100%) Project ID P Borrower(s) CENTRAL BANK OF ARMENIA Central Bank of Armenia Vazgen Sargsyan str. 6, Armenia Tel: (374-10) Fax: (374-10) Implementing Agency CBA PIU V. Sargsyan str. 6, 0010 Armenia Tel: (+37410) Fax: (+37410) Environment Category [ ] A [ ] B [ ] C [ X] FI [ ] TBD (to be determined) Date PID Prepared December 30, 2008 Date of Appraisal January 20, 2009 Authorization Date of Board Approval February 26, Country and Sector Background 1. The authorities carried out a successful stabilization and structural reform program following the hyperinflation, fiscal crisis and severe economic contraction immediately after independence in a period that also saw the devastating consequences of a major earthquake and armed conflict with Azerbaijan. Trade and prices were liberalized, the legal framework for a market economy was established, most small and medium-sized enterprises were privatized, and the government s intervention in the economy was considerably reduced. Macroeconomic stability was maintained, inflation was low, structural reforms were carried out successfully and economic recovery began. Successful implementation of economic reforms contributed to an average growth of 5.5 percent per year during Reforms accelerated after 2000, with a shift towards improving the business environment and public utilities management, strengthening governance, competition and financial intermediation as well as promoting structural changes in public service delivery. Annual average growth rates of 12 percent were achieved over Such high rates of sustained growth have led to a fall in poverty from over half of the population in 1999 to less than 25 percent in 2007, and an even sharper fall in severe poverty from 21 percent to under 4 percent. Growth has only recently begun to dent unemployment which stands at nearly onethird of the labor force. Growth continues to rely on trading, construction and services as the main contributors.

2 3. Strong economic fundamentals have shielded the economy from the initial effects of the current global output slowdown and the financial crisis. Fiscal deficits and public debt remain modest in relation to GDP and gross external reserves are at $1.4 billion, equivalent to 3.5 months of imports. Year to date GDP growth remains at around 8.2 percent as of December, while CPI inflation further declined to 6.6 percent in November from 11 percent in September. Inflation is no longer seen as a major issue, especially against the background of declining commodity prices worldwide. The Armenian authorities have been acting with fiscal prudence in recent years. The average fiscal deficit for was 2 percent of GDP and the 2008 deficit is expected to shrink to 1.0 percent of GDP. Impact of the current crisis 4. However, economic vulnerabilities have grown substantially arising from the global financial crisis. Export growth is expected to decline further aggravated by declining metal prices and weakening external demand. Two top companies in the extraction industry stopped production in early November and have temporarily laid-off most workers. Armenia relies heavily on remittances as a source of capital for development, and this is particularly true of informal SMEs. In 2007, remittances reached nearly 20 percent of GDP. The global slowdown particularly in Russia may also lead to slower growth in remittances in 2009, or even a decline. 5. The international financial crisis and growing domestic imbalances represent significant challenges to the outlook for Armenia. As financial disturbances spread to the real economy in Europe, the US and Russia, Armenia s external current account deficit, which was 6.4 percent in 2007 is likely to experience more pressure (and is expected to reach 12.5 percent by end-2008). Background of the Financial Sector 6. The 2005 FSAP update concluded that the Armenian authorities have made substantial progress putting into practice the recommendations of 2000 FSAP. Their further success in implementing economic policies has resulted in positive macroeconomic performance, improved confidence in the financial system, and an expansion in financial intermediation. Now the overriding challenge is to sustain this progress. 7. To ensure further development of the financial system while maintaining financial stability, the authorities need to address weaknesses in the governance of the corporate sector, including in disclosure and accounting, and strengthen aspects of the financial infrastructure, such as creditor rights. These improvements should enhance banks' capacity to assess and manage credit risk. The decision to merge the financial regulatory agencies, adopted after the completion of the FSAP update, involves both opportunities and risks. The authorities have implemented a series of measures to minimize risks in operating a unified regulatory body. 8. The financial system remains small and bank dominated, and is not yet a major contributor to economic growth. Banking sector assets were 18.8 percent of GDP in 2007, substantially

3 below the CIS 1 average of over 50 percent in Banks funding sources are mostly from deposits, external financing and own capital. Deposit costs range from 6 11 percent, whilst lending rates vary from percent, depending upon the type of credit. The banking sector has benefitted from stable earnings in past years. The non-bank financial sector is undeveloped and accounts for around three percent of total financial system assets. Similarly, the stock market is under developed with market capitalization of less than one percent of GDP. The high cost of loans - averaging about 20 percent - reflects inefficiencies in the financial system that impedes access to credit. The formerly substantial inflow of remittances from abroad and the on-going large informal economy negatively affect financial intermediation by domestic institutions. 9. Strong economic growth combined with recent bank acquisitions by foreign banks have translated into 70 percent growth in credit in the twelve months through September 2008, mostly towards consumer, corporate and mortgage lending. Subsequently, lending growth has markedly reduced, as has the growth in deposits in recent months. To meet the recent boom in the credit demand, Armenian banks have markedly increased borrowings from external sources beginning in 2007, though much is from foreign parent banks. The loan to deposit ratio is now about 135%, above the median level of comparable countries, increasing vulnerabilities to re-financing risk. The proposed AFSME facility is designed to mitigate such re-financing risks with a stable source of longer term funding Loan/deposit ratio, % Notwithstanding such a strong expansion in external borrowing and credit, the total capital adequacy of the Armenian banking sector was reported to be around 30 percent at end However, much of the recent upsurge in bank lending has not reached SMEs, particularly outside Yerevan. Evidence shows that smaller firms outside Yerevan have been underserved, with less access to credit than other types of borrowers in Yerevan. The share of banks reported SME 2 credits to total credits dropped from 33 percent in 1H 2006 to 27 percent in 1H Survey results limited to Russia, Ukraine, Belarus and Kazakhstan 2 The Law on State Support of Small and Medium Entrepreneurship, Article 2, provides detailed definitions of SME, categorized according to sector and number of employees.

4 bln. drams H H H Total Lending, Yerevan Total Lending, Marz SME Lending, Yerevan SME Lending, Marz 11. The financial crisis and the resulting global liquidity squeeze have effectively blocked external borrowing for banks in many emerging markets, including Armenia. Foreign banks operating in Armenia (which total about 66 percent of bank capitalization at end-2007) may not continue funding their subsidiaries at prior levels. Many internationally active banks are in the process of re-building capital and liquidity in their home markets. Going forward, foreign banks may cut their emerging market exposure, call upon subsidiaries for dividend payments, reduce credit lines, or at worst, prematurely call in existing credit lines. This loss of access to funds would reduce the ability of Armenia to sustain growth. As a result, domestic banks may become even more reluctant to lend to SMEs. 2. Objectives 12. The proposed loan will support the project s development objective to increase Armenian small and medium enterprises access to medium-term finance in an increasingly unstable global environment. The project would positively impact SMEs and those selected qualified banks not only during the implementation period ( ), but beyond, as the PFIs will use the repayments from the initial sub-borrowers to finance new investments before the funds are returned to the World Bank. 13. Intermediate outcome indicators (see Annex 3 for more details) will measure the amount of medium term financing available to SMEs and the increase in the number of SMEs receiving medium term financing. Long term results would be the growth and employment generated by supported SMEs and would be measured by an impact evaluation of the SMEs and banks supported. 14. The Sustainable Development Program (SDP), approved by the government in October 2008, is Armenia s second Poverty Reduction Strategy Paper (PRSP-2), which lays out a second generation economic growth and diversification strategy aimed at deepening competition and fostering private sector development. The SDP has three key goals covering the period : (i) reducing poverty, including the elimination of extreme poverty; (ii) ensuring human development; and (iii) broadening economic growth and accelerating development of lagging regions.

5 15. The proposed AFSME credit line facility is designed to address the third goal through stimulating development of SMEs. By making medium term finance available through local banks, SMEs can invest in new equipment so as to encourage, inter alia, job expansion and growth into new sectors. An effective financial sector provides credit to firms, which supports economic development by enabling them to invest in technology and capacity. That raises output and productivity, thereby fueling growth and employment opportunities. In addition, evidence 3 suggests that a well-functioning financial system enables the poor to benefit proportionally more from economic growth (i.e.; growth is pro-poor). 16. The Bank s most recent Country Assistance Strategy (CAS) covered FY05 to FY08 and was completed successfully in the high case. A new Country Partnership Strategy (CPS) is under preparation which will include the proposed line of credit to SMEs as a priority for FY09 as part of a package to stem further deterioration in GDP growth, provide near term employment, and build the private sector needed for medium term sustainable growth. In light of its growing GNI per capita and sound economic framework, Armenia was declared eligible for IBRD borrowing starting in FY08 and this will be Armenia s first IBRD loan for the next CPS period and the second IBRD loan since WB presence in Armenia Rationale for Bank Involvement 17. The rationale for advancing this proposed wholesale credit line operation to SMEs centers on strengthening access to finance and improving the resiliency of Armenia s private and financial sectors in light of the affects of the global financial crises on banks, SME borrowers and remittances. Thus it is imperative that the funding shortcomings of the financial sector be addressed to better ensure sustained growth. 18. As banks rollover or re-financing risks have been substantially magnified in the past months, banks in both developed and emerging markets have begun to conserve liquidity, inter alia, to enable them to set aside larger loan loss provisions and to better prepare for the repayment of external obligations. In addition, reduced remittance flows to SMEs are likely to leave them with less informal sources of funds to invest. Availability of credit will therefore be key in providing the needed cushion for investment and job creation in the coming year. 19. In this context, credit growth to Armenian businesses, and in particular SMEs in 2009 will most likely be limited by two factors: First, although Armenian banks are now relatively liquid, with high capital adequacy ratios, going forward they are facing an increasing scarcity of available resources to grow their lending portfolio. Because of rising uncertainties, the growth of deposits has been slower; moreover, recent months have seen the beginning of dollarization a trend that may become stronger with a possible exchange rate depreciation. Thus, with a slowly 3 See Beck, Demirgüç-Kunt, and Levine (2007). 4 The first IBRD loan Institution Building Project was approved in 1993.

6 growing deposit base, Armenian banks find it difficult to grow their loan portfolio in local currency. Second, with a worsening economic environment and growth prospects, the quality of Armenian banks loan portfolios is coming under increasing pressure. The reassessment of credit risks is likely to lead to much tighter credit conditions, especially towards SME borrowers, who traditionally can offer the least collateral to secure a loan. The lack of adequate level of bank resources in local currency may also exacerbate the tightening of credit conditions for SMEs as these companies are typically not export-oriented and, therefore, lack the capacity to hedge borrowing in foreign currency. The proposed wholesale credit line aims to address in priority the first obstacle to credit growth above, which is currently perceived as the major bottleneck to undisrupted financing of SMEs. Initial discussions with commercial banks indicate a strong demand for such financing, even given the global and domestic slowdown. 4. Description 20. This is a single component operation, focused on providing wholesale funding to qualified banks 5 for on-lending to SMEs. The CBA will borrow from the World Bank with a sovereign guarantee issued by the MoF and on-lend only to qualified banks which, inter alia, have demonstrated capacity to serve SME borrowers. The CBA would provide wholesale funds to PFIs (participating financial institutions, which are to be private commercial banks) through Subsidiary Loan Agreements. The PFIs would in turn on-lend these funds to SMEs in urban, rural and peri-urban areas. See Appendix 4.3 for a description of PFIs on-lending terms and conditions to SMEs. 21. Participating banks will include both local and foreign owned banks that meet specific eligibility criteria as laid out in Appendix 4.2. The size of each SME loan is to be limited to US $150,000. The project Operating Manual covers various details of the project and also provides for a substantial negative list of types of borrowers which are ineligible for financing under the facility. 22. Credit & Forex risks. All credit and related risks are to reside with the originating PFI. As most SMEs income and expenses are denominated in Armenian Dram (AMD), the CBA is to extend PFIs loans only in local currency. However, PFIs may choose to lend to subborrowers in foreign currency in the event SMEs have significant sources of foreign exchange earnings and, subsequently, if there is a demand from SMEs. [Bank management considers it important for the health of PFIs that the CBA provides funds to PFIs in the currency of the PFI loans. This issue will need to be resolved prior to appraisal.] 23. The foreign exchange risks derived from the CBA s borrowing in USD and lending in AMD will be substantially mitigated through a variable rate feature of the PFI loans, and funded through a spread above World Bank loan rates and related commitment fees to be derived from on-lending to PFIs 6. This spread will cover any unexpected fluctuation in foreign 5 See Appendix 4.2 for a description of the bank two tiered qualification process. 6 See Annex 4.1. It is estimated that this spread would e above 400 basic points.

7 exchange rates. Due to the non-existent Dram swap market and a lack of hedging instruments in the market for FX vs AMD loans, the CBA is the most suitable institution to handle the FX risk. 5. Financing Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 50 Total Implementation A. Partnership arrangements 24. The Access to Finance for SMEs project builds upon a strong foundation and PIU established for an expiring line of credit extended by KfW and will work with a number of donor partners in helping achieve the objectives of the project. The CBA will provide extensive new support to the PIU to upgrade its capacity through hiring additional staff and the provision of office space, IT, etc. As to co-financing, discussions are on-going with a key bilateral donor to raise the capacity through training of potential Participating Financial Institutions with respect to SME credit appraisal and risk management. The Bank will work with the Ministry of Economy s SMEDNCA to raise awareness of the program overall and to assist the SMEs with regard to the applications process for the project and overall business development support. The IFC and EBRD are working with various individual banks and this line of credit will be closely coordinated with them as well. B. Institutional and implementation arrangements 25. The project will be implemented by CBA s PIU (also known as the Project Management Unit of German-Armenian Fund Institution - PMUGAF), which has implemented KfW financed projects including Promotion of Micro, Small and Medium Enterprises in Armenia project. For capacity building purposes the following actions have been agreed to be implemented: Actions for capacity building Responsible Completion Date 1. Organize training on the WB FM policies and procedures for the CBA s PIU FM staff and recruit a staff with relevant experience. The CBA and CBA s PIU Prior to the project implementation 2. Request access to the WB Client Connection system. 3. Develop Operational Manual and Financial Management Manual (OM/FMM) for the project to reflect the specific activities of the project, the internal control procedures as well as the accounting policies and procedures applicable to the project. The OM/FMM should CBA s PIU CBA s PIU Prior to the project implementation Prior to negotiation

8 also reflect the policies and procedures that will clearly define conflict of interest and related party transactions (real and apparent) and provide safeguards to protect the organization from them. 4. Establish and maintain a budgeting, accounting and reporting system under the project.. B. Monitoring and evaluation of outcomes/results CBA s PIU Prior to the project implementation 26. The World Bank will evaluate progress on the proposed indicators through regular reporting through the PFIs to the PIU and through periodic supervision missions. The PFIs and the PIU have agreed to submit yearly reports including output and outcome indicators. Project management-oriented Interim Un-audited Financial Reports (IFRs) previously known as Financial Monitoring Reports (FMRs) will be prepared under the project. The PIU will produce a full set of IFRs every calendar quarter throughout the life of the project. The PIU have sufficient capacity to ensure provision of the monitoring data. In accord with its longstanding KfW directed policy, the PIU s auditors 7 will provide regular on-site inspections of the qualified banks credit files and periodic inspections of the sub-borrower s records at its premises. 27. Project management-oriented IFRs will be prepared quarterly under the project. The data will come from internal PIU information, as well from regular reports provided by the PFIs to the PIU. Given that the envisaged SME credit line facility will expand considerably the scope of the PIU s operations, the PIU has agreed to hire a number of new staff to strengthen its existing capacity to ensure the sufficient provision of monitoring and reporting. C. Sustainability 28. Project sustainability will be ensured by the Government s commitment to increasing access to finance for SMEs and the PFI s increasing their capacity to intermediate international credit lines for SMEs. The Government of Armenia has made SME development a key pillar in the growth strategy of the country. Following on from publication of the SME development policy and strategy in Armenia and passage of the Law on SMEs (both approved in 2000), the GoA approved a Program on Small and Medium Entrepreneurship in According to GoA Decree # 1367-A dated November 20, 2008, US $50 million has been allocated as additional financing to the long-standing KfW SME program. In parallel, the CBA authorized inclusion of three additional banks (for a total of 8 banks) all of which were subject to due diligence under the envisaged AFSME wholesale line of credit facility. The GoA will seek to refinance a portion of these funds provided retroactively through from the AFSME project. 7 Assisted as may be needed by the CBA s bank supervision department examiners 8

9 30. Thus the project s sustainability will be supported by the Government s plans to foster SME development. As discussed in previous sections, the Government has taken several steps toward improving SMEs access to finance and overall support for SMEs. This will help ensure that increasing access to finance for SMEs will remain at the center of the Government s agenda. 31. Second, during the year, Armenian banks have begun to shift their credit portfolios towards smaller firms. This trend is likely to continue, as confirmed by interviews with numerous banks during the pre-appraisal mission. SME borrowers were widely perceived by banks as closer to their respective markets, thus more nimble and less vulnerable to potential economic downturns. 32. While the World Bank can play an important catalytic role at this stage by providing banks with medium term financing, currently quite scarce, it is expected that in the future, banks will again be able to secure this funding directly from the market. This will lead to full sustainability of the operation. Should external financing develop more slowly than expected or the global financial crises prolonged, the World Bank may consider a second credit line to ensure that banks continue to have access to medium term funds for on-lending to SMEs. D. Critical risks and possible controversial aspects 33. These risks and related mitigation measures to address such risk are summarized below. After mitigation, the overall risk is assessed as moderate. Furthermore, as described in Appendix 4.2, prospective PFIs underwent a two-tiered due diligence process, the latter phase of which examined numerous qualitative determinants at each bank, including, inter alia, risk management and corporate governance practices. The implementation of the project poses various risks. Risk factors Description of risk Mitigation measures Rating of Risk after Mitigation Financial Sector Risks The financial sector is small at about 20% of GDP and generally sound: capital adequacy is high (30% at end-2007) and nonperforming loans are low (3% as of mid-2008). Nevertheless, deposit growth has lagged credit growth, and recently liquidity risk has risen in light of current international circumstances. Many SMEs however are informal, receiving funding from remittances as much or more than from banks. In the event the Russian economy continues to slow, remittances are likely to sharply fall in 2009, further constraining SMEs access to finance. Credit to SMEs remains modest in Armenia at less than 30% of all loans; the current demand for medium term financing is high. If such financing for SMEs becomes available through this operation and other lenders, a key funding risk for banks and SME borrowers alike should be reduced. The two-tiered due diligence is to determine eligibility of banks which meet a series of both quantitative financial and qualitative criteria. Selection of strong PFIs should help further mitigate risks. The two-tiered due diligence is to determine eligibility of banks which meet a series of both quantitative financial and qualitative criteria. Selection of strong PFIs should help further mitigate risks.. Moderate

10 Technical Design Implementation Capacity And Sustainability Credit risk with SMEs may increase as the economy slows. Thus great care must be taken in the selection of PFIs best able to appropriately underwrite SME credit risks and going forward, to monitor performance of the SME borrowers. The PIU might not be sufficiently resourced to provide (new) PFIs with guidance as needed, to regularly monitor performance or otherwise determine banks# adherence to the Operating Manual. As featured above, the project will undertake a two-stage due diligence process to ensure appropriate selection of qualified PFIs, which are only to be bank. Those selected as PFIs will have a low NPL ratio and meet numerous other criteria. Most PFIs expected to participate in the project formerly benefitted from either KfW or EBRD training on SME credit underwriting. The low ceiling or limit on SME credit exposure ($150k) also serves as an important risk mitigant. The central bank s PIU, which has 9 years experience with several different KfW line of credit facilities, has strong exi sting resources and is committed to expand its capacity to ensure its quality of service and reporting is maintained in the AFSME project. Moderate Low Financial Management The PFIs chosen may not consistently enforce the terms and conditions of their Sub-Loan Agreement with the CBA or with the terms and conditions of the Operating Manual. The overall FM arrangements utilized at the PIU including budgeting, accounting, internal controls, funds flows, financial reporting and auditing may not be adequate without prior experience in Bank-financed projects and adequate financial management manual and accounting system in place, although it has significant experience in implementing KfW financed on-lending projects. The PIU will require regular reporting from the PFIs, most of whom are already working with the PIU in other KfW onlending schemes. Additionally, to determine compliance with agreed conditions, the PIU will provide period on-site inspections at each PFI, supplemented as needed by CBA staff, who will periodically inspect SME borrowers. Training will be organized on WB policies and procedures for PIU accounting staff: the PIU has committed to also recruit additional experienced staff to help with accounting and reporting. The internal audit function at the PIU is regularly carried out by the CBA#s Internal Audit Department and supplemented by an external audit report and periodic reviews by KfW. The project Operations Manual and Financial Management Manual will reflect the financial management policies and control procedures applicable to the project and will be strictly followed. Moderate Procurement Lack of WB procurement experience with the beneficiary banks or PFIs. Budgeting, accounting and reporting system for the project will be established and maintained under the project. PMU will provide PFIs guidance, oversee and monitor procurement activities carried out by the beneficiaries Provision in the sub-loan Agreement prohibiting procurement of goods from the negative Moderate

11 Social and Environmental Safeguards OVERALL RISK SME loans could raise social and environmental issues list and second hand goods.. The policy on Involuntary Resettlement will not be triggered because there will be no acquisition of land by public sector institutions The Operations Manual will clearly lay out other social and environmental requirements and these will be regularly monitored by the PIU, its auditors and through periodic supervision missions. Low Moderate 34. According to the recent Business Environment and Enterprise Performance Survey (BEEPS) report, the corruption in Armenia is significant with about 30 percent of businesses indicating that it is an impediment to doing business. Adequate mitigation measures are incorporated in the project, and the Bank staff will closely monitor performance during implementation. Specific procedures are developed by the project to secure proper financial accountability of this project and to minimize project financial management risks. Additional financial management arrangements in the project will include the audit of project financial statements by independent auditor acceptable to the Bank, and on the term of reference acceptable to the Bank. Fiduciary risk, after mitigation and considering the implementation arrangements at the CBA, is assessed to be moderate. 7. Sustainability 8. Lessons Learned from Past Operations in the Country/Sector 35. The project reflects lessons learned from recent regional analytic work on SME development. Specific support to SMEs is justified by the fact that SMEs face market failures that need to be addressed to avoid increasing the gap between SMEs and larger firms. SMEs: (a) are more affected by regulation and transaction burdens than larger firms (business environment constraints); (b) have less access to credit (finance constraints); and (c) have less access to information, advisory services, technology and innovation (knowledge constraints) On the basis of these lessons, the project proposes to reduce access to finance constraints by providing a credit line specifically targeting SMEs. The Government is undertaking complementary initiatives through its Small and Medium Entrepreneurship Development National Center 10 (SME DNC) at the MoE to reduce business environment and knowledge constraints (partly in collaboration with the World Bank see Section 3 on World Bank complementary operations), ensuring that key constraints facing SMEs will be addressed. 37. The project will benefit from lessons learned from credit line financing throughout the world (e.g., India, China, Ukraine and Bosnia) as well as from the Turkey EFIL I, II and III 9 For an overview of constraints facing SMEs, see IFC, SME Strategy. 10

12 projects. One concise statement of lessons learned from credit lines that the World Bank has provided to its client countries throughout the world is the following: 38. While past experience with financing of credit lines has been mixed, recent evaluations indicate that the problems have stemmed mainly from weak borrower accountability and management capacity, lack of clearly defined and transparent indicators for monitoring of the financial performance of the concerned financial intermediaries as well as poor monitoring of the overall project impact, inadequate demand from ultimate beneficiaries and lack of bankable sub-projects, and inflexibilities in project design that make it difficult to adjust design to reflect changing ground realities (SME India Project, based on, among other papers, Yaron, J., 2003). 39. More recent World Bank credit lines in Ukraine and Turkey have not experienced these problems. However, these lessons have been taken as a reference and incorporated in the design of the proposed operation as follows: (i) the PIU has been assigned clear responsibilities for project implementation; (ii) the capacities of the qualified banks (or PFIs) has been independently evaluated and the banks determined to be able to implement the operation (see Annex 6); (iii) the team has defined clear project indicators (see section B.2); and (iv) a majority of banks in country have expressed strong demand for medium term credit The World Bank team, after in-depth discussions with the Armenian RESCAD and Energy Efficiency teams and with the CBA s PIU administering the KfW credit lines, incorporated a number of measures in this project: (i) loans would initially be approved by the PFI, unless environmental or re-settlement related issued were screened; (ii) all loans would be initially funded from the PFI s own resources, which would then seek financing through the PIU; (iii) a large negative list, as outlined in Annex 4, will preclude key types of lending; and (iv) intensive FM and Procurement support will be provided to the PIU and as needed, PFIs. 41. Amongst the lessons learned from the Turkey EFIL projects include: (i) the lending institutions have always been banks, thus ensuring that it is banks rather than line ministries that implement credit lines; (ii) the credit line facilities have been available for both investment as well as working capital financing, thus increasing flexibility; (iii) the PFIs as well as sub-borrowers have always been private sector entities, thus aligning incentives for commercial decision making; and (iv) the pricing of loans has been left to the Borrower and PFIs, based on their assessment of on-lending risks. In addition, the success of the credit lines have been achieved through comprehensive project supervision and monitoring throughout the life of the project. 42. The team also incorporated lessons learned from the Ukraine EDP project by undertaking thorough due diligence on the PFI and gauging the needs of the market to ensure timely implementation. These are particularly relevant because they have been internalized both by the World Bank team and by the PIU. 11 With respect to demand, during project pre-appraisal, the World Bank team estimated that the total financing demand by banks under the proposed credit line would exceed US$300 million, based upon preliminary indications of interest expressed by most banks in country.

13 9. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [ ] [X] Indigenous Peoples (OP/BP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X ] Safety of Dams (OP/BP 4.37) [ ] [X ] Projects in Disputed Areas (OP/BP 7.60) 12 [ ] [X ] Projects on International Waterways (OP/BP 7.50) [ ] [X ] 10. List of Factual Technical Documents Approved: Approved: Minutes of Concept Review for ARMENIA: Access to Finance for Small and Medium Enterprises - P ARMENIA: Access to Finance for Small and Medium Enterprises - P Safeguards Meeting Minutes (FINAL) Project Appraisal Document Data Sheet - Access to Finance for Small and Medium Enterprises - P Project Appraisal Document - Access to Finance for Small and Medium Enterprises - P Fw: FM INPUTS Concept Review Package for ARMENIA: Access to Finance for SMEs - P Integrated Safeguards Data Sheet (Concept Stage) - Access to Finance for Small and Medium Enterprises - P Concept Review Package Project Information Document (Concept Stage) - Access to Finance for Small and Medium Enterprises - P Project Concept Note - Access to Finance for Small and Medium Enterprises - P Project Concept Note Data Sheet - Access to Finance for Small and Medium Enterprises - P Contact point 12 By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas

14 Contact: Michael Edwards Title: Lead Financial Sector Specialist Tel: (202) Fax: For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) pic@worldbank.org Web: