Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT. (Grant IDA-H4840) ON A GRANT

Transcription

1 Public Disclosure Authorized Document of The World Bank Report No.: ICR Public Disclosure Authorized Public Disclosure Authorized IMPLEMENTATION COMPLETION AND RESULTS REPORT (Grant IDA-H4840) ON A GRANT IN THE AMOUNT OF SDR 5.5 MILLION (US$8 MILLION EQUIVALENT) TO THE ISLAMIC REPUBLIC OF AFGHANISTAN FOR A FINANCIAL SECTOR STRENGTHENING PROJECT Public Disclosure Authorized Finance and Markets Global Practice Afghanistan Country Unit South Asia Region April 30, 2015

2 CURRENCY AND EQUIVALENTS (Exchange Rate Effective April 1, 2015) Currency Unit = Afghani (AFN) AFGN 1 = US$ US$1 = AFN 57.9 FISCAL YEAR December 21 December 20 1 ABBREVIATIONS AND ACRONYMS ABA AIBF AML/CFT ANDS ARDS CBS CR DA DAB EEC EG&PSS FIU FSRRP FSSP GDP GoA HR HRM IAS ICB ICR IDA IFC IMF IP ISN Afghanistan Bankers Association Afghanistan Institute of Banking and Finance Anti-Money Laundering/Combating the Financing of Terrorism Afghanistan National Development Strategy Afghanistan Reconstruction and Development Services Core Banking Solution Collateral Registry Designated Account Da Afghanistan Bank Enabling Environment Conference Economic Governance and Private Sector Strengthening Financial Intelligence Unit Financial Sector Rapid Response Project Financial Sector Strengthening Project Gross Domestic Product Government of Afghanistan Human Resources Human Resources Management International Accounting Standards International Competitive Bidding Implementation Completion and Results Report International Development Association International Finance Corporation International Monetary Fund Implementation Progress Interim Strategy Note 1 Afghanistan financial year was modified in It used to be March 21 March 20.

3 ISR MFI MISFA ML/FT MoF MTR NCB PCB PCR PDO PEP-MENA PIC PSC SCB SDU SOE SME STL TTL USAID Implementation Status and Results Report Microfinance Institution Microfinance Investment Support Facility for Afghanistan Money Laundering/Financing of Terrorism Ministry of Finance Mid-term Review National Competitive Bidding Private Commercial Bank Public Credit Registry Project Development Objective Private Enterprise Partnership Middle East and North Africa Project Implementation Cell Project Steering Committee State-owned Commercial Bank Special Disbursement Unit Statement of Expenditure Small and Medium Enterprise Secured Transactions Law Task Team Leader United States Agency for International Development Vice President: Country Director: Practice Manager: Project Team Leader: Annette Dixon Robert J. Saum Niraj Verma Guillemette Sidonie Jaffrin ICR Team Leader and Primary Author: John P. Byamukama

4

5 CONTENTS DATA SHEET... 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... iv H. Restructuring (if any)... v I. Disbursement Profile... vi 1. Project Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1: Project Costs and Financing Annex 2: Outputs by Component Annex 3: Economic and Financial Analysis Annex 4: Bank Lending and Implementation Support/Supervision Processes Annex 5: Beneficiary Survey Results Annex 6: Stakeholder Workshop Report and Results Annex 7: Summary of Borrower s ICR and/or Comments on Draft ICR Annex 8: Comments of Cofinanciers and Other Partners/Stakeholders Annex 9: List of Supporting Documents MAP... 55

6

7 DATA SHEET A. Basic Information Country: Afghanistan Project Name: Afghanistan Financial Sector Strengthening Project Project ID: P L/C/TF Number(s): IDA-H4840 ICR Date: 04/29/2015 ICR Type: Core ICR Lending Instrument: SIL Borrower: Original Total Commitment: Revised Amount: XDR 1.50M Environmental Category: C Implementing Agencies: DA AFGHANISTAN BANK Cofinanciers and Other External Partners: B. Key Dates GOVERNMENT OF AFGHANISTAN XDR 5.50M Disbursed Amount: XDR 1.50M Process Date Process Original Date Revised / Actual Date(s) Concept Review: 04/15/2008 Effectiveness: 06/18/ /18/2009 Appraisal: 03/10/2009 Restructuring(s): 02/13/2014 Approval: 04/30/2009 Mid-term Review: 09/01/ /24/2013 Closing: 06/30/ /30/2014 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Unsatisfactory Substantial Moderately Unsatisfactory Moderately Unsatisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Unsatisfactory Government: Moderately Satisfactory Quality of Supervision: Moderately Implementing Moderately Unsatisfactory Agency/Agencies: Unsatisfactory i

8 Overall Bank Performance: Moderately Unsatisfactory Overall Borrower Performance: Moderately Unsatisfactory C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Performance any) Potential Problem Project at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: No Yes Unsatisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Banking Credit Reporting and Secured Transactions Theme Code (as % of total Bank financing) Infrastructure services for private sector development International financial standards and systems Other Financial Sector Development 3 3 Regulation and competition policy E. Bank Staff Positions At ICR At Approval Vice President: Annette Dixon Isabel M. Guerrero Country Director: Robert J. Saum Nicholas J. Krafft Practice Manager/Manager: Niraj Verma Simon C. Bell Project Team Leader: Guillemette Sidonie Jaffrin Md. Reazul Islam ICR Team Leader: ICR Primary Author: John P. Byamukama John P. Byamukama F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The project development objective was to help DAB improve its core function of banking supervision and regulation; and to help improve access to formal banking services by establishing key initial building blocks for further financial sector reform. ii

9 Revised Project Development Objectives (as approved by original approving authority) Not Applicable (a) PDO Indicator(s) Indicator Indicator 1 : Baseline Value Original Target Values (from approval documents) iii Formally Revised Target Values Actual Value Achieved at Completion or Target Years Overall improvement of DAB's core functions of banking supervision and regulation as perceived by the commercial banks through biannual service and evaluated by the supreme council. Value quantitative or Not measured Qualitative) Date achieved 04/10/ /30/ /30/2014 Comments (incl. % achievement) The survey of commercial banks was conducted once in 2010 and no other survey was taken after that, Indicator 2 : Improve the ranking of the Getting Credit indicator in the annual Doing Business Report Value quantitative or Qualitative) Date achieved 04/10/ /30/ /30/2014 Comments (incl. % achievement) This was not a good indicator to measure project outcomes. The ranking is dependent on performance in other countries. Afghanistan rank stood at 86 and 89 in the 2014 and 2015 Reports respectively. CR and PCR launched in March and Dec respectively. (b) Intermediate Outcome Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1 : Increase in number of items of collateral registered in CR Value (quantitative or Qualitative) Date achieved 04/10/ /30/ /15/2013 Comments (incl. % achievement) CR became operational in February 2013, has a total registered value of AFN 28.4 billion and all the commercial banks have accounts. Target was 85% achieved. The number of registered items had increased to 3,000 by the end of December Indicator 2 : Value (quantitative Increase in the number of commercial banks staff trained in Afghanistan Institute of Banking and Finance (AIBF)

10 or Qualitative) Date achieved 04/10/ /30/ /30/2014 Comments (incl. % achievement) The target was vastly exceeded. The actual figure includes staff of commercial banks and MFIs trained. AIBF is now a recognized institute and had started scaling up its activities. But it went through institutional difficulties in Indicator 3 : Decrease in the number of days required to process supervisory data collected from the commercial banks Value (quantitative or Qualitative) Date achieved 04/10/ /30/ /30/2014 Comments (incl. % achievement) The off-site banking supervision activity was not implemented as the output of the IT consultant was rejected by the Borrower. Target was 0% achieved. Indicator 4 : DAB's financial statements prepared according to international financial reporting standards with an UNQUALIFIED opinion. Value (quantitative Unqualifed Opinion Unqualified Opinion Unqualified Opinion or Qualitative) Date achieved 04/10/ /30/ /30/2014 Comments (incl. % achievement) Indicator 5 : The result of this indicator cannot be attributed to the project as technical assistance on accounting was minimal. The indicator was also not robust; baseline was "Unqualified Opinion" and end-target was also "Unqualified Opinion". Increase in the number of training courses implemented on the basis of training needs assessment results. Value (quantitative or Qualitative) Date achieved 04/10/ /30/ /30/2014 Comments (incl. % achievement) The strengthening of HR management in DAB was not implemented (based on the findings of the Mid-term Review (MTR)). Indicator 6 : Increase in the number of credit reports sent by the public credit registry (PCR) to the commercial banks Value (quantitative or Qualitative) Date achieved 04/10/ /30/ /30/2014 Comments (incl. % achievement) The PCR was launched in December 2013, one month before cancellation of the project proceeds and six months earlier than the closing date. But by December 2014, 471 credit reports had been generated. G. Ratings of Project Performance in ISRs Date ISR Actual Disbursements No. DO IP Archived (USD millions) 1 11/23/2009 Satisfactory Satisfactory 0.00 iv

11 2 06/30/2010 Moderately Satisfactory Moderately Unsatisfactory /14/2011 Moderately Unsatisfactory Moderately Satisfactory /28/2011 Moderately Satisfactory Moderately Satisfactory /09/2012 Moderately Satisfactory Moderately Satisfactory /08/2013 Moderately Unsatisfactory Moderately Unsatisfactory /27/2014 Unsatisfactory Unsatisfactory 2.32 H. Restructuring (if any) Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO Amount Disbursed at Restructuring in USD millions 02/13/2014 N U U 2.32 IP Reason for Restructuring & Key Changes Made Following the March 2013 MTR, it was decided to restructure the project in coordination with a parallel project, the Financial Sector rapid response Project (FSRRP). The undisbursed SDR4 million (US$5.6 million) of the FSSP was to be cancelled and selected activities of FSSP would be transferred to the FSRRP under Additional Financing in order to complete them. The FSSP proceeds were cancelled in February 2014 and the project closed on schedule on June 30, 2014 v

12 I. Disbursement Profile vi

13 1. Project Context, Development Objectives and Design 1.1. Context at Appraisal 1. Country and Sector Background: Afghanistan is a low-income country of 30.6 million people with a gross domestic product (GDP) of US$20.7 billion (in 2013). At the time of Appraisal of the Financial Sector Strengthening Project (FSSP) in early 2009, Afghanistan had experienced war and internal strife for almost thirty years. During this time, much of the country s infrastructure and human capital had been destroyed. The country also experienced political extremes, from the Communist Government supported by the Soviet Union, which implemented a centralized economy, to the Taliban Government with almost total neglect of the economy. 2. The formal economy and the financial system in Afghanistan were almost non-existent in 2001 after the fall of the Taliban regime. However, there had been some progress made in the development of the country since 2001, but Afghanistan still faced threats from an armed insurgency, a high rate of joblessness, high incidence of poverty, especially in the rural areas, and lack of proper governance, including corruption. Additionally, the financial sector faced the risk of being used as a conduit for channeling and laundering of illegal funds from the opium economy and for financing terrorist and insurgent activities. 3. Since 2003, Afghanistan had experienced significant (although volatile) economic growth. Key growth drivers were post-conflict recovery in traditional agriculture, reconstruction, and public sector investments financed through large external donor assistance. Real GDP growth was in double digits between 2002 and 2006, but was reduced to 7.4 percent in 2007 and to about 3.5 percent in 2009 (due to drought conditions in the country); per capita income increased from US$125 in 2002 to US$300 in Financial Sector Background. At the time of Appraisal of the FSSP, Afghanistan s formal financial sector had experienced considerable growth, although from a low base, especially with regard to private commercial banks and an increase in the amount of loans and deposits. The banking sector grew from two state-owned commercial banks and four stateowned development banks in 2003 to ten privately-owned commercial banks, two stateowned commercial banks, and five branches of foreign commercial banks in Total assets of the banking system had increased from AFN 19.3 billion (US$386 million) in 2005 to AFN billion (US$2.3 billion) in 2008, and the share of the private commercial banks had expanded from 21 percent to 63 percent with an increase in the amount of their assets from AFN 4.0 billion (US$81 million) to AFN 73.5 billion (US$1.4 billion). 5. Despite this overall growth in the sector and the economy, Afghanistan s financial sector still remained weak and fragile and was identified as one of the constraints to private sector development. It was acknowledged that the sector did not meet the financial needs of businesses and individuals. Due to highly collateralized lending practices, along with a lack of financial intermediation capacity in the financial sector, access to credit was a serious bottleneck to private sector development. The share of total credit to GDP was 6.7 percent 1

14 (2007) which was far less than the average in South Asia at 43 percent. Afghanistan ranked 178th out of 181 countries in Doing Business (2009) rankings for Getting Credit, a measure of credit information-sharing and legal rights of borrowers and lenders. 6. There had been considerable efforts to rebuild the financial sector in terms of its institutional and legal framework, including enactment in 2004 of the Law of Da Afghanistan Bank (DAB), the Afghanistan Central Bank, and the Law of Banking in Afghanistan, but there was still a disproportionately weak capacity for banking supervision at DAB, and underdeveloped financial infrastructure. The laws were meant to lay a foundation for the re-establishment of DAB as the central bank with autonomous regulatory authority to implement monetary policy and banking regulation and supervision. However, in a situation where the private commercial banks were experiencing rapid growth, the inability of DAB to undertake rigorous banking supervision exposed the banking sector to systemic risks. The poor performance or failure of one of these commercial banks would easily shatter public confidence in the financial sector. 7. Strong commitment of the Government: The Government of Afghanistan (GoA) recognized improvement of the financial system and better access to finance as the main factors to enhance economic development in the country. In the Afghanistan Compact (2006), the GoA committed itself to undertaking a series of financial sector reforms, including strengthening the banking supervision function of DAB, and restructuring of state-owned banks. In addition, under the Enabling Environment Conference (EEC) Road Map (2007), the GoA, together with Development Partners and the private sector, agreed to take strategic actions with a view to strengthening the financial sector to increase access to credit and financial services. 8. These strategic actions were further reflected in the Afghanistan National Development Strategy (ANDS) under the pillar of Economic Governance and Private Sector Development. The ANDS described a modern and competitive financial sector as one of its main development objectives and articulated a strategy to expand the availability and range of financial products and services. The objectives of the FSSP were also in line with the priorities of the DAB Strategic Plan ( ): (i) strengthening the supervisory function; (ii) building an accurate credit information system; (iii) reforming human resources; and (iv) enhancing capacity in the financial sector. 9. Rationale For Bank Involvement: At the time of project design, the USAID-funded Afghanistan Economic Governance and Private Sector Strengthening (EG&PSS) Project, that contributed immensely to DAB s institutional building in a number of areas since 2002 (including on-site examination, laws and legislation, licensing external, off-site reporting, early warning systems, and external audit regime, among others) had ended (Ref: Project Appraisal Document (PAD), page 18). The core project ended in September 2008 but a few consultants continued work on a no-cost extension basis until February USAID was expected to continue to support DAB s capacity building in on-site examination through a new contract (the EGGI contract provided this technical assistance until the contract was suspended in 2011) coupled with assistance from the IMF METAC Facility. However, there was a gap in the off-site supervisory function, which was 2

15 understaffed and needed to be strengthened and automated. The DAB also wanted to address weaknesses in its internal control systems, to prepare Accounting and Audit Manuals and train staff on their usage, and to reform the Human Resources Department. The government requested for assistance in these areas and the Bank provided support through the FSSP. 10. Contribution to higher level objectives: The objectives of the FSSP were in line with the Economic and Social Development pillars of the Bank s Interim Strategy Note (ISN) for Afghanistan of April 2006, and the new ISN scheduled for delivery in June The three strategic pillars were: (i) building the capacity of the state and its accountability to citizens to ensure delivery of services that are affordable, accessible, and of adequate quality; (ii) promoting growth of the rural economy and improving rural livelihoods; and (iii) supporting growth of a formal, modern, and competitive private sector. 11. As mentioned earlier, Afghanistan ranked poorly in Access to Credit indicators and thus the project was a good fit to complement other Bank projects in supporting the private sector in Afghanistan. The FSSP also had the advantage of having the International Finance Corporation (IFC) on board for technical advice in the implementation of the Public Credit Registry (PCR) and Collateral Registry (CR) Original Project Development Objectives (PDO) and Key Indicators 12. The PDO was to help DAB improve its core function of banking supervision and regulation, and to help improve access to formal banking services by establishing key initial building blocks for further financial sector reform. 13. Project Outcome Indicators: The project identified two outcome indicators to measure the attainment of the PDO: i. Overall improvement of DAB s core functions of banking supervision and regulation as perceived by the commercial banks through bi-annual surveys and evaluated by the Supreme Council; ii. An improvement of Afghanistan s position on the Getting Credit ranking on the World Bank s Doing Business indicators Revised PDO and Key Indicators, and reasons/justification The PDO and Key Indicators were not revised during the project period. Following the Midterm Review in March 2013, it was concluded that the project needed to be restructured, in coordination with a parallel project, the Financial Sector Rapid Response Project (FSRRP) 2, 2 This project (US$22 million) was approved in 2011 following the Kabul Bank crisis to finance audits of ten commercial banks and to modernize the national payments system (as it was argued by the Afghan authorities that 3

16 also implemented by DAB. The overall restructuring approach was approved in August 2013 and involved the following: (i) cancellation of undisbursed balance of FSSP; and (ii) Additional Financing to FSRRP to continue selected activities of the FSSP. The Additional Financing was approved in November 2013 and the Government requested for a cancellation of the undisbursed balance (SDR4 million) of FSSP in early December Main Beneficiaries 14. The first main beneficiary was the DAB. The project aimed to help DAB improve its core function of banking supervision and regulation. The second main beneficiaries were the players in the financial sector, especially the commercial banks, which would benefit from the creation of the PCR and CR by getting comprehensive and timely credit reports, reliable collateral, and stability in the financial sector as a result of more rigorous supervision by DAB, and increased human resource skills from the training at AIBF. The other beneficiaries were the general Afghanistan population, and individuals and private sector enterprises, who would benefit from improved access to financial services Original Components 15. The Project had two components, briefly described below: 16. Component 1 - Strengthening the Capacity of Da Afghanistan Bank (US$5.7 million). This component aimed to support strengthening of DAB capacity through provision of consultancy services and financing of IT system development in three critical areas: (i) developing off-site supervision systems and supervision competencies in DAB; (ii) creating an effective accounting and internal auditing system functioning according to generally acceptable international standards, which was operationally critical and necessary to establish DAB s credibility; and (iii) establishing an effective human resource management system so it could move from relying on expatriate advisors to relying instead on well-trained and empowered Afghan national staff. 17. Component 2 - Development of Basic Infrastructure in the Financial Sector (US$2.3 million). In close collaboration with the IFC, this component aimed to support establishing the following basic financial sector infrastructure in Afghanistan: (i) a Public Credit Registry (PCR) that would provide lenders with information for efficient risk assessment of borrowers; (ii) a Collateral Registry (CR) for movable property aimed to provide lenders the ability to effectively use borrowers property as collateral; and (iii) the Afghanistan Institute of Banking and Finance (AIBF) that would support development of professional human resources for the financial sector. In supporting the establishment of PCR and CR, IFC was to provide technical advice for a legal framework, vendor selection, and a public awareness program, while the International Development Association (IDA) was to provide funding for the physical development of necessary IT systems and training of staff on use of the systems. IDA was also to provide support for establishing the AIBF, for Kabul Bank could not be liquidated as it was responsible for civil servants salary payments, including the army and the police). 4

17 training equipment, for hiring AIBF staff, and for developing a training collaboration with a regional banker s training institute Revised Components 18. There were no revisions to the components Other Significant Changes 19. Financial Sector Rapid Response Project approved in August Following the Kabul Bank crisis in 2010 (see Box 1 below), the Government of Afghanistan asked the World Bank to finance audits according to international standards of ten commercial banks in Afghanistan. In relation to this request, the project team considered restructuring the FSSP to cover the cost of these audits. However, in early 2011, despite slow implementation progress 3, it was considered that the objectives and activities of the FSSP were still highly relevant and needed. An Additional Financing to FSSP was also proposed but was rejected by Bank Management 4. It was then decided to prepare a new project to finance the requested audits as well as modernization of the payments system 5 under OP/BP 8.0 (emergency procedures). The project was approved in August When an institution implements a World Bank financed project for the first time, it is not unusual, in weak capacity environments, that implementation progress is initially slow, but then accelerates once the institution becomes more familiar and confident with World Bank procedures. 4 As progress towards achievement of Development Objectives of the FSSP was rated Moderately Unsatisfactory (because of the Kabul Bank crisis), a waiver for Additional Financing had to be sought. This request for a waiver was rejected. 5 As explained in Footnote 2, the Government of Afghanistan considered that Kabul Bank could not be liquidated as it was responsible for most civil servants salary payments. It was therefore decided to finance the modernization of the payments system as a medium term solution to facilitate payments in Afghanistan. 5

18 Box 1: The Kabul Bank Crisis Concerns over the soundness of Kabul Bank caused a run on the bank in early September 2010 during which the bank lost about half of its US$1.3 billion deposits. With one-third of the banking system s assets of US$4 billion, the crisis threatened the stability of the financial system. The authorities removed the management of the bank, putting the bank into conservatorship, and guaranteed all deposits. This helped stem the initial panic and stopped the run. When the dust had settled, the government had to shoulder US$825 million for the cost of the lender-of-last-resort facility loans that covered the deposit guarantee (about 5 percent of GDP). Kabul Bank was subsequently put into receivership, revoking shareholders rights altogether. Aside from the fiscal costs, the Kabul Bank crisis has had a negative impact on intermediation, as it had by far the largest and most effective branch network in the country and an effective payments system. These helped bring individuals into the formal sector and supported the government s program of automating employee records and salary payments. Kabul Bank has been split up into a good bank and a bad bank. The bank s deposits and good assets were transferred to a bridge bank, New Kabul Bank. For the time being, New Kabul Bank cannot extend loans and is envisaged to be privatized in 2012*. The bad assets have been retained by the receiver, appointed and overseen by the independent Financial Dispute Resolution Commission. Based on current estimates, about US$935 million in the asset portfolio are sought for recovery. The Kabul Bank crisis has magnified the risks of rapid banking sector growth with inexperienced supervision and weak rule of law. Moreover, it has undermined confidence in the banking sector (preference for cash increased and deposit growth came to a halt) and further overburdened banking supervision. Adapted from IMF Country Report No. 11/330 (November 2011) *The privatization of New Kabul Bank is still pending. 20. Cancellation of credit proceeds: By the Mid-term Review in March 2013, almost four years into implementation, the FSSP had disbursed only 20 percent of Grant proceeds of US$8 million. The project s implementation progress and disbursement had been very slow, due to delays in procurement and an over-ambitious project design, in the weak capacity environment. The ratings of both progress toward achievement of PDO and implementation progress were downgraded from Moderately Unsatisfactory to Unsatisfactory in the last Implementation Status and Results Report (ISR) of January Following the agreed restructuring strategy (described in Section 1.3 above), the Government of Afghanistan (GoA) requested the cancellation of the remaining SDR4 million (US$5.6 million) as of December 7, 2013, with the closing of the FSSP remaining at the scheduled closing date (on June 30, 2014). The cancellation of undisbursed grant proceeds was approved by the Bank on February 13, Reallocation of Project activities: As part of the restructuring process, the following activities were reallocated and incorporated into the Financial Sector Rapid Response Project (FSRRP) under an Additional Financing arrangement: (i) re-designed support for banking regulation and supervision based on FSSP lessons (US$4.5 million); (ii) support for the establishment of PCR (US$2.2 million); and (iii) technical assistance and training for the implementation of the PCR and CR. This Additional Financing was designed taking 6

19 into account the lessons identified during the Mid-term Review of the FSSP. Considering the weak capacity environment and the difficulty in attracting qualified consultants in Afghanistan, it was decided to focus significant resources on one critical activity (banking regulation and supervision) to be able to attract qualified firms and to pursue the delayed but well performing activities of FSSP (the PCR and CR). 2. Key Factors Affecting Implementation and Outcomes 2.1. Project Preparation, Design, and Quality at Entry (a) Soundness of the Background Analysis 22. The project was designed after a substantial amount of analysis of the needs of the financial sector in Afghanistan. The FSSP was based on the needs of financial sector reforms as identified by the GoA in its various policy papers such as the Afghanistan Compact (2006), the EEC Roadmap (2007), the ANDS ( ), and the DAB Strategic Plan ( ). The World Bank had also carried out a Financial Sector Study in Afghanistan in 2004 and an Investment Climate Assessment in A combination of the above policies and assessments provided the analytical underpinning for choosing the specific interventions included in the project. The FSSP aimed to build on the work and achievements of the World Bank (earlier Finance and Private Sector Development projects included the Expanding Microfinance Outreach and Improving Sustainability Project, and ARTF Microfinance Support for Poverty Reduction Project, ) and other donors in the financial sector, especially the International Monetary Fund (IMF) and the United States Agency for International Development (USAID). The project enjoyed support and endorsement of donors as well as from the government of Afghanistan. The Bank finalized the scope and components of the FSSP after thorough analysis of the existing literature and numerous consultations with donors. (b) Assessment of the Project Design 23. Project activities supported the achievement of the PDO. Project preparation benefitted from collaboration between the Bank and IFC teams and identified correctly what needed to be done. However, the project design was ambitious and did not forecast the worsening security environment in Afghanistan. The delivery model that was chosen focused more on use of individual consultants, which in hindsight was not suited for the rising insecurity in Afghanistan 6. Project Concept Review and Decision Meetings confirmed that not only did financial sector reforms remain a major challenge, but that the resources available for the project were also not adequate to achieve the proposed targets, given the country 6 At project design, the team chose to rely on individual consultants embedded in DAB rather than firms, as recent experience at DAB had shown that little capacity transfer was happening when relying on firms. It should also be highlighted that when the World Bank re-engaged in Afghanistan, the security situation was relatively stable. Security started to worsen in 2007/2008 at the time of project design. 7

20 context. The Bank team was advised to take into account lessons learned from USAID and from other donors experiences in Afghanistan. In this regard, the team held discussions with USAID, IMF, and the Department for International Development (DFID), among other donors, on the proposed project components. (c) Adequacy of Government Commitment 24. The Government showed strong commitment to the financial sector reforms from the outset as evidenced from its policy papers and the priority the Governor of DAB gave to the project. The Government was fully involved and committed to project objectives and activities at appraisal. However, the project approach of building capacity of DAB through the contributions of individual international consultants was not effective due to challenges in recruiting suitable expatriate expertise in a challenging security environment 7. Procurement delays and failures in the procurement process of the IT firm and the contract for establishing the PCR slowed the pace of implementation. The Kabul Bank crisis in September 2010 was another major blow to the perceived progress in financial sector development in Afghanistan. Its resolution became the main priority of the Afghan authorities (Ministry of Finance and DAB) in DAB was particularly affected by the Kabul Bank crisis which highlighted weaknesses in banking supervision and in the overall governance of DAB and the Afghan financial sector. Subsequently, at the request of the Afghan Parliament, the Governor of DAB named the list of Kabul Bank defaulters and then fled to the United States in June A new Governor was appointed, after several months, in November (d) Assessment of Risks 25. A number of risks at the country/sector/project level were identified during preparation and their mitigation was discussed with the DAB. Major potential risks were at the sector and project level relating to the sustainability of the project outcomes. These include: Money Laundering and Terrorist Financing (ML/FT) fueled by the opium economy. The existence of the opium economy and an increasing amount of government corruption in an environment of a weak anti-money laundering regime at DAB and at the commercial banks, and the lack of investigative techniques and measures raised a high possibility of the occurrence of Money Laundering and Financing of Terrorism. While this risk required a significant drive from GoA and collaboration with the international community to bring it down, DAB had already set up a Financial Intelligence Unit to monitor and record any suspicious transactions. The creation of the PCR and CR would also allow the banks to build a verifiable data set of individuals and their transactions which could be used as 7 In the increasingly insecure environment, it proved extremely difficult for DAB to hire qualified individual consultants, because under such contracts, the consultants are responsible for their own security. Under such circumstances, it is generally more effective to hire firms with experience in conflict-affected countries who can afford to provide security for their employees. 8

21 part of the wider Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) efforts. Lack of a timely Legal Framework for a PCR. If a new law were to be required for the operation of a PCR, the slow pace at which laws are developed in Afghanistan would also slow down the start of operations of the PCR. When IFC conducted an assessment of the existing laws, it found out that a new law was not necessary but that the DAB could adopt its existing rules or regulations to allow for operations of a PCR. It was agreed that this requirement would be included in the Financing Agreement as a condition for disbursement for this component. Lack of Legal Framework for Collateral Registry. There was a risk that the Secured Transactions Law (STL) would not be approved by the National Assembly in time to allow for operationalizing the CR. The mitigating factor was that the Lower House had approved the law in March 2009 (before Project Negotiations) and there was no precedent where the Upper House turned down a law approved by the Lower House. To be safer, DAB agreed to include the adoption of appropriate legislation enabling the creation of a CR as a disbursement condition in order to have leverage for pushing for timely enactment of the law. Weak Implementation Capacity in DAB. It was acknowledged that DAB had never implemented a donor-funded project itself, and that the USAID had hired Bearing Point to implement its project. The mitigating factor for this risk was that a Project Implementation Cell (PIC) had been set up well in advance of the start of implementation, its members were briefed on their respective roles and responsibilities, and their capacity would be further strengthened through the assistance provide by international consultants. The PIC was supposed to be under the oversight of a Project Steering Committee (PSC) chaired by the Governor or the First Deputy Governor. The PSC was expected to regularly review the progress of the project and provide policy advice and guidance to the PIC to ensure the project was implemented smoothly. Lack of Coordination between IFC and IDA. There was a risk that lack of coordination between the IDA and IFC teams would slow down project implementation. This risk was identified and discussed between the two teams earlier on during preparation and it was agreed that the legal agreements would be structured in such a manner to ensure smooth implementation. It was also agreed that IFC and IDA teams would carry out joint implementation support missions twice every year Implementation 26. Project implementation started off smoothly in June 2009 with the Project Director (PD), the PIC, and the Project Steering Committee (PSC) already in place. Prior to project effectiveness, the PD and the head of the procurement department at DAB were sent for training in World Bank procurement in Hyderabad, India. 9

22 27. Five months into implementation, there were early signs that there were going to be implementation delays on account of failure to attract good quality consultants on three out of the first six consultant assignments advertised, which eventually had to be re-advertised. This problem continued to be a recurrent feature throughout the life of the project. By the Mid-term Review in March 2013, the project had only two major achievements: (i) establishment of the Afghanistan Institute of Banking and Finance (AIBF); and (ii) launch of the Collateral Registry. The contract for the PCR had just been signed in February 2013 and total disbursements from the Grant amounted to about US$2 million (20 percent of the total Grant amount). 28. There were two main factors that affected the pace of implementation. They were: (i) DAB was implementing a World Bank project for the first time and the expected implementation support from international consultants was delayed, which resulted in slow initial implementation progress; and (ii) difficulty in attracting qualified individual international consultants (both individual and firms) to a deteriorating security environment. 29. While DAB was enthusiastic about the project, DAB was implementing a World Bank project for the first time and did not have adequate internal capacity. It took 18 months after the project became effective to hire the proposed international consultants to support and mentor the DAB staff assigned to the PIC. There also were financial management issues that persisted until an international financial management expert was hired. The design of the project appears to have been optimistic about the time the PIC staff would take to fully understand the World Bank implementation guidelines and procedures. 30. The problems with attracting qualified individual international consultants were recognized at an early stage but once in early 2011 three international consultants were in place, there was hope implementation progress would be accelerated. In addition, considering the procurement delays encountered by the project, it was decided to focus on three major activities: the implementation of the movable collateral registry (CR), the implementation of the public credit registry (PCR) and re-launching the procurement of the IT Consultancy firm. The project faced another procurement set back with the first bids for the PCR assessed as non-compliant. The procurement process therefore had to be relaunched. It was decided to undertake the MTR after the procurement of the PCR had been completed which delayed the MTR till early Mid-term Review (MTR). A MTR was carried out in March 2013 for this project. By that time, after three and a half years of project implementation, the FSSP had disbursed only 20 percent of total Grant proceeds of US$8 million. The project s implementation progress and disbursements were very slow due to an ambitious project design (considering the weak capacity environment), delays in procurement, and an unsuitable implementation approach (in a deteriorating security environment) of relying on individual international experts to support and train the PIC staff, and to implement some activities in Component 1 (building the capacity of DAB in accounting, auditing, HR Management, and off-site supervision). Based on the recommendations of the MTR, the ratings of both progress toward achievement of PDO and implementation progress were downgraded from Moderately Unsatisfactory to Unsatisfactory (Ref: Implementation Status and Results 10

23 Report (ISR), Seq. #7). The MTR noted that it was highly unlikely that the project would achieve its development objectives. It recommended restructuring the project and focusing on key activities in order to increase effectiveness and impact. The restructuring was supposed to have been completed by June 2013 (Ref: ISR Seq. #6) but the process for the overall restructuring (FSSP and FSRRP) was approved in August 2013 (Ref: Management Letter sent to Ministry of Finance and DAB on September 1 st, 2013). As indicated earlier, as part of the restructuring, the undisbursed balance of the FSSP was to be cancelled and selected activities were to be transferred to FSRRP through an additional financing Monitoring and Evaluation (M&E) Design, Implementation and Utilization 32. M&E Design: There were repeated comments during the design and appraisal phases, at the Quality Enhancement Review (QER) and Decision Meeting, about the inadequacy of the proposed Monitoring and Evaluation framework. As it turned out, the performance indicators used to measure achievement of the PDO were not adequate, a fact that was again highlighted during the Mid-term Review. The first PDO indicator required the commercial banks to grade the performance of DAB s core functions of banking supervision and regulation. This created an inherent conflict of interest for the commercial banks since they were being regulated by DAB and therefore could not be relied upon to be independent in their assessment. It is conceivable that commercial banks may prefer a more lenient central bank than a central bank that firmly enforces laws and regulations. The second PDO indicator used a Getting Credit ranking from the World Bank s Doing Business Report to measure improvements in credit information sharing and legal rights of borrowers and lenders. However, this ranking depends on comparisons of performance across countries and does not measure absolute achievements in just one country. Absolute rankings (versus the overall comparative ranking) included within the Getting Credit indicator could have been used instead. 33. For the Intermediate Results Indicators, six indicators were identified of which five were quantifiable and could be measured directly from the outputs of the various projects activities. The sixth indicator was qualitative because it measured whether DAB s financial statements were Qualified or Unqualified by the external auditors. 34. M&E Implementation and Utilization: The Monitoring and Evaluation function was the responsibility of the PIC at DAB. The data for the first PDO indicator was supposed to be collected by the Afghanistan Bankers Association (ABA) using a bi-annual survey of commercial banks, and evaluated by the DAB Supreme Council. However, the survey of commercial banks was conducted once in 2010 after which no survey was carried out because of the Kabul Bank crisis (following the crisis, it appeared ill-advised to ask commercial banks to comment on banking supervision). Data for all the other indictors was to be collected by the PIC using annual and semi-annual reports prepared by the various project beneficiaries and the project s external auditors. 35. The implementation of the FSSP was monitored in accordance with the M&E plan during the initial year of the project. However, because of the slow pace of implementation of most activities thereafter, there was little or no data generated in the subsequent years that 11

24 would be used to measure progress of implementation and progress towards achievement of the PDO. The bi-annual survey of commercial banks was carried out only once in April 2010 and was never carried out again after the Kabul Bank crisis in September The performance of the PCR could not be monitored because the contract for its establishment got delayed and was signed at the time of the MTR. The PCR was launched in December 2013, and by that time the Government had already requested that the remaining Grant proceeds be cancelled and that the contracts for the remaining activities under this sub-component be moved to the FSRRP in preparation for the closing of the FSSP, as per the agreed restructuring. Establishment of the CR and the AIBF are the only two activities where results were achieved during implementation and where progress was monitored regularly Safeguard and Fiduciary Compliance 36. Safeguards. The FSSP was rated as a Category C project. According to the project appraisal document, the Project did not fund any activity with potential direct impact on local environmental and social aspects. Therefore the project was not envisaged to trigger either environmental (OP 4.01) or social (OP 4.12) safeguards. The FSSP was an Emergency Technical Assistance operation just to help support financial sector reforms so as to increase the availability of financial services in Afghanistan in an efficient and effective manner based on an appropriate legal and regulatory framework for both consumers and lenders to enforce their rights. 37. Procurement. The assessment of Procurement Risk at Appraisal was rated as High due to a lack of adequate procurement experience by the DAB staff, lack of a procurement expert in Government, and limited capacity in the private sector. To mitigate the risk, it was agreed that Bank staff would carry out an intensive but narrowly focused procurement training program for DAB staff both in English and Dari, and that the staff of the Director General (Services & Constructions, in charge of DAB procurement) would attend training programs conducted by the Procurement Policy Unit (PPU) of the Ministry of Finance (MoF). In addition, the government s central procurement facilitation unit, the Afghanistan Reconstruction and Development Services (ARDS-PU), would support DAB for large value procurement following National Competitive Bidding/International Competitive Bidding (NCB/ICB) procedures. 38. There were procurement problems from the outset with failure to attract well qualified individual international consultants in the Afghanistan environment of rising insecurity. This also impacted the performance of the PIC since the staff members were unfamiliar with Bank procedures and had been expected to be supported by the international consultants. Procurement was continuously downgraded from Satisfactory at project effectiveness to Moderately Satisfactory and then to Moderately Unsatisfactory by June 2011 due to the delays in getting a qualified IT consultant and in procuring the equipment (software and hardware) for the PCR. It was eventually upgraded to Satisfactory following the staffing of the PIC with international and national procurement specialists, and the finalizing of the contract for an IT consultancy firm. It continued to be rated Satisfactory up to project closing. 12

25 39. The Satisfactory rating does not seem justified in light of the multiple rounds of tendering that were needed to get qualified consultants for the various activities, which led to lengthy delays throughout project implementation (the project team considered that these procurement difficulties were beyond the control of DAB procurement staff). The unsatisfactory performance of the chosen IT consultancy firm at DAB led to the decision during the MTR to suspend the automation of off-site supervision, which had been a major ticket item of the project. The main issue in this regard was that after unsuccessful attempts to attract a qualified individual consultant with banking supervision expertise, the scope of work of the IT consultancy firm was expanded to include banking supervision expertise. However, the IT firm adopted a purely IT-driven (rather than business-need driven) approach and focused on automating existing systems without assessing whether existing systems needed to be first improved and then automated. This experience confirmed that attracting qualified consultants (individual and firms) is extremely challenging in Afghanistan. 40. Financial Management. The overall Financial Management (FM) risk for the FSSP was rated High during appraisal, and as a mitigation measure it was agreed to minimize use of the Designated Account (DA) (it had a ceiling of US$400,000), to maximize direct payments (amounts exceeding US$80,000) to contractors and consultants, and to hire international consultants to support the PIC in its fiduciary responsibilities. However, the project became effective without both an international FM Consultant at the PIC and an FM manual. The FM rating was quickly downgraded to Moderately Unsatisfactory. While these shortcomings were addressed and the FM rating had been upgraded to Satisfactory by June 2012, it was again downgraded to Moderately Unsatisfactory in February 2013 due to weaknesses identified in the capacity of FM (there were shortcomings in the IFRs and the project did not have a quick-book accounting system which required purchase of some software). At the time the project closed, most of these weaknesses had been rectified and the final FM rating was Moderately Satisfactory Post-completion Operation/Next Phase 41. The MTR of March 2013 concluded that with the current design and rate of implementation of the FSSP, it was highly unlikely that the project would achieve its development objectives; and that a restructuring was required. The agreed restructuring involved the following: to cancel the undisbursed Grant proceeds of SDR4 million, to close the FSSP at the scheduled closing date, and to transfer critical outstanding activities to the FSRRP. The restructuring of the FSSP was finalized in February The critical outstanding activities of the FSSP 8 were moved to the FSRRP under an Additional Financing (AF) arrangement 8 The selected activities to be covered under the FSRRP Additional Financing include: (i) targeted activities to strengthen DAB s capacity based on lessons from the implementation of the FSSP; (ii) development of the financial sector infrastructure; and (iii) technical assistance and training for project implementation, including technical assistance for the PCR and CR. 13

26 in the amount of SDR4.4 million (equivalent to US$6.7 million). The implementation of FSRRP and its Additional Financing is progressing slowly but satisfactorily. 3. Assessment of Outcomes 3.1. Relevance of Objectives, Design, and Implementation 42. Relevance of Objectives. The relevance of objectives is rated as High. The Project Development Objective of the FSSP was to help DAB improve its core functions of banking supervision and regulation, and to help improve access to formal banking services by establishing key initial building blocks for further financial sector reform. The project was prepared in a conflict-affected emergency environment and the PDO was consistent with the Government priority to rebuild the financial sector as outlined in the Afghan Compact (2006), the EEC Road Map (2007) and the ANDS The Government was cognizant of the fact that lack of finance was one of the main challenges to economic development, and that a properly functioning financial sector was necessary to support private-sector development. The financial sector, which had been destroyed during the 30 years of conflict, needed proper supervision and new financial infrastructure (such as the PCR and CR) to facilitate increased access to financial services. Since a number of private banks had entered the Afghanistan financial sector between 2003 and 2008, it was imperative that the capacity of the DAB to supervise and regulate the sector required strengthening so as to minimize potential systemic risks. Moreover, the financial sector also faced the risk of being used as a conduit for the channeling and laundering of illegal funds from the opium economy, and for financing of terrorists and insurgent activities. The project thus served as an important entry point for a sustainable engagement for broader financial sector reforms that would lead to increased access to financial services across the country and ensure stability in the sector. 43. Relevance of Design. The design of the Project is rated Modest. While the PDO was in line with the financial sector policy reforms that the government was committed to and that were reinforced by the donors, the project design (especially Component One) proved overambitious considering the weak capacity environment. In addition, with a deteriorating security environment, attracting qualified international individual consultants as per the project design proved increasingly difficult. The results framework was also not comprehensive or robust enough to measure the performance of both the PDO and intermediate outcomes. At the technical level, the project correctly identified the priorities for financial sector strengthening. However, the proposed implementation mechanism was no longer appropriate in a deteriorating security environment. 14

27 44. Relevance of Implementation. The relevance of Project Implementation is rated Low. The Project ran into implementation delays within the first six months of implementation due to the failure to attract well-qualified individual consultants willing to work in the insecure Afghanistan environment. Having identified the problem, the team did not proactively take measures at an early stage to change the project design in a manner that could better suit the Afghan environment. As such, procurement was continuously downgraded from Satisfactory at Project effectiveness to Moderately Satisfactory and then to Moderately Unsatisfactory by June 2011 due to the delays in getting a qualified IT consultant for Component One and in procuring equipment for the PCR. Because of the slow pace of implementation, the Project was only able to disburse 29 percent of the proceeds in four and a half years of implementation. The Results Framework for the project was also inadequate and should have been another driver to undertake restructuring earlier in the project. For example, following the Kabul Bank crisis, the authorities realized that asking for the opinion of commercial banks on the quality of banking supervision at DAB was ill-advised. A new PDO indicator should have been introduced at this point to measure the achievements under Component One, which would have required a restructuring Achievement of Project Development Objectives 45. The project did not achieve most of its stated objectives. The indicators used to measure the achievements were either not adequate and/or not monitored over the life of the project. The first PDO indicator which was supposed to be based on annual surveys of commercial banks perception of DAB s performance on its core functions was not monitored, and only one survey was carried out (in 2010) throughout the life of the project. As already indicated, this indicator was not appropriate as the authorities came to realize after the Kabul Bank crisis. The second PDO indicator, which was supposed to measure improved access to financial services, was a poor choice because it was based on a comparison between Afghanistan and other countries rather than on the absolute improvement in the country itself. With regard to intermediate outcomes, the achievements were negligible, as explained below. 46. Component One: Strengthening the capacity of DAB. This component was supposed to involve the setting up of IT systems to help in automation of off-site supervision and automation of human resources. It took a long time to obtain a suitable consultant for assessing the IT requirements, design, implementation and supervision of IT installations (the first procurement process failed when the selected firm turned down the offer due to security concerns), and the consultancy firm that was eventually procured did not provide quality output on technical specifications for the required IT systems to automate off-site supervision. The firm s output was rejected by the authorities and the activity for automation of off-site supervision at DAB was suspended. 47. With regard to the establishment of an effective human resource management (HRM) system at DAB, a consultant was hired who developed ten human resource policies and conducted initial training, but the consultant cancelled his contract before its term ended. The automation of HRM did not take place within the project lifetime. The IT firm concluded that a new information system for HRM was not necessary. Instead, the firm 15

28 recommended the installation of a missing module (the attendance module) and customizing the Human Resource Management system in the existing Core Banking Solution (CBS) of DAB. This recommendation was not implemented during the lifetime of the project and was transferred to FSRRP. 48. Component Two: Development of basic infrastructure in the financial sector. This component was focused on establishing: (i) a PCR that would provide lenders with information for effective risk assessment on borrowers; (ii) a CR for movable property that would enable lenders to effectively use borrowers property as collateral; and (iii) the Afghanistan Institute of Banking and Finance (AIBF) to support development of professional human resources for the financial sector. The implementation of both PCR and CR was supported by IFC Technical Assistance in the areas of legal framework, vendor selection, and a public awareness program, and IDA provided the physical development of necessary IT systems and training of staff to operate the systems. 49. The CR was launched in February 2013 just before the Mid-term Review, and by December 2013 it had 1700 items of collateral registered, compared to an end-project target of This was one of the few successful activities under the project. The procurement of PCR software and hardware experienced long delays (the first bids were declared noncompliant). The contract was signed in February 2013, and the PCR was launched formally in December 2013 at around the time the Government requested for cancellation of the Grant as part of the agreed restructuring. However, the most recent data shows that by March 2015, 1,370 credit reports had been sent by the PCR to commercial banks. Some uncompleted activities related to the operation of the PCR were transferred to the FSRRP. The establishment of the AIBF was also one of the few activities that was implemented in a timely manner and it became operational in November By December 2013, about 3,000 staff of commercial banks and Micro Finance Institutions (MFI) had been trained at the institute and it was continuing to expand its activities with the support of various development partners. Unfortunately, the AIBF is currently facing institutional difficulties following major staff changes in Efficiency 50. At appraisal, due to the nature of the project, it became difficult to quantify the economic and financial benefits of the project, which in turn made it difficult to carry out a proper Cost-Benefit Analysis. The team instead carried out, with DAB Management, a business benefits review of the investments in four areas, including: (i) internal process efficiency; (ii) benefits to internal and external clients; (iii) benefits for compliance, regulatory and control framework; and (iv) work process and manpower efficiency (Annex #9 PAD). The ICR, following the appraisal approach, listed the business benefits of achieved activities under Component 2 (establishment of Afghanistan Institute of Banking and Finance (AIBF), the Public Credit Registry and the Collateral Registry). There were virtually no benefits under Component 1 since none of the activities were completed. The results of Component 2 were more positive, with the establishment of the CR, PCR and AIBF, with continuous support under FSRRP. Efficiency for the project is rated as Unsatisfactory. 16

29 3.4. Justification of Overall Outcome Rating Rating: Unsatisfactory 51. The following summarizes the overall outcome ratings based on Relevance, Achievements, and Efficiency. The overall outcome rating is Unsatisfactory. While the relevance of the project objectives was High in light of the urgent needs of the Afghanistan financial sector at the time, the relevance of the design was Modest because the designed proved overambitious and vulnerable to a deteriorating security environment and because it had a weak results framework. Given the implementation delays faced within the first eighteen months of the project, the Bank task team failed to address these design weaknesses through a timely project restructuring, and this negatively impacted the pace of implementation. There were minimal achievements under Component One which accounted for 71 percent of the project proceeds. Efficacy is rated Unsatisfactory because the first PDO indicator was not suitable and was never measured consistently, the second PDO indicator does not measure per se increase in access to finance (it measures the strength of credit reporting systems and the effectiveness of collateral and bankruptcy laws in facilitating lending), and both indicators 9 should have been changed during implementation. In addition, four out of the six intermediate indicators were not met. Efficiency is rated Unsatisfactory as the beneficiaries under Component One did not receive any tangible benefits and the PCR was launched just before the Grant proceeds were cancelled Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 52. While poverty and social development were not applicable, gender impact was proposed in the PAD as follows: The FSS Project will therefore finance an HR adviser to advise and develop a set of new HR policies as set out above and assist in their implementation for HR reform in DAB which would include Gender Mainstreaming (Ref: PAD, page 28). While a harassment general and sexual harassment policies were prepared by a consultant, there is no indication that these policies were implemented. (b) Institutional Change/Strengthening 53. The Afghanistan Institute of Banking and Finance (AIBF) was established and has provided training to over 3,000 staff from commercial banks and microfinance institutions. 9 The indicator Getting Credit (which measures the strength of credit reporting systems and the effectiveness of collateral and bankruptcy laws in facilitating lending) may have been relevant for the project, but the M&E framework should not have tracked the overall ranking of Afghanistan which is impacted by the performance of other countries. 17

30 IDA and IFC collaborated in the establishment of the CR and PCR and the two registries were launched in February 2013 and December 2013 respectively and are fully operational. The Public Credit Registry collects information from creditors and available public sources on a borrower s credit history. The Registry compiles information on individuals and/or small firms, such as information on credit repayment records, court judgments, and bankruptcies, and then creates a comprehensive credit report that is sold to creditors. The moveable Collateral Registry registers notices of securing charges in movable assets as collateral for loans or other financing, and notices of lien in all types of movable assets. This registry, which facilitates securing debt and creating contracts using movable property, in particular facilitates access to finance for small and medium enterprises. By December 2014, a total of 3,687 items of collateral had been registered in the CR and the PCR had issued 471 reports (and 1,370 reports by March 2015). (c) Other Unintended Outcomes and Impacts (positive or negative) 54. None 3.6. Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 55. Not Applicable 4. Assessment of Risk to Development Outcome Rating: Substantial 56. The PAD had identified five potential risks that the project faced, although some of these risks were not rated. The risks included: i) increases in money laundering; ii) increases in terrorist financing; iii) the failure to put in place a legal framework for a PCR and CR in a timely manner; iv) weak implementation capacity in DAB; and v) lack of coordination between IFC and IDA. The money laundering and terrorist financing risks were considered High because of the opium economy with a high degree of smuggling and trafficking, the integration of the informal financial Hawaladar network into the formal financial networks of neighboring countries, the weak anti-money laundering regime in place in DAB and the commercial banks, and the lack of investigatory techniques and measures. 57. While the capacity building activities, specifically the automation of off-site supervision, at DAB were not completed under the FSSP, some of them have been transferred to the FSRRP, which should help augment capacity at DAB in the coming years. An increase in DAB s capacity to regulate the financial sector is critical for its enforcement of anti-money laundering activities. The collaboration between IDA and IFC in the establishment of the CR and PCR worked well, because these two systems are fully operational and capacity to operate them has already been created within DAB. However, there is a risk that a change in the Director of the CR and PCR at DAB could affect the operation of the two registries. 18

31 The AIBF, which had been established and was working well until 2013, has run into institutional difficulties following a major change in its staff in Assessment of Bank and Borrower Performance 5.1. Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Unsatisfactory 58. The Bank s performance in ensuring quality at entry was Moderately Unsatisfactory. The project team undertook significant analysis of the Afghanistan financial sector in order to choose the components to include in the project. It used various reports prepared by the Bank (Financial Sector Study 2004) and the Government (EEC Road Map 2007, ANDS , and DAB Strategic Plan ) to ensure that the project objectives were aligned with the Government s vision for the sector. The team also held consultations with other donors operating in the sector, notably USAID and the IMF, about the relevant entry points for supporting the government reforms in the sector. 59. The design of the project, however, was overly ambitious, given the limited capacity, and its delivery model became vulnerable to a deteriorating security environment. The choice of a capacity building approach that relied on international individual consultants was no longer appropriate with rising insecurity. The design also did not have a robust Monitoring and Evaluation system, and the PDO-level indicators chosen were not suitable to measure achievement of development objectives. (b) Quality of Supervision Rating: Moderately Unsatisfactory 60. The composition of the Bank Team varied over the life of the project and was comprised of financial sector development specialists (Lead and Senior), senior private sector development specialists, financial management specialists, procurement specialists, legal counsel from the Bank, and a Principal Financial Specialist from IFC. There were two Task Team Leaders (TTL) during the implementation phase of the project, both based in Kabul, with the change in TTLs occurring in early Implementation progress was documented by the Bank team in Aide Memoires after supervision missions and in ISRs every 6 months (and on some occasions every 12 months). These helped provide Bank management with updates on implementation progress and have also provided background for preparing the Implementation Completion and Results Report (ICR). 61. The problem of delayed procurements continued to slow down the pace of implementation. In the case of the critically important consultancy position for the IT systems for DAB, which was responsible for implementing about 60 percent of the project, it took more than two years to be put in place. The team responded to the delays by downgrading the 19

32 implementation progress (IP) to Moderately Unsatisfactory. However, there were no immediate proactive steps taken to address the underlying problem of difficulties in attracting qualified individual consultants to the project. A restructuring would have been advisable by mid-2011, two years after the start of what was now a slow implementation, in order to change course and use a different implementation approach. This would also have been a suitable time to revise the M&E framework and introduce appropriate performance indicators. 62. The Mid-term Review (MTR) had originally been scheduled for September 1, 2012, but it did not take place until late February 2013, when it was apparent that the project was not on track to meet its development objectives, with only 20 percent of project proceeds disbursed. The decision of the MTR mission to restructure the project, and then the subsequent decision to cancel the project and transfer the funds and a limited number of key activities into the FSRRP, although occurring late in the process, were the correct decisions under the circumstances. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Unsatisfactory 63. Overall Bank performance is rated Moderately Unsatisfactory on account of the weaknesses in the design and implementation phases noted above. While the project was responding to an urgent and visible need from the Government, and while the initial design was grounded in sound analysis of the Afghanistan financial sector, the method of implementation chosen did not adequately take into account the Afghan political, security, and economic environments. When implementation began and faced significant delays, the team took too long to suggest the necessary changes that would be required if the project were to meet its development objectives Government Performance (a) Government Performance Rating: Moderately Satisfactory 64. Government Performance is rated as Moderately Satisfactory. The Government showed full commitment to the reform of the financial sector during the preparation of the project and shared with the Bank team its vision for the sector, as articulated in its various documents that are mentioned before in this ICR. However, during implementation, the focus of the Government shifted to the resolution of the Kabul Bank crisis, due to its impact on the financial sector and, more broadly, on the dialogue between the Afghan authorities and the international community. (b) Implementing Agency or Agencies Performance 20

33 Rating: Moderately Unsatisfactory 65. The implementing agency was the DAB, and a Project Implementation Cell (PIC) comprising all relevant heads of departments in DAB was set up to manage the day-to-day activities of the project. The idea was to create project implementation capacity within DAB and more project ownership, unlike the USAID-funded Bearing Point model where implementation responsibility was with the Bearing Point team. While the PIC had the full support of the Governor and management of DAB, a risk that was identified during design was that the staff had no experience in implementing a donor-funded project. The focal point staff in each DAB department involved in the project was supposed to be partnered with expatriate consultants for capacity building, and the plan was that over time, the local staff would take charge of project implementation. As it turned out, with a deteriorating security environment, it was very difficult to attract well-qualified international staff to Afghanistan. There was also supposed to be a Project Steering Committee (PSC), chaired by the Governor or First Deputy Governor, acting as the supreme body to monitor and make key management decisions for effective implementation of the project. 66. DAB started with some degree of initiative by hiring the Project Director (head of the PIC) before the project became effective and sending him, together with the head of the procurement department, to India for World Bank procurement training. However, project implementation started before the PIC was fully constituted. The international consultants who were supposed to mentor the focal point staff in the DAB departments were not in place and it took more than 18 months for the international procurement and financial management consultants to join the PIC. This limited capacity at the PIC, and the rising insecurity, resulted in long implementation delays because of the inability to hire qualified consultants. 67. The PSC was instrumental in addressing the initial problems encountered in the establishment of the AIBF. However, the difficulties affecting the implementation of Component One (strengthening the capacity of DAB) were beyond the control of the PSC. The minimal achievements under Component One largely contributed to the outcome of the project being rated as Unsatisfactory. (c) Justification of Rating for Overall Borrower performance Rating: Moderately Unsatisfactory 68. Overall Borrower performance is rated as Moderately Unsatisfactory. While the Government showed commitment to the project in the early stages of design and implementation, the Implementing Agency had difficulties implementing the project, due design shortcomings and unsuccessful procurement processes, linked to a deteriorating security environment. 21

34 6. Lessons Learned 69. In a conflict-afflicted environment, the Project Team should review the general constraints to implementation faced by ongoing projects in the country s Bank Portfolio to better understand the operating environment. Because this was the first Bank project being implemented by the DAB, it was bound to face capacity constraints. However, while there were almost two dozen projects in the Bank s portfolio in Afghanistan s other sectors in 2008 (with the oldest project approved in 2003), the design of the FSSP did not seem to have taken into account the systemic constraints faced by Bank projects in Afghanistan that could have led the team to incorporate some mitigating measures in the design. For example, there were seven projects that were at least two years old but that had minimal or zero disbursements, which could have raised a red flag on the adequacy of project design and readiness for implementation of the FSSP. 70. Attracting good quality individual international consultants in a conflict environment is a major constraint to implementation. This is related to the lesson described above on the operating environment. The project team correctly identified the weak implementation capacity in DAB and the need as a mitigating measure to hire international consultants to train/mentor focal point staff with DAB departments and support the activities of the PIC (such as financial management and procurement). However, nowhere in the PAD is it acknowledged or mentioned that there could be a problem attracting those consultants to Afghanistan, as the possibility of a significant deterioration in the security environment was not considered. 71. Corrective actions need to be taken earlier on in the implementation phase if Implementation Progress (IP) is consistently Not Satisfactory. The delay in taking corrective actions can lead to loss of resources and time as seen in this project where a number of contracts had to be advertised at least twice. The major corrective action in the FSSP should have been taken by the second year of implementation rather than at the Midterm Review, which was three and a half years after project effectiveness. As can be seen in this case, the delay in revising the monitoring and evaluation framework made it difficult to evaluate the achievements of the project. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing Agencies Comments 72. The Borrower received and reviewed a draft of the ICR in which the performance of the Implementing Agency had been rated as Unsatisfactory. The Borrower suggested, with some justification, that the performance of the Implementing Agency should be rated as Moderately Unsatisfactory. After internal discussions and consideration, the team agreed to the Moderately Unsatisfactory rating. (b) Cofinanciers 22

35 N/A (c) Other partners and stakeholders N/A 23

36 (a) Project Cost by Category in XDR Annex 1: Project Costs and Financing Category Category Description Amount Allocated Amount Disbursed % Disbursed 1 Goods, Consultants Services, and 3,870, , Training Part 1: Component 1 2 Goods, Consultants Services, and 1,090, , Training Part 2A: Public Credit Registry 3 Goods, Consultants Services, and 310,000 19, Training Part 2B: Collateral Registry 4 Goods, Consultants Services, and 170,000 31, Training Part 2C: AIFB 4 Unallocated 60, TOTAL 5,500,000 1,495, (b) Project Cost by Component (in US$ million) Component Appraisal Estimate Actual/Latest Estimate Of which IDA (at Appraisal) 1. Strengthening the Capacity of DAB Development of necessary financial infrastructure TOTAL PROJECT COST (c) Financing (in US$ million) Source of Funds Type of Cofinancing Appraisal Estimate Actual/ Latest Estimate Percentage at Appraisal IDA IFC/PEP-MENA Counterpart Funding DAB, ABA and MISFA TOTAL Includes US$590,000 from IFC for TA for the CR and PCR; and US$770,000 counterpart funding (local funds) from the Authorities (DAB, ABA and MISFA) 24

37 (d) Project Disbursements Original Projections Vs Actual Disbursements Cumulative Disbursements 25

38 Annex 2: Outputs by Component 1. The FSSP supported activities for strengthening the capacity of Da Afghanistan Bank (DAB) as well as for developing necessary infrastructure in the financial sector, such as the Public Credit Registry (PCR), the Collateral Registry (CR), and the Afghanistan Institute of Banking and Finance (AIBF). Strengthening the DAB was a focus of the GoA since the fall of the Taliban regime, and the DAB had previously received assistance from the World Bank, USAID, and IMF to strengthen its internal administration and bank supervisory (on-site) capacity. While there had been good progress, DAB still had a disproportionately weak banking supervision capacity. The GoA also aimed to resolve the core constraints to lending to the private sector with a specific focus on establishing and enforcing the realization of collateral, and enhancing credit information flow so as to identify good and bad customers. The two components under the project and the related outcome indicators are outlined below. 2. Component 1: Strengthening the Capacity of Da Afghanistan Bank. The FSSP provided support in three critical areas: Developing the off-site supervision systems and supervision competencies in DAB; Creating effective accounting and internal auditing systems that would function at generally acceptable international standards, which was critical operationally and for the credibility of DAB as a central bank; and Establishing an effective human resources (HR) management system so it could move from relying on expatriate advisors to utilizing well-trained and empowered Afghan national staff. 3. The following indicators were used to measure progress: (i) decrease in the number of days required to process supervisory data collected from the commercial banks; (ii) DAB s financial statements prepared according to International Financial Reporting Standards (IFRS) with an UNQUALIFIED opinion of external auditor; and (iii) increase in the number of training courses implemented on the basis of training needs assessment results. By the time the decision was made to cancel the project at the MTR, the status of Component One outputs was as follows: Planned Activity Results and Outputs Completion Status 1. Strengthening of DAB s off-site supervisory functions Recruitment of a qualified individual consultant with expertise in banking supervision was unsuccessful. Activities were included in the scope of the IT consultancy firm. The consultancy firm s technical specifications for the automation of off-site supervision were rejected by the Borrower, Activity was not completed and will be carried out under the Additional Financing for the FSRRP. The 26

39 Planned Activity Results and Outputs Completion Status 2. Strengthening accounting and internal audit capabilities 3. Establishment of effective human resource management 4. Development of an effective information technology system following a technical review from the World Bank. Activity was suspended. Accounting: Accounting policies and procedures manual are in place Budget manual, Part 1 and 2 Financial management manual for the FSSP and FSRRP Training for manual implementation Internal audit Internal audit manual Part 1 (policies and standards) and Part 2 (audit methodologies) Internal audit policies Audit charter Training and guidance on manuals Terms of Reference (TOR) for audit committee Detailed assessment of Comptroller General staff and on-the-job training of the staff. Policies were developed and are being implemented on: performance management; recruitment, selection, and appointment; staff training and development; promotion; conflict of interest; harassment in general; sexual harassment; grievance and reconciliation; corrective and disciplinary action; and staff requisition forms. Assessment of existing IT systems was made IT development strategic plan and implementation roadmap were prepared Technical requirements for off-site supervision 27 number of days required to process supervisory data has not changed. Activity was completed. Activity was partially completed as the automation of HR management was not carried out under FSSP, but will be carried out under FSRRP, as per the recommendations of the Consultant. Consultant advised a new IT system was not needed but instead a missing module (attendance module) could be installed to customize the HR Management system in the existing Core Banking System. The activity was partially completed as technical specifications for automation of off-

40 Planned Activity Results and Outputs Completion Status Technical requirements for HR systems automation Technical requirements for automation of audit department (the actual automation of audit department was not covered under the project) Technical requirements for automation of foreign exchange auction and daily exchange rate (the actual automation of foreign exchange auction and daily exchange rate was not covered under the project) site supervision were rejected by the Borrower and the procurement phase for automation of off-site supervision was suspended. 4. Component 2. Development of Necessary Infrastructure in the Financial Sector. The FSSP provided support for: Setting up a Public Credit Registry that would provide lenders information for efficient risk assessment on borrowers; Establishing a Collateral Registry for movable property that would provide lenders the ability to effectively use their property as collateral; and Developing a bankers training institute that could improve professional banking and financial sector skills. 5. The following indicators were used to measure progress: (i) increase in the number of credit reports sent by the Pubic Credit Registry to commercial banks; (ii) increase in the number of items of collateral registered in the Collateral Registry; and (iii) increase in the number of commercial banks staff trained at the AIBF. The status of outputs of Component 2 was as outlined below. Planned Activity Results and Outputs Completion Status 1. Establishment of a PCR Enabling legislation for operations of a PCR was put in place Phase 1 of the PCR (establishing production site) was launched in December The PCR became fully operational in December 2014, once financial institutions had uploaded all the required credit information. 2. Establishment of a CR Enabling legislation for operations of a CR was put in place CR was launched in February 2013 and is fully operational. Activity was completed around the time the cancellation of the project was proposed. However, by December 2014, the PCR had sent out 471 credit reports to commercial banks. Activity was completed. By June 2013, the CR had 1700 items of collateral registered (against a target of 2,000) valued at AFN 24.8 billion and all 28

41 Planned Activity Results and Outputs Completion Status commercial banks had accounts. By December 2014, the number of registered items had increased to 3, Physical Development of the Afghanistan Institute of Bankers and Finance (AIBF) AIBF was established in 2010 and is operational, offering short term and long term courses. Activity was completed. 3,064 staff of commercial banks and microfinance institutions had been trained at AIBF by end June 2014, as against a target of

42 Annex 3: Economic and Financial Analysis 1. At appraisal, by the nature of the project, it was found difficult to quantify the economic and financial benefits of the project and therefore difficult to carry out a proper Cost- Benefit Analysis. The team instead carried out a Business Benefits review with DAB management of the investments in four areas, including: (i) internal process efficiency; (ii) benefits to internal and external clients; (iii) benefits for compliance, regulatory and control framework; and (iv) work process and manpower efficiency (Annex #9, PAD). The ICR following the appraisal approach computed Business Benefits of achieved activities under Component 2 (establishment of Afghanistan Institute of Banking and Finance (AIBF), Public Credit Registry and Collateral Registry). There were virtually no benefits under Component 1 since all the activities were not completed. The following activities under Component 2 were also not completed and were transferred to the FSRRP: (i) support to the establishment of PCR; and (ii) technical assistance and training for the implementation of a PCR and a CR. 30

43 Annex 4: Bank Lending and Implementation Support/Supervision Processes (a) Task Team Members Names Title Unit Responsibility/Specialty Lending Md. Reazul Islam Senior Private Sector Development Specialist SASFP 1 st Task Team Leader (TTL) Kyoo-Won Oh Underwriter SASFP Co-TTL Nagavalli Annamalai Lead Counsel LEGPS Legal Kiatchai Sophastienphong Senior Financial Sector Specialist SASFP Shanthi Divakaran Program officer SASFP Nazir Ahmad Research Analyst SASFP Richard Nash Research Analyst SASFP Shah Nur Quayyum Operations Analyst SASFP Md. Faijul Islam Information Analyst ISGOS Sheila Braka Musiime Senior Counsel LEGES Legal Davis C. Freese Senior Finance Officer LOAFC Disbursements Mohammad Arif Rasuli Senior Environmental Specialist SASDN Environmental Safeguards Asta Olesen Senior Social Development SASES Social Safeguards Specialist Kenneth O. Okpara Senior Financial Management SARFM Financial Management Specialist Deepal Fernando Senior procurement Specialist SARPM Procurement Parwana Wawreena Program Assistant SASFP Administration Aza A. Rashid Program Assistant SASFP Administration Marjorie Espiritu Program Assistant SASFP Administration Thomas James Jacobs Country Officer, Lebanon IFC PCR and CR component 31

44 Names Title Unit Responsibility/Specialty Oscar Maddedu Principal Financial Specialist IFC PCR and CR component Mohammad Amin Shoaieb Program Officer IFC Credit Bureau Program Murat Sultanov Operations Officer IFC PCR and CR component Supervision/ICR Md. Reazul Islam Senior Private Sector SASFP Task Team Leader Development Specialist Kyoo-Won Oh Underwriter SASFP Co-TTL Richard George Andrew Counsel LEG Legal Nash Kenneth O. Okpara Senior Financial Management SARFM Financial Management Specialist Deepal Fernando Senior Procurement Specialist SARPS Procurement Parwana Wawreena Nasiri Program Assistant SASFP Administration Shamsuddin Ahmad Senior Financial Sector Specialist FPDPO Shah Nur Quayyum Financial Sector Specialist SASFP Abdel Qadeer Jawad E T Consultant SASFP Guillemette Sidonie Jaffrin Senior Private Sector SASFP Development Specialist Nazir Ahmad Research Analyst SASFP 2 nd Task Team Leader Ann Christine Rennie Lead Financial Sector Specialist SASFP Asha Narayan Financial management Specialist SARFM Financial Management Murat Sultanov Operations Officer IFC (CMEAF) PCR and CR Component Asif Ali Senior Procurement Specialist SARPS Procurement Oscar Maddedu Principal Financial Specialist IFC (CAIFI) PCR and CR Component Aza A. Rashid Program Assistant SASFP Administration Rahimullah Wardak Procurement Specialist SARPS Procurement Zohra Farooq Financial Management Specialist SARFM Financial Management John P. Byamukama Financial Analyst GFMDR ICR TTL 32

45 Names Title Unit Responsibility/Specialty Samson Omodele Idahosa E T Consultant SARPS Procurement Akram Abd El-Aziz Hussein Senior Financial Management SARFM El-Shorbagi Specialist Shiori Onishi Consultant GFMDR Financial Management Bassim Ahmed Sharafeldin Operations Officer GFMDR (b) Staff Time and Cost Stage of Project Cycle Lending Staff Time and Cost (Bank Budget Only) USD Thousands (including No. of staff weeks travel and consultant costs) FY FY Total: Supervision/ICR FY FY FY FY FY FY FY Total: Grand Total:

46 Annex 5: Beneficiary Survey Results Not Applicable 34

47 Annex 6: Stakeholder Workshop Report and Results Not Applicable 35

48 Annex 7: Summary of Borrower s ICR and/or Comments on Draft ICR The Borrower has provided a comprehensive 72-page ICR and only a summary detailing the section on evaluation of performance is provided here. The full report is available upon request and has also been uploaded in the Portal. AFGHANISTAN FINANCIAL SECTOR STRENGTHENING PROJECT IMPLEMENTATION COMPLETION REPORT To IDA FSSP - P October

49 CURRENCY EQUIVALENTS Currency Unit = US$ ABBREVIATIONS AND ACRONYMS ABA AIBF ARDS BER CBS CR DAB EOI FAIDA FSSP FY IBRD IDA IFC IMF IUFR MFIs MISFA MOF MTR NOL PAD PCR PDO PIC PSC RFP RFQ SDU SIR SPC TA TOR UNDB USAID Afghanistan Banking Association Afghanistan Institute of Banking and Finance Afghanistan Reconstruction Development Services (part of Ministry of Economy) Bid Evaluation Report Core Banking System Collateral Registry Da Afghanistan Bank Expression of Interest Financial Access for Investing in the Development of Afghanistan (part of USAID Financial Sector Strengthening Project Fiscal Year International Bank for Reconstruction and Development (part of the World Bank) International Development Association (part of the World Bank Group) International Finance Cooperation International Monetary Fund International unaudited Financial Report Microfinance Institutions Microfinance Investment Support Facility for Afghanistan Ministry of Finance of Afghanistan Mid-term Review No Objection Letter (World Bank Approval) Project Appraisal Document Public Credit Registry Project Development Objective Project Implementation Cell Project Steering Committee Request for Proposal Request for Quotation Special Disbursement Unit (part of Ministry of Finance) System Integration Review Special Procurement Committee (a Committee in Ministry of Finance) Technical Assistance Terms of Reference United National Development Business U.S Agency for International Development 37

50 Content: Title Page DATA SHEET i B. Key Dates Error! Bookmark not defined. C. Ratings Summary Error! Bookmark not defined. D. Sector and Theme Codes Error! Bookmark not defined. E. Bank Staff Error! Bookmark not defined. F. Results Framework Analysis Error! Bookmark not defined. G. Ratings of Project Performance in ISRs Error! Bookmark not defined. H. Restructuring (if any) Error! Bookmark not defined. I. Disbursement Profile Error! Bookmark not defined. 1. Project Context, Development Objectives and Design 1 2. Key Factors Affecting Implementation and Outcomes 7 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 22 Annex 1: Project Costs and Financing 24 Annex 2: Outputs by Component 26 Annex 3: Economic and Financial Analysis 30 Annex 4: Bank Lending and Implementation Support/Supervision Processes 31 Annex 5: Beneficiary Survey Results 34 Annex 6: Stakeholder Workshop Report and Results 35 Annex 7: Summary of Borrower s ICR and/or Comments on Draft ICR 36 Basic Data Project Performance Overall Performance Performance of Consultants, Contractors, and Suppliers Performance of DAB and Donor Agency Performance of DAB Performance of Donor Agency (IDA) Overall Performance and Rating 49 38

51 4. Challenges, Lessons/Recommendations Challenges and Recommendations Lessons: 51 Annex 8: Comments of Co-Financiers and Other Partners/Stakeholders 53 Annex 9: List of Supporting Documents 54 MAP 55 Basic Data Table 1: Fact Sheet Original Date: 24 May 209 to 30 Jun 2014 Revised date: 24 May 09 to 31 Dec 2014 DAB Governor: Noorullah Delawari Project Director: Basharmal Pasarlai, Previous Director: Zalmei Sherzad Project Deputy Dir: Samiullah Mahaal Project ID: P Grant Number H484-AF Task Team Leader: Guillemette Sidonie Jaffrin Sectors: Banking 80%, Gen Financial Sector (20%) Themes: Other Financial and Private Sector Recipient: Islamic Republic of Afghanistan Responsible Agency: Ministry of Finance, Government of Afghanistan Implementing Agency: Da Afghanistan Bank Type of Operation: New Operation Financing type: IDA Grant Total Amount: US$8,000,000 Implementing Period: 54 months Effectiveness date: June 18, 2009 Closing Date: 31 December

52 Financing Plan (USD m) Source Local Foreign Total IDA Estimated Disbursements (by the Bank FY/USD Millions) Total IDA

53 Table 2: IDA Financing and Project Disbursement by Category of Expenditure (US$ millions) Expenditure Category Amount of the Grant Allocations (US$ m) Financing Percentage (inclusive of taxes) Amount of Grant Disbursed (US$ m) Disburseme nt Percentage (inclusive of taxes) (1) Goods, consultants services and training for component % 1,413, % (2) Goods, consultants services and training for component 2: Public % 541, % Credit Registry (3) Goods, consultants services and training for component 2: % 176, % Collateral Registry (4) Goods, consultants services and training for component 2: Afghanistan Institute of Banking % 184, % and Finance Bank Charges 325 Total ,316, % Table 3: Goods, Consultancy Services and Trainings Cost Disbursement by Year: Category Total Goods 43, , , , Services 335, , , , , ,587, Trainings 84, , , , Bank Charges G. Total 463, , , , , ,316,

54 FSSP - P Goods Services Trainings Bank charges Grant Disbursement on Annual Basis 5. Project Performance 5.1 Overall Performance The FSS Project management observed the overall performance stated in below table 15. Mid Term Review report quotes incorporated in the context. Project Development Objective: The PDO is to assist DAB to improve its core function of banking supervision and regulation, and to help improve access to formal banking services by establishing key initial building blocks for further financial sector reform. The Project has improved access to formal banking services bound to approved regulations and establishing key initial financial infrastructure for further financial reform such as establishment of Collateral Registry and Public Registry System at DAB and as well as activation and supported the Afghanistan Institute of Banking and Finance by providing technical assistance and equipment. The Project design has major focus on off-site supervision automation rather than a feasible approach of capacity building prior to automation of the off-site supervision. In the current design, the project director role was only a facilitator and Project implementation maintained by PIC structure in a functional organization. 42

55 As per the Mid Term Review was conducted by the World Bank during March In hindsight, the PDO indicators have also shown their limits. Overall improvement of DAB s core functions of banking supervision and regulation as perceived by the commercial banks through biannual service and evaluated by the supreme council. Since the Kabul Bank crisis, the Central Bank or ABA has not conducted any survey. In addition, the quality of banking regulation and supervision should not be only measured by perception surveys with commercial banks, as commercial banks might prefer a more lenient Central Bank, rather than a Central Bank which strictly enforces laws and regulations. Component 1: The Project aims to strengthening DAB s capacity through (i) strengthening of the off-site supervisory functions of DAB. (ii) Strengthening of DAB s accounting and internal audit capabilities, and (iii) establishment of an effective human resource management system, and (iv) development of an effective information technology system. Since the recruitment of qualified individual consultant for the preparation of required technical specification for automation of Off-site supervision was unsuccessful. In consultation with World Bank, DAB include banking supervision expertise in the Term of Reference of the IT consultancy firm (US Tech Solutions), hired in October 2011 for the assessment of IT requirements design, implementation and supervision of IT installations. Strengthening Accounting Department s Capacity: An individual consultant was hired for a year, and the following key outputs were delivered. Comprehensive DAB Budget manual in 2 parts Accounting policies and procedures manual Financial management manual for both projects (FSSP and FSRRP) Training for manual implementation Strengthening Internal Audit Department s Capacity: Individual consultant was hired for almost one and half year (18 months), and following key outputs were delivered. Internal audit manual part I ( policies and standards) and part II (audit operations and methodologies) Internal audit policies Audit charter 43

56 Training and guidance on the manuals Conducted detailed assessment of comptroller general (CGO) staff, and on the Job training to CGO staff. Human Resource Management: Individual consultant was hired for nine months, and following policies were delivered and being implemented: Performance management policy Recruitment, selection and appointment policy Staff training and development policy Promotion policy Conflict of interest policy Harassment general policy Sexual harassment policy Grievance and reconciliation policy Corrective and disciplinary action policy Staff requisition forms Information Technology: A first procurement process failed, which led to significant delays for the implementation of the whole project. The second procurement process was successful and an IT consultancy firm (US Tech Solutions) was hired in October 2011 for the assessment of IT requirements, design, implementation and supervision of IT installations. The firm delivered the following key outputs: Initial assessment of current IT systems IT development strategic plan Implementation roadmap Proposed IT organization development plan Technical requirements for off-site supervision automation Technical requirements for human resource systems automation Technical requirements for foreign exchange auction and daily exchange rate Technical requirement for audit department Assistance in procurement of Public Credit Registry Assistance in the HRMS software procurement process. 44

57 As discussed above, the World Bank found unsatisfactory the technical specifications for automation of Off-site supervision, and it was recommended not to proceed with the procurement phase and to review this activity during the Mid Term Review conducted during March Following the assessment was conducted by the IT firm, it was concluded that a new Information System for Human Resource Management was not necessary. Instead, it was deemed sufficient to install missing modules (attendance module and pension module) and customize and integrate the HRMS in the existing Core Banking System (CBS) of DAB. Component 2: Development of basic infrastructure in the financial sector. Establishment of a public credit registry (i) Technical assistance for the review and drafting of relevant enabling laws, regulations and amendments (ii) Conducting workshops to explain the benefits of credit reporting systems (iii)acquisition and installation of physical infrastructure including software and hardware development (iv) Organization of study tours and workshops to educate relevant stakeholders on the benefits of a public credit registry, Establishment of a collateral registry (i) technical assistance for the review and drafting of relevant enabling laws, procedures, A first procurement process failed (bids were noncompliant) which led to significant delays. The second procurement process was ultimately successful and the contract between DAB and the selected bidder (Credit Info GmbH) was signed on February 19, The first phase (establishing production site) of the public credit registry was inaugurated on December 16, 2013 and the Disaster Recovery Site (DRS) will be completed in % of the contract price was paid under FSSP and the rest of 75% of the contract amount will be paid under additional financing to FSRRP. The IFC has been providing technical assistance to DAB on this activity. The PCR technical staffs have attended various technical trainings/workshops were conducted by IFC in Dubai and as well as workshops held by the firm. The contract for the supply and installation of the (movable) Collateral Registry was signed between DAB and a firm (Paradigm Application LCC) on June 30, The Collateral Registry was inaugurated on February 19,

58 regulations and amendments on registration of collateral (ii) Conducting workshops to explain the benefits of a collateral registry (iii) Acquisition and installation of physical infrastructure including software and hardware development (iv) Training aimed at building internal capacity for managing the registry (v) Development of a registry guide and manual (vi) Conducting workshops to explain the benefits of a collateral registry Similarly, another contract for the supply and installation of hardware system for the collateral registry was signed between DAB and a firm (Mega Plus Afghanistan Ltd). The required hard was supplied and installed at DAB. Recently, after inauguration the DAB CR department has requested for additional functionality of the Collateral Registry through providing following features. The proposal has been accepted and will be funded under additional financing to FSRRP. Establishment of Disaster Recovery Site (DRS) for collateral registry Training of CR staff on complete functional and technical issues of the software and Extension of required support and maintenance for the additional 2 years between the firm and DAB. The IFC has provided technical assistance to DAB on this activity. Supporting the physical development of the Afghanistan Institute of Banking and Finance (AIBF) (i) technical assistance for the review and drafting of relevant enabling laws, procedures, regulations and amendments on registration of collateral (ii) Conducting workshops to explain the benefits of a collateral registry The activity supports the establishment of a movable collateral registry and doesn t tackle immovable collateral. The system is operating normally and thousands of notices being registered. The project supported DAB in establishing the AIBF in November 2010 for contributing to the capacity building of the banking and microfinance sector. Beside FSSP and the Financial Sector Rapid Response Project (FSRRP), the IFC, HARAKAT and USAID s Financial Access for Investing in the Development of Afghanistan project (FAIDA), has supported the AIBF and technical assistance provided to the Institute. Based on needs, the FSS project has provided technical assistance and office equipment, furniture, IT equipment and other goods to the Institute. A partnership agreement for regional collaboration was also signed between DAB and a regional banker s training institute (Bangladesh Institute of Banking and Management, BIBM) to support AIBF 46

59 in training of trainers, provision of training modules, and curriculum design. The BIBM delivered three years training curriculum, modules and training polices. However, the contract was terminated in a mutual agreement in January 2013, because the scope of the contract was no longer relevant for AIBF. The slow project performance is attributed to the following main reasons: Multiple failed procurement processes which led to significant delays. It was noticed that it is extremely difficult to hire qualified individual consultants (with highly technical expertise on financial sector issues and reasonable remuneration) because of the security context of Afghanistan. The first procurement of the IT firm also failed because of security consideration (the winning firm ended up declining the assignment because of the security context). The first procurement process for the Public Credit Registry failed as bids were declared non-compliant. In hindsight, the project design appears ill adapted to the Afghan context: It was found in the Mid Term Review that the approach to capacity building through individual consultants is not effective, which was quoted in the MTR report as follow: Experience has shown, in Afghanistan, that building sustainable capacity in institutions require a comprehensive and long term approach, as piloted by the Capacity Building for Results (CBR) facility rather than relying on individual consultants tasked with developing, for example, manuals. In addition, the scope of Component 1 also appears, in hindsight, over ambitious considering the limited resources of the project and the capacity building approach chosen (reliance on individual consultants); strengthening of the off-site supervision of DAB; strengthening of DAB s accounting and internal audit capabilities; establishment of an effective human resource management systems and development of an effective information technology system. The above reasons have resulted into low disbursement of IDA grants for FSS project. By end of the project only 29% of the IDA grant of US$8million had been disbursed after 4 years of project implementation. On the basis of above reasons, the project was highly proposed for restructuring and closing of the project. On 31 st December 2013, the project was officially closed with a three month grace period to wind up and make all pending payments. Existing long term (PCR and HR Software) and new contract (Capacity 47

60 development for Financial Supervision Department of DAB) etc were transferred to FSRRP with additional financing of US$6.7million. 5.2 Performance of Consultants, Contractors and Suppliers The consultants that were hired under FSS project substantially completed their assignments and the key outputs delivered by the consultant to the concern department of DAB. The IT Consultancy firm (US Tech Solutions) has completed 60% of their assignment. The contractors and supplier of collateral registry (for software Paradigm Application, and for hardware Mega plus Afghanistan) have completed their assignments and the supplier of public credit registry (Credit Info) has almost completed implementation of the system and contract, it is expected that the remaining work would be done under additional financing to FSRRP. The procurement consultant contract was completed during 2012 and another consultant was hired in October 2012 under the FSRR project. A list of consultants, contractors and suppliers is attached as Appendix 6 to the report. 6. Performance of DAB and Donor Agency 6.1 Performance of DAB The performance of Da Afghanistan Bank in project implementation was satisfactory in general and DAB had two level monitoring and supervision of the FSS project and the project has been implemented by DAB through a two tier system of project management, i.e, project implementation Cell (PIC) and Project Steering Committee (PSC). Project Implementation Cell (PIC): The PIC was responsible for managing day to day project implementation. The PIC, led by Project Director, was composed of staffs of the related department of responsibilities include, inter alia, coordination of project implementation among the various DAB departments and the PSC, preparation of annual work plans and budgets, procurement, financial management, and preparation of progress reports. As per project document each concerned department for the project was nominate a PIC member with relevant experience. The PIC member was working closely with hired consultant; provide them with necessary information; attend project implementation meetings and brief the head of its department on the progress of project implementation. Capacity within the related department was created in the areas of procurement, financial management, human resource management, IT and others as required for the project implementation. The PIC was fully integrated into enhance the effectiveness of the project implementation. Project Steering Committee (PSC): The PSC chaired by the Governor and the First Deputy Governor, and composed of all heads of the related departments, has overseen the PIC and provide strategic guidance and managerial direction for the project implementation. DAB has supported the project in hiring process of the project staffs based on approved structure by Supreme Council. The salaries of the project staff have been paid by DAB 48

61 according to its scale. The FSS project operating cost were covered from DAB operating budget until the FSRR project operating cost was approved by the World Bank in All the contracts procurements were done by the assigned committees under close supervision of DAB. The decision body for the project was the PSC led by DAB management. During the project implementation, several PSC meetings conducted by Steering Committee and the progress of the project were reported to the committee. 6.2 Performance of Donor Agency (IDA) The World Bank has provided close support and collaboration in the implementation of the project in term of reviewing and approval of the procurement plan and as well as training plan (some trainings on individual basis approved). The Task Team for the project, procurement unit, and finance unit for the project in the World Bank has provided the close support through Task Team leadership to the project for financing their activities and solution of the existing problems. The procurement processes for goods and consultancy services were closely followed up by the World Bank and their technical advice were considered and incorporated into the RFPs, Bid documents, Bid Evaluation Reports and Contracts for goods and services. The IFRs were reviewed and accepted by the World Bank. The Bank has also audited the FSS project annually and provided DAB with final observation and recommendations for improving project implementation process, and also did follow up the progress after recommendations. The No Objection for prior review contracts were given on time except some more technical cases naturally needs more time for review. 7. Overall Performance and Rating The FSS project most of the activities retained for the rescaled project were late but satisfactory implemented except automation of off-site supervision. There were significant delays in the procurement processes of the IT system for PCR and IT consultancy firm due to many reasons, out of which one is the security threats that were avoiding eligible vendors to join assignments in Afghanistan. Since, the procurement process for the prior review contracts were based on International Competitive Bidding process, therefore the project implementation was slow in disbursement part and as well as due to many significant delays happened, such as procurement process failed. In MTR conducted during March 2013 and by implementing the findings of review, the project performance was rated on section wise as follow: a) Procurement Satisfactory 49

62 b) Financial Management Moderate Satisfactory c) Counterpart Funding Satisfactory d) Monitoring and Evaluation Satisfactory e) Project Management Satisfactory Furthermore, the M&E results framework is tabulated in page Challenges, lessons/ recommendations: 8.1 Challenges and Recommendations The implementation arrangements of the FSSP were relatively new in Afghanistan. The project was design with the assumption that the project Director will implement the project with the full support and collaboration of the Project Implementation Cell (PIC) and Project Steering Committee (PSC). However, after project kick off, it was very apparent that not all the implementing partners/members have the same pace and strong institutional capacity to meet all their targets. Timely procurement was very paramount for the accelerated of project implementation. The project faced major challenges in the recruitment of qualified and competent consultants and contractors. Most of these have to do with the current situation in Afghanistan. There were few Afghan firms/companies/individual with the requisite experience to effectively undertake and complete projects at the required standards. International firms/companies/individual in most cases were reluctant to come to Kabul and in the case where they choose to come, they was charging a premium to come. During the course of the project, other major challenges were encountered which contributed to delay in the project implementation procurement and inadequate capacity can be singled out as the biggest challenges. Higher remuneration for staff that commensurate with their work should be considered. The uncompetitive pay package, which is not commensurate with the workload, was a major obstacle to maintaining high-level motivation and retention of professional staff. Training and capacity-building by offering both long and short term courses can be a very good motivation factors for the limited staff of the project. All payments were centralized through the Ministry of Finance. Whilst this was good for Government control purposes, the turnaround time to effect payment is longer that what the project expect. This challenge was beyond the control of the project team and there was need for the intervention of higher authorities. As can be seen in the financial figures, there was a big gap between the commitment amount and the actual amount disbursed. Other challenges include the followings. No authority given to the Project Director: Each and every stage of the procurement process that needs approval or review was forwarded to DAB management for action. The project director had no authority to approve or sign any document. Even the purchase of routine items like office stationeries and supplies was forwarded to the management for 50

63 approval. These arrangements greatly contribute to the delay in procurement. To avoid such situation it will be a good idea to give some level of authority to the Project Director by allowing him to handle low value contracts. For example all procurement contracts below USD50,000 should be handled by the Project Director and only contract above USD 50,000 should be taken to the Governor for signature. Late involvement of DAB legal Department in the procurement process: All contracts were referred to DAB Legal Counsel for review before the Governor can take any action. The argument according to the office of the Governor was that, it is a Government requirement to have all contracts reviewed by the Legal Department to ensure compliance with the National Law. Whiles this was a welcoming idea, it usually take weeks before a feedback can be received from the legal counsel. The lengthy process for legal review unnecessarily increases the procurement lead time since all contracts were based on World Bank standard format. It would be better to involve the Legal Department at an earlier stage in the procurement (as a member of the evaluation team) so that their views can be incorporated before the contract is finalized. This will ultimately lead to some reduction in the procurement lead time. Composition and commitment of the evaluation team: Evaluation team members were usually the Director of Head of Departments who were extremely busy with their normal schedule and had little time to attend evaluation meeting. Because they do not have enough time for evaluation, they usually come to evaluation meeting unprepared and therefore would not contribute effective. The result was usually a request for another meeting leading to the delay in completion of the evaluation reports it would be more appropriate to have the evaluation done by junior or mid-level management staffs that have some knowledge on what is being evaluated and then present their findings to senior management for approval. Bureaucracy procedure for the payment in MoF: The FSS project was responsible to pay to their vendor by approval of DAB management and through designated account of Ministry of Finance via its normal procedures (details explained in disbursement/payment cycle in previous pages), which is a very lengthy and bureaucratic procedure holding strong role for significant delays in payment to the vendor. Therefore, it would be better that each project get a specific budget code as other ministries holds, this will help the project to prepare the allotment (B27) and payment order (M16) by their own and get approval of signatories at MoF, and payment package will finally submitted to SDU for payment and check issuance to vendor. In this way, the whole payment process will take only 15 days as per discussion with other ministries Focal Points. Late World Bank NoL: The project was not usually receiving WB NoL at due time to process the activities as planned. 8.2 Lessons: Several lessons were learnt from the implementation of this project, some of them are explained as follows: 51

64 In November 2010, a contract was signed between DAB and Bangladesh Institute of Banking and Management (BIBM) for the purpose of providing collaboration to the Afghanistan Institute of Banking and Finance (AIBF) for 3-5 years in term of conducting training to trainers, provision of training modules, and curriculum design. The BIBM has delivered training curriculum and modules. As a result of AIBF Director visit to BIBM during January 2013 and also according to the evaluation of the performance of BIBM during the past 18 months, it was noticed that the scope of the contract was no longer relevant for AIBF at the time. It was therefore highly recommended to terminate the contract and develop a new RFP with a broader and comprehensive scope whereby a better institute can be attracted to support AIBF. The contract termination notice to BIBM was shared on February 20, However, the project recommends that for such cases of the regional collaboration, a temporary contract as a pilot study with regional bankers institute should take place in order to determine whether the services offered meets the scope and requirements of the purchaser. The second lesson learnt was the practice of allocating additional budget for the contract of public credit registry. In the project design the allocated cost for public credit registry was $1.6 million and the actual contract become $2.2 million; therefore in consultation with World Bank the project decided to suspend the trainings and instead spend the amount on the actual contract of supply and installation of public credit registry. However, this was a best practice for successfully implementation of the credit registry. But the project recommends that during project design the stakeholders should have real picture of the IT industry along with up-gradations and reasonable value estimation for such activity. 8.3 Special Thanks to DAB Governnor H.E. DAB Governor; Noorullah really prioritized project plans and activities H.E. DAB Governor; Noorullah was very much committed to the success of the project. 52

65 Annex 8: Comments of Cofinanciers and Other Partners/Stakeholders 1. NOT APPLICABLE 53

66 Annex 9: List of Supporting Documents 1. World Bank: Afghanistan Financial Sector Study; World Bank Interim Strategy Note for Afghanistan; April World Bank Minutes of PCN Review Meeting; April World Bank Minutes of the Decision Meeting; February Implementation Status and Results (ISR) Reports; November 2009 January 2014: Sequences 1 to 7 6. World Bank Emergency Project Paper; April World Bank Financing Agreement; April World Bank Supervision Mission Aide Memoires 9. World Bank Mid-term Review Mission Aide Memoire; March World Bank Restructuring Paper on a proposed restructuring of the Afghanistan Financial Sector Rapid Response Project; November World Bank Restructuring Paper on a proposed restructuring of the Afghanistan Financial Sector Strengthening Project ; January Afghanistan Financial Sector Strengthening Project: Borrower s ICR; October The Afghanistan Compact; Afghanistan Enabling Economic Conference (EEC) Road Map; Afghanistan National Development Strategy (ANDS); Public Credit Registry (PCR) Afghanistan Project Completion Report, March 2015, IFC 54

67 MAP 55