Completion Report

Project Number: 33040 Loan Numbers: 2000, 2001 December 2009

Tajikistan: Microfinance Systems Development Program

CURRENCY EQUIVALENTS

Currency Unit – somoni (TJS)

At Appraisal At Time of Program Evaluation 15 May 2003 30 November 2009 TJS1.00 = $0.32 $0.23 $1.00 = TJS3.70 TJS4.35

ABBREVIATIONS

ADB – Asian Development Bank AMFOT – Association of Microfinance Organizations of Tajikistan EBRD – European Bank for Reconstruction and Development GDP – gross domestic product IMF – International Monetary Fund LIBOR – London interbank offered rate MDO – microcredit deposit organization MFI – microfinance institution MPSC – microfinance policy steering committee NBT – National Bank of Tajikistan NGO – nongovernment organization OSS – operational self-sufficiency PAR>30 – portfolio at risk over 30 days PMU – project management unit RRP – report and recommendation of the President SDR – special drawing rights TA – technical assistance TWG – technical working group

NOTE

In this report, "$" refers to US dollars.

Vice-President X. Zhao, Operations 1 Director General J. Miranda, Central and West Asia Department (CWRD) Director R. Subramaniam, Financial Sector, Public Management, and Trade Division, CWRD

Team leader N. P. Knoll, Financial Sector Specialist, CWRD Team member F. Teves, Assistant Project Analyst, CWRD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i I. PROGRAM DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Program Outputs 2 C. Program Costs 2 D. Disbursements 3 E. Implementation Arrangements 3 F. Program Schedule 5 G. Conditions and Covenants 6 H. Related Technical Assistance 8 I. Consultant Recruitment and Performance; Procurement and Performance of Contractors and Suppliers 8 J. Performance of the Borrower and the Executing Agency 9 K. Performance of the Asian Development Bank 9 III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Effectiveness in Achieving Outcome 9 C. Efficiency in Achieving Outcome and Outputs 11 D. Preliminary Assessment of Sustainability 12 E. Impact 13 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 14 A. Overall Assessment 14 B. Lessons Learned 14 C. Recommendations 15

APPENDIXES 1. Statistical Data on Microfinance Institutions Participating in Credit Line Component 16 2. Status of Compliance with Loan Covenants 18 3. Program Framework 32 4. Policy Matrix 39

BASIC DATA

A. Loan Identification

1. Country Tajikistan 2. Loan Numbers 2000, 2001 3. Program Title Loan 2000 Microfinance Systems Development Program Loan 2001 Microfinance Systems Development Project 4. Borrower Republic of Tajikistan 5. Executing Agency National Bank of Tajikistan 6. Amount of Loans Loan 2000 SDR2.934 million ($4 million equivalent) from Asian Development Fund (ADF) resources Loan 2001 SDR2.934 million ($4 million equivalent) from Asian Development Fund (ADF) resources 7. Program Completion Report Number PCR: TAJ 1142 B. Loan Data

1. Appraisal – Date Started 29 April 2002 – Date Completed 17 May 2002

2. Loan Negotiations – Date Started 28 April 2003 – Date Completed 30 April 2003

3. Date of Board Approval 26 June 2003

4. Date of Loan Agreement Loan 2000 10 November 2003 Loan 2001 10 November 2003

5. Date of Loan Effectiveness Loan 2000 – In Loan Agreement 8 February 2004 – Actual 21 July 2004 – Number of Extensions 5 Loan 2001 – In Loan Agreement 8 February 2004 – Actual 21 July 2004 – Number of Extensions 5

6. Closing Date Loan 2000 – In Loan Agreement 31 December 2004 – Actual 12 December 2006 – Number of Extensions 1 Loan 2001 – In Loan Agreement 30 June 2008 – Actual 17 October 2008 – Number of Extensions 0

7. Terms of Loans Loan 2000 – Interest Rate 1.0% during the grace period and 1.5% thereafter – Maturity 24 years – Grace Period 8 years

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Loan 2001 – Interest Rate 1.0% during the grace period and 1.5% thereafter – Maturity 32 years – Grace Period 8 years

8. Disbursements a. Dates

Initial Disbursement Final Disbursement Time Interval

Loan 2000 13 April 2005 12 December 2006 20 months

Loan 2001 2 August 2005 18 September 2008 37 months

Effective Date Original Closing Date Time Interval

Loan 2000 21 July 2004 31 December 2004 5 months

Loan 2001 21 July 2004 30 June 2008 45 months

b. Amount (SDR) Last Amount Original Net Amount Amount Undisbursed Category Revised Added / Allocation Available Disbursed Balance Allocation (Canceled) Loan 2000 01 MSDP–Program 2,934,000 2,934,000 0 2,934,000 2,934,000 0 Total 2,934,000 2,934,000 0 2,934,000 2,934,000 0 Loan 2001 1A–Equipment, 94,000 94,000 0 94,000 85,398 8,602 Software and Furniture for NBT 1B–Equipment, 136,000 0 (136,000) 0 0 0 Software and Furniture for MFIs 1C–Vehicles for NBT 58,000 58,000 0 58,000 43,253 14,747 2–Consulting 279,000 279,000 0 279,000 16,680 262,320 Services 3A–Overseas 22,000 22,000 0 22,000 21,684 316 Training 3B–Domestic Training 131,000 131,000 0 131,000 54,237 76,763 4–Credit line to MFIs 1,888,000 2,024,000 136,000 2,024,000 1,929,843 94,157 5–Liquidity 37,000 37,000 0 37,000 0 37,000 Guarantee Fund 6–Project 200,000 200,000 0 200,000 86,167 113,833 Management 7–Interest Charge 59,000 59,000 0 59,000 7,274 51,726 8–Unallocated 30,000 30,000 0 30,000 0 30,000 Total 2,934,000 2,934,000 0 2,934,000 2,244,536 689,464 MFI = microfinance institution, MSDP = Microfinance Systems Development Program, NBT = National Bank of Tajikistan.

9. Local Costs (Financed) – Amount (SDR) 245,492 – Percent of Local Costs 14.7% – Percent of Total Cost 24.3%

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C. Program and Project Data

1. Program and Project Costs ($)

Cost Appraisal Estimate Actual

Loan 2000 Foreign Exchange Cost 4,000,000 4,378,099 Total 4,000,000 4,378,099

Loan 2001 Foreign Exchange Cost 1,821,006 104,733 Local Currency Cost 3,490,276 5,409,262 Total 5,311,282 5,513,995

Grant 4132 Foreign Exchange Cost 611,710 394,710 Local Currency Cost 28,290 9,810 Total 640,000 404,520

Total Foreign Exchange Cost 6,432,716 4,877,542 Local Currency Cost 3,518,566 5,419,072 Total 9,951,282 10,296,614

2. Financing Plan ($)

Cost Appraisal Estimate Actual

Loan 2000 First tranche release 1,500,000 1,532,127 Incentive tranche release 1,000,000 988,008 Second tranche release 1,500,000 1,857,964 Total 4,000,000 4,378,099

Loan 2001 Implementation Costs Borrower Financed 389,173 262,606 ADB Financed 4,000,000 3,474,667 Other External Financing MFIs 701,609 701,609 MFI Clients 220,500 1,075,113 Total 5,311,282 5,513,995

Grant 4132 ADB Financed 640,000 404,520 Total 640,000 404,520

Grand Total 9,951,282 10,296,614 ADB = Asian Development Bank, MFI = microfinance institution.

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3. Cost Breakdown by Program and Project Components (SDR)

Component Appraisal Estimate Actual

Loan 2000 MSDP–Program 2,934,000 2,934,000 Total 2,934,000 2,934,000

Loan 2001 1A–Equipment, Software and Furniture for NBT 94,000 85,398 1B–Equipment, Software and Furniture for MFIs 136,000 0 1C–Vehicles for NBT 58,000 43,253 2–Consulting Services 279,000 16,680 3A–Overseas Training 22,000 21,684 3B–Domestic Training 131,000 54,237 4–Credit Line to MFIs 1,888,000 1,929,843 5–Liquidity Guaranty Fund 37,000 37,000 6–Project Management 200,000 86,167 7–Interest Charge 59,000 7,274 8–Unallocated 30,000 0 Total 2,934,000 2,281,536 MFI = microfinance institution, MSDP = Microfinance Systems Development Program, NBT = National Bank of Tajikistan.

4. Project Schedule

Loan 2001 Appraisal Actual Estimate Commencement of Operations of Project Management Unit 2003 Oct 2005 Execution of First Subloan Agreement 2004 Dec 2006 First Disbursement of Loans to Clients of MFIs 2004 Feb 2007 Final Disbursement of Loans to Clients of MFIs 2007 Jun 2008 MFI = microfinance institution.

5. Program Performance Report Ratings

Ratings Implementation Period Development Implementation Progress Objectives

Loan 2000 From 30 June 2003 to 30 April 2004 Satisfactory Satisfactory From 1 May 2004 to 30 June 2004 Satisfactory Unsatisfactory From 1 July 2004 to 28 February 2005 Satisfactory Partly Satisfactory From 1 March 2005 to 31 December 2005 Satisfactory Satisfactory From 1 January 2006 to 31 December 2006 Satisfactory Satisfactory

Loan 2001 From 30 June 2003 to 30 May 2004 Satisfactory Satisfactory From 31 May 2004 to 30 June 2004 Satisfactory Unsatisfactory From 1 July 2004 to 31 December 2008 Satisfactory Satisfactory

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D. Data on Asian Development Bank Missions No. of Specia- No. of Person- lization of Name of Mission Date Persons Days Membersa Reconnaissance 5–14 Apr 2000 Technical Assistance Loan Fact-Finding 5–24 Aug 2000 Technical Assistance Loan Processing 28 Feb–14 Mar 2001 Reconnaissanceb 20–26 Jun 2001 Fact-Finding 3–15 Feb 2002 Appraisal 29 Apr–17 May 2002 Special 23–25 Oct 2002 Post-Appraisal 1–8 Feb 2003 Loan Negotiations 28–30 Apr 2003 Pre-Inception 5–10 Oct 2003 2 12 c, a Inception 5–11 Dec 2003 3 11 b, c, e Review 1 4–5 Feb 2004 1 2 c Review 2 27 Feb 2004 1 1 c Review 3 4–5 Apr 2004 1 2 c Review 4 23–27 Jul 2004 1 5 c Review 5 1–7 Jul 2005 2 14 c, e Review 6 13–14 Mar 2006 2 4 d, e Program Completion Review (Policy Loan) 20–28 Oct 2008 1 9 f Program Completion Review (Investment Loan) 15-19 Jun 2009 1 5 f TA = technical assistance. a a = regional cooperation specialist, b = financial management specialist, c = microfinance specialist, d = financial economist, e = associate project analyst, f = finance sector specialist. b This mission’s purpose was to seek the Government of Tajikistan’s agreement to change the technical assistance loan to a sector development program loan.

I. PROGRAM DESCRIPTION

1. The goal of the Microfinance Systems Development Program was to create a strong, commercially viable microfinance sector in Tajikistan in order to provide the country’s poor with access to financial products through sustainable1 microfinance institutions (MFIs).2 The program, which was designed as a sector development program, had several components, including:

(i) promoting the adoption of policy, regulatory, and institutional actions to develop a healthy microfinance industry in Tajikistan; (ii) building the capacity of the National Bank of Tajikistan (NBT) to regulate and supervise MFIs; (iii) building the institutional capacity of MFIs; and (iv) promoting the transformation of microcredit programs operated by nongovern- ment organizations (NGOs) into formally licensed and regulated MFIs.

2. The program, which was designed in 2002 and approved in June 2003, consisted of a policy loan (2000-TAJ) for a committed amount of SDR2,934,000 ($4 million equivalent) together with an investment loan (2001-TAJ) for the same committed amount—both from the Special Funds resources of the Asian Development Bank (ADB)—and a technical assistance (TA) grant (4132-TAJ) of up to $640,000.

3. This program completion report provides an overview and evaluation of the program’s implementation.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

4. The program’s design was consistent with the strategies of the government and ADB regarding poverty reduction and microfinance. 3 For example, one of the conditions for disbursement of the policy loan was the adoption of a microfinance law and regulations for the supervision of MFIs. This condition promoted one of the goals of ADB's microfinance strategy— that is, creating a policy environment conducive to microfinance. Another goal of ADB's microfinance strategy—creating viable MFIs—was supported by the technical assistance delivered to MFIs under the TA grant and investment loan components of the program, as well as by the funds provided to MFIs under the investment loan. Both the policy loan and the investment loan supported the government's goal of promoting private sector development through the development of microfinance institutions.

1 MFIs are considered sustainable if their incomes are sufficient to cover the operational and financial costs (including loan losses) of providing their services, so that they can operate without periodic or continuing subsidies from the government or donors. 2 ADB. 2003. Report and Recommendation of the President to the Board of Directors on Proposed Loans and Technical Assistance Grant to the Republic of Tajikistan for the Microfinance Systems Development Program. Manila (RRP). para. 48. 3 Government of Tajikistan. 2002. Poverty Reduction Strategy Paper. Dushanbe; ADB. 2000. Finance for the Poor: Microfinance Development Strategy. Manila; ADB. 2000. Country Assistance Plan 2001–2003. Manila; ADB. 2002. Country Strategy and Program Update (2003–2005): Tajikistan. Manila; ADB. 2002. Tajikistan: Economic Assessment. Manila.

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B. Program Outputs

5. The program achieved each of its four components. First, to facilitate the development of the microfinance industry, amendments to the tax code were passed and a law on microfinance organizations was enacted. In addition, pursuant to the new law, the NBT issued three regulations—one for each type of MFI allowed under the law: (i) No. 135 for microcredit deposit organizations, i.e., commercial entities that may accept deposits; (ii) No. 136 for microlending organizations, i.e., commercial entities that may not accept deposits; and (iii) No. 137 for microlending funds, i.e., noncommercial entities.

6. Second, the NBT's capacity to regulate and supervise MFIs was improved significantly. This was achieved through the acquisition of equipment4 and the delivery of TA which helped the NBT develop efficient and effective procedures for on-site inspections and off-site monitoring and appraisals of MFIs.

7. Third, the institutional capacity of MFIs in Tajikistan was strengthened. Technical assistance was provided under both the TA grant and the investment loan. Under the latter, the project management unit (PMU) organized 89 training sessions on nine topics including best practices, development of new products, financial reporting, gender issues, registration of pledge agreements, and taxation. These training sessions were attended by 414 participants from 39 organizations.

8. Fourth, more than 50 NGOs were transformed into formally licensed and regulated MFIs. Twenty-eight MFIs also have the power to take deposits, although only 11 of them were exercising this power as of 31 May 2009. Furthermore, the microfinance industry in Tajikistan has thrived. At the end of 2008, the industry's aggregate gross loan portfolio totaled more than $79 million, with aggregate capital of almost $37 million. Profitability has been good, enabling MFIs to use their retained earnings to expand their outreach. For example, the members of the Association of Microfinance Organizations of Tajikistan (AMFOT) had an average operational self-sufficiency (OSS) ratio of 153.5% in 2007 and 154.5% in 2008.5 Performance has been sufficiently impressive to enable some MFIs to dramatically expand their loan portfolios using funds borrowed from foreign lenders such as Blue Orchard, the European Bank for Reconstruction and Development (EBRD), Frontiers, Incofin, Oikocredit, and responsAbility.

C. Program Costs

9. At appraisal, the total program cost was $9.95 million—$8.64 million provided by ADB ($4 million through the policy loan, $4 million through the investment loan, and $640,000 through the TA grant), $389,000 by the government, $702,000 by MFIs, and $220,000 by MFI clients. The actual total program cost was $10.30 million—$8.26 million provided by ADB ($4.39 million through the policy loan, $3.47 million through the investment loan, and $405,000 through the TA grant), $263,000 by the government, $702,000 by MFIs, and $1,075,000 by MFI clients.

4 This equipment included computers, printers, and photocopiers. 5 AMFOT. 2008. Analysis of AMFOT Members Statistic Data: Reporting Term January 1 Till December 31 of 2007. Dushanbe; AMFOT. 2009. Analysis of AMFOT Members Statistic Data: Reporting Term January 1 Till December 31 of 2008. Dushanbe. An MFI is considered “operationally sustainable” if its operating revenues cover (operational self-sufficiency [OSS] ratio equals 100%) or exceed (OSS ratio greater than 100%) its costs. SEEP Network and Alternative Credit Technologies, LLC. 2005. Measuring Performance of Microfinance Institutions: A Framework for Reporting, Analysis, and Monitoring. Washington, DC. p. 66.

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10. Compared with appraisal projections, (i) the amount disbursed under the policy loan was higher because of the appreciation of the SDR against the dollar; (ii) the amount disbursed under the investment loan was lower because expenses in almost all categories (Basic Data, para. C.3.) were lower than expected; (iii) government expenditures were lower because less equipment was purchased under the program than anticipated (therefore resulting in less taxes being foregone); and (iv) the amount attributable to MFI clients, which consisted of savings deposited in MFIs (which, in turn, could be used by MFIs to make loans), was much higher because much more savings were in fact collected.

11. Expenses under the investment loan were lower than projected because, among other things, (i) MFIs refused to borrow from the government to acquire equipment, software, and furniture; (ii) the staff of the PMU and the individuals providing training to MFIs were local rather than international hires contracted through a firm; (iii) no liquidity guarantee fund was established; (iv) delays in establishing the PMU resulted in PMU expenses being incurred during only part of the program period; and (v) more than 85% of the loan was disbursed in the last 2 years of program implementation, resulting in low capitalized interest charges.

D. Disbursements

12. The initial tranche6 of the policy loan was disbursed in April 2005. The incentive tranche was disbursed in November 2005 after the two conditions for its disbursement were fulfilled (para. 22 and Table 2). The final tranche was disbursed 5 months behind schedule in December 2006 after the four conditions for its disbursement were fulfilled (para. 22 and Table 2). Disbursements under the investment loan began in 2005 (1 year behind schedule) and ended in 2008 (as scheduled).7

13. The original disbursement schedule for the policy loan, which contemplated disbursement of the three tranches in 2003, 2004, and 2005, was overly optimistic because it did not anticipate (i) the delay in loan effectiveness (paras. 18–19), (ii) the extended time required for Parliament to enact the microfinance law, and (iii) the 1-year interval between the passage of the microfinance law and the approval of regulations implementing the law. Disbursements under the investment loan were delayed as a result of the delays in the establishment of the PMU (para. 19).

E. Implementation Arrangements

14. The NBT was the executing agency for both loans and had overall responsibility for program implementation. It consulted with the Ministry of Finance, Ministry of Justice, Office of the President, and Ministry of State Revenue and Duties on measures to be implemented. The program also provided for the creation of a microfinance policy steering committee (MPSC), a technical working group (TWG), and a PMU. The MPSC and the TWG—each of which included representatives from the Ministry of Finance, Ministry of Justice, Ministry of State Revenue and Duties, NBT, NGOs, and the Office of the President—were designed to facilitate cooperation between the various represented entities;8 they were merged with ADB's approval

6 The RRP refers to the three tranches of the policy loan as the first tranche, the incentive tranche, and the second tranche. For clarity, they will be referred to in this report as the initial tranche, the incentive tranche, and the final tranche, respectively. 7 Twenty-three percent of the investment loan allocation remained undisbursed at closing and was cancelled. Had ADB acceded to the government's request to extend the loan for an additional 12 months, the amount of the undisbursed balance would have been smaller. 8 Footnote 2, paras. 67, 95, 99.

4 in 2006. 9 The PMU, established in the NBT, was responsible for the day-to-day implementation of the components of the investment loan.10

15. The proceeds of the credit line component of the investment loan were onlent by the government to the NBT at a rate of 1.5%.11 In turn, the NBT onlent them to two commercial banks—Agroinvestbank and Amonatbank—at a rate of the 6-month London interbank offered rate (LIBOR),12 with interest payable semiannually. The two banks then onlent the funds to 14 MFIs at 6-month LIBOR plus 4.5%,13 with interest also payable semiannually (Table 1). Semi- annual amortization payments on the loans from NBT to the two banks, and on the loans from the two banks to the MFIs, begin on 31 December 2009 and end on 30 June 2016.14

16. With respect to each of the loans between the banks and the MFIs, 7% of the principal is due on each of the first 12 principal payment dates, while 8% of the principal is due on each of the last two principal payment dates. The loans from the NBT to the banks, and from the banks to the MFIs, were disbursed in somoni but denominated in dollars. Thus, the exchange rate risk (the risk that the somoni would weaken against the dollar) was transferred from the NBT to the MFIs.

9 ADB. 2006. Microfinance Sector Development Program (Investment Loan)–Request for Major Change in Scope and Implementation Arrangements. Manila. 10 November. 10 Footnote 2, paras. 67, 98. 11 The RRP (para. 100) provided a rate of 0%. The rate was increased as part of a major change in scope and implementation arrangements approved by ADB in November 2006 (footnote 8). 12 The RRP (para. 100) envisaged that the NBT would lend to the banks in somoni at a rate acceptable to ADB, but not less than NBT's published discount or refinancing rate. The change in rate and currency were approved by ADB in November 2006 as part of a major change in scope and implementation arrangements (footnote 8). 13 This rate was designed to approximate the market rate for dollar loans to Tajik MFIs. (At the time the rate was approved by ADB in November 2006, the EBRD was lending to MFIs at 6-month LIBOR plus a spread of 5.5%, plus a disbursement fee of 1%.) 14 The RRP (paras. 101–102) contemplated that the loans from the NBT to the banks, and from the banks to the MFIs, would originally be disbursed for 1 year, and that 10-year loans would be available after that 1 year if loan repayment was satisfactory and eligibility conditions for the MFIs continued to be met. Pursuant to the major change in scope and implementation arrangements approved in November 2006 (footnote 8), the loans could be made for an original term of up to 10 years. Since all of the loans were disbursed in 2007 and 2008 and mature in June 2016, their actual original term varied from 8 to 9 years.

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Table 1: Summary of Credit Line Lending Arrangements Aggregate Principal Lender Borrower Interest Rate ($ equivalent) ADB Republic of Tajikistan 3,025,078 1% (first 8 years); 1.5% (years 9–32) MOF NBT 3,025,078 1.5% NBT Agroinvestbank 1,610,078 6-month LIBOR Amonatbank 1,415,000 6-month LIBOR Agroinvestbank Furuz 204,576 6-month LIBOR + 4.5% Gender va Taraqqiyot 282,696 6-month LIBOR + 4.5% Haqiq 420,828 6-month LIBOR + 4.5% Imkoniyat 641,979 6-month LIBOR + 4.5% Oxus 60,000 6-month LIBOR + 4.5% Amonatbank Borshud 445,000 6-month LIBOR + 4.5% Haft Ganj 85,000 6-month LIBOR + 4.5% Ishkoshim 80,000 6-month LIBOR + 4.5% Kiropol 155,000 6-month LIBOR + 4.5% Madina 75,000 6-month LIBOR + 4.5% Mehnatobod 100,000 6-month LIBOR + 4.5% Pakhtaobod 160,000 6-month LIBOR + 4.5% Service-Credit 155,000 6-month LIBOR + 4.5% Vorukh 160,000 6-month LIBOR + 4.5% MFIs MFI clients 3,025,078 Between 2.5% and 3.0% per month ADB = Asian Development Bank, LIBOR = London interbank offered rate, MOF = Ministry of Finance, NBT = National Bank of Tajikistan. Note: From 2007 through November 2009, 6-month LIBOR ranged from 0.4763% to 5.5950%. Sources: Loan agreements; NBT project management unit.

17. The MFIs lent the funds received from the two banks to 5,419 MFI clients at rates of 2.5%–3.0% per month, for periods of between 1 and 24 months (Appendix 1, Table A1.2). The loans, which were made between February 2007 and June 2008, totaled TJS10.371 million. As required by law, the loans were denominated in somoni. Typically, the loans were not indexed to the dollar, so the MFI retained the exchange rate risk that had been transferred to it (para. 13). However, if the loans were indexed to the dollar, the exchange rate risk was transferred to the clients of the MFIs. The loans supported activities in the following sectors: trade, 42%; production, 32%; agriculture, 15%; and other, 11% (Appendix 1, Table A1.2). More than 80% of the loans were made in rural areas.15 Although not all loan installments have become due yet, loan performance has been very good, with more than 97% of the aggregate loan principal already repaid. Four MFIs (Mehnatobod, Oxus, Pakhtaobod, and Vorukh) have achieved 100% repayment. Given the high repayment rate and relatively short loan periods, some MFIs have already made three loans using the funds received under the ADB program.

F. Program Schedule

18. Program implementation was delayed by 2 years for several reasons. First, the policy loan—as well as the investment loan—only became effective in July 2004 (13 months after Board approval and 8 months after the signing of the loan agreements) because its effectiveness was conditioned upon the establishment of the MPSC and the TWG (para. 14), which occurred by presidential decree in July 2004.

15 The loans were made in the following districts: Baljuvon, Bokhtar, Danghara, Darvoz, Dushanbe, Faizobod, Farkhor, Hamadoni, Hisor, Isfara, Ishkoshim, Jirgatol, Jilikul, Jomi, Khorog, Kolkhozobod (Rumi), Khovaling, Kulob, Muminobod, Murghob, Nurobod, Penjikent, Qumsangir, Qurghonteppa, Roghun, Roshtqala, Rudaki, Rushon, Sarband, Shahrinav, Shughnon, Tavildara, Temurmalik, Tojikobod, Tursunzoda, Vahdat, Vakhsh, and Vose.

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19. Second, the initial tranche of the policy loan was not disbursed until April 2005 (22 months after Board approval and 9 months after effectiveness), because effectiveness was conditioned upon the establishment of the PMU. This was delayed because the government initially took steps to establish the PMU as a separate, autonomous legal entity rather than as a part of the NBT, as required under the loan agreement for the investment loan. After ADB objected to the government's approach, the PMU was eventually set up as part of the NBT. Further delay ensued because the NBT sought to appoint the project manager directly from its staff (as had been done in previous ADB programs in Tajikistan), rather than through an open recruitment process that excluded existing NBT staff and included public solicitation and ranking of qualified applicants. ADB eventually acceded to NBT’s request and approved a minor change in implementation arrangements. However, the project manager initially selected by the NBT soon resigned, prompting the need to recruit a replacement, which took several months.

20. These implementation arrangement problems had no impact on the timing of the disbursement of the subsequent two tranches of the policy loan, however. The incentive tranche was disbursed in November 2005 (3 months after the last condition for its disbursement was fulfilled), while the final tranche was disbursed in December 2006 (8 months after the last condition for its disbursement was fulfilled) (para. 22, Table 2). Although the final tranche was scheduled to be disbursed by July 2006, its delay was caused by a disagreement between ADB and the NBT as to whether the 2004 amendments to the tax code were sufficient to meet the disbursement condition. This last disbursement occurred in December 2006, 3 months after ADB acceded to NBT’s position.

G. Conditions and Covenants

21. As noted in para. 2, the program was supported by two loans, both funded from ADB’s Special Funds resources. The policy loan principal of SDR2,934,000 is repayable in 32 equal, semiannual installments beginning on 15 July 2011 and ending on 15 January 2027. The investment loan principal of SDR2,244,535 (SDR2,934,000 less the unused loan portion of SDR689,465) is repayable in 48 equal, semiannual installments beginning on 15 July 2011 and ending on 15 January 2035. Both loans carry an interest rate of 1% until 15 July 2011 (the end of the grace period) and 1.5% thereafter. As discussed in paras. 18–19, there were substantial delays in meeting the conditions of effectiveness for both loans.

22. The policy loan was designed to be released in two or three tranches. The initial tranche of SDR1,100,000 (equivalent to $1.5 million) was to be released upon effectiveness. The release of the final tranche of SDR1,834,000 (equivalent to $2.5 million) was to occur upon the fulfillment of four conditions (Table 2). However, if a microfinance law and implementing regulations were adopted at least 6 months before the final tranche was expected to be released, the loan agreement (schedule 3, para. 5[b]) provided that SDR equivalent to $1.0 million would be released early, as an incentive tranche, while the amount of the final tranche would be correspondingly reduced (i.e., to $1.5 million equivalent). The conditions for release of the incentive tranche, which are summarized in Table 2, were complied with, and the tranche was released in November 2005. The final tranche was released in December 2006 after the conditions for its release were complied with. Appendix 2 presents the status of compliance with the loan covenants contained in both loans.

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Table 2: Summary of Tranche Release Conditions

Condition Comment A. Initial Tranche (released 13 April 2005) Execution and delivery of the investment loan agreement Occurred simultaneously with the execution and (2001-TAJ) delivery of the policy loan agreement on 10 November 2003 Establishment of a project management unit (PMU), The PMU was created by a presidential decree on a microfinance policy steering committee (MPSC), and 30 June 2004. The MPSC and the TWG were created a technical working group (TWG) by a presidential decree on 21 July 2004. Execution and delivery of the subsidiary loan agreement Occurred on 6 February 2004 between the borrower and NBT, as provided under the investment loan agreement (2001-TAJ)

B. Incentive Tranche (released 30 November 2005) Enactment of a law on microfinance institutions (MFIs) A law on microfinance organizations was enacted in which includes provisions for (i) categories of MFIs, May 2004. However, MFIs could not be licensed under (ii) services to be offered by MFIs, (iii) licensing and the law until August 2005 when necessary amendments accreditation requirements, and (iv) supervision to a law on licensing became effective. requirements Adoption of prudential and non-prudential regulations for Regulations adopted by NBT became effective in the supervision of diversified categories of MFIs, and for May 2005. the enforcement of such regulations

C. Final Tranche (released 12 December 2006) Two incentive tranche release conditions plus: Enactment of amendments to tax legislation in order to Amendments to the tax code were enacted in establish a taxation environment supportive of the December 2004. establishment and development of MFIs, including a fair and consistent tax regime appropriate for MFIs Issuance of operating licenses to at least two NBT issued licenses to Credit-Express and Service deposit-taking MFIs Credit in March and April 2006, respectively.

MFI = microfinance institution, MPSC = microfinance policy steering committee, NBT = National Bank of Tajikistan, PMU = project management unit, TWG = technical working group. Sources: Loan Agreement 2000-TAJ, sec. 6.01; Loan Agreement 2001-TAJ, sec. 6.01(b),(c); ADB. 2005. Progress Report on the Release of the Incentive Tranche for Microfinance Systems Development Program in Tajikistan. Manila. paras. 16, 18; ADB, 2006. Progress Report on the Release of the Second Tranche for Microfinance Systems Development Program in Tajikistan. Manila, Table 1 and paras. 13–23.

23. Compliance with reporting requirements was only partly satisfactory. For example, quarterly reports were not filed as required under the loan agreement for the policy loan. However, the covenants in this agreement generally were not relevant to the achievement of program objectives. For example, the failure of the MPSC to meet regularly and of the NBT to submit quarterly reports on policy matrix implementation did not negatively impact the work of the NBT and other stakeholders.

24. With respect to the investment loan, the PMU regularly and timely submitted reports on its activities. However, full compliance did not occur with respect to seven covenants (Appendix 2). For example, audited financial statements of participating banks and MFIs were chronically submitted late. Two MFIs did not meet the 35% minimum threshold for women borrowers. However, Borshud only missed the threshold by 1% (in 2008), and Furuz (which missed the threshold by 3% in 2007) surpassed the threshold by 6% in 2008. In addition, three

8

MFIs each violated one financial covenant. The OSS ratios of Haft Ganj (95%), Ishkoshim (90%), and Madina (59%) were less than 100% in 2007, but increased to 98%, 147%, and 75%, respectively, in 2008. Kiropol's ratio of capital to risk weighted assets was 13% at the end of 2008—2% less than the 15% minimum.

25. In addition, one of the two participating commercial banks—Agroinvestbank—did not receive a satisfactory rating from the NBT in its on-site examination reports because of insufficient loan loss reserves, thereby violating one of the loan covenants. In one year (2008), Agroinvestbank also violated a covenant requiring it to have a return on assets of at least 2%. (Its ratio was 0.7%.)

26. Paragraphs 9 and 12 of schedule 6 of the investment loan agreement provided that any commercial bank or MFI participating in the program which violated an eligibility requirement (e.g., a financial covenant) for more than 3 months would be automatically excluded from the program, and that it would be required to immediately prepay any amounts borrowed under the loan's credit line component. These provisions were not enforced by either the NBT or ADB. In addition, in retrospect they appear excessively severe, as they do not take into account relatively minor violations (such as Borshud's missing the minimum threshold for women borrowers by 1%) or allow forbearance in situations where the violation has been cured within a reasonable period of time (for example, by Furuz, which increased its percentage of women borrowers from 32% in 2007 to 41% in 2008).

H. Related Technical Assistance

27. Project preparatory TA was not utilized for the program. However, a small-scale TA project (3555-TAJ) helped develop policies and legal and regulatory measures, virtually all of which were later adopted under the program.16 Under the program's advisory TA (4132-TAJ), the NBT's capacity to regulate and supervise MFIs was strengthened and MFIs obtained additional capacity to operate as commercially viable institutions. Under the same TA, extensive assistance was provided to MFIs on legislative and regulatory requirements, corporate planning, budgeting, risk management, governance, and human resources management. Six of the seven planned outputs of the TA were completed, and the TA was rated highly successful.17

I. Consultant Recruitment and Performance; Procurement and Performance of Contractors and Suppliers 28. Three international consultants and one local consultant were individually contracted on a competitive basis under the TA grant. The investment loan agreement provided that all consultants paid using loan funds would be selected and engaged as a firm by the NBT using the quality- and cost-based selection (QCBS) method. Instead, at the request of the NBT, ADB agreed that these consultants could be individually contracted. This change resulted in large savings to the borrower (Basic Data, C.3., items 2 and 6). Over the course of the program, around two dozen consultants were hired as professional staff or support staff using investment loan monies. All consultants under both the TA grant and the investment loan performed satisfactorily. Procurement under the investment loan, which proceeded under the shopping method, was uneventful, with no problems regarding suppliers.

16 ADB. 2000. Technical Assistance to the Republic of Tajikistan for Support for Rural Financial Systems Development. Manila. 17 ADB. 2008. Technical Assistance Completion Report on Institutional Strengthening of Microfinance Systems. Manila.

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J. Performance of the Borrower and the Executing Agency 29. Overall, the performance of the borrower and the NBT were satisfactory. The NBT's role in developing and implementing laws and regulations governing MFIs was critical. This satisfactory effort outweighed the negative performance of the borrower and the NBT at the program’s outset in achieving loan effectiveness and fulfilling the other prerequisites to disbursement of the initial tranche of the policy loan. Although the NBT still suffers from weaknesses in institutional capacity, 18 it continues to play a constructive, effective role in maintaining a good legal and regulatory environment for microfinance in Tajikistan and in supervising MFIs.

K. Performance of the Asian Development Bank 30. Overall, ADB’s performance in administering the program was satisfactory. ADB worked actively with the NBT to address the delay in loan effectiveness, fielding four missions over 4 months. ADB’s disagreements with the NBT over the selection of the project manager and on whether the 2004 changes to the tax code were sufficient (both of which were ultimately resolved in the NBT’s favor) delayed the disbursement of the initial and final tranches of the policy loan. In addition, although ADB provided 3 days of training on loan administration to six NBT employees in December 2003, as well as additional training in 2004 and 2005, it failed to provide any training to the replacement project manager who was hired in July 2005. By comparison, ADB worked diligently to negotiate a memorandum of understanding requested by the NBT in April 2008 to facilitate disbursement of the remainder of the credit line component of the investment loan.

III. EVALUATION OF PERFORMANCE A. Relevance 31. The program is rated highly relevant. It was designed to promote the enactment of well- drafted microfinance legislation and regulations and thereby to implement the government’s strategy of reducing poverty by facilitating the provision of affordable, sustainable financial services to the poor. The program's design was also fully consistent with ADB's country and microfinance sector strategies (para. 4 and footnote 3). The choice of a sector development program was appropriate because an integrated approach combining both policy actions and investment was required to meet the needs of the microfinance sector in Tajikistan. Stakeholders including the NBT and MFIs were highly committed to achieving program results.

B. Effectiveness in Achieving Outcome 32. The program is rated highly effective. It successfully resulted in the creation of a sound legal and regulatory environment for Tajikistan’s microfinance industry in a relatively short period of time.19 This, in turn, contributed to a rapidly expanding, profitable microfinance sector that attracted additional investment in the form of wholesale loans and contributions to the equity of newly formed MFIs (Table 3). At the same time, all unlicensed entities providing microfinance services ceased their operations or obtained proper approvals to operate.

18 International Monetary Fund. 2008. Republic of Tajikistan: Staff-Monitored Program, International Monetary Fund Country Report 08/197. Washington, DC. pp. 5–6, paras. 5–6 and Box 1. 19 Other donors contributed to achieving this outcome. For example, a draft microfinance law was developed with the support of the International Finance Corporation (IFC) and the United States Agency for International Development (USAID).

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Five targets were included in the report and recommendation of the President.20 Only one of these—the proportion of savings deposits to loans—was not achieved.21 The other four targets were substantially exceeded (Table 4). In addition, the performance of the 14 MFIs participating in the credit line component of the investment loan was good (Appendix 1, Table A1.1 [OSS ratio and portfolio at risk over 30 days ratio] and Table A1.4 [return on average assets ratio and return on average equity ratio]).

Table 3: Information on Microfinance Institutions

2004 2005 2006 2007 2008 Number of unlicensed entities providing 150 90 10 0 0 microfinance loans (estimated)

Number of registered microfinance 0 21 60 70 92 organizations, consisting of: microcredit deposit organizations 0 0 5 8 14 microlending organizations 0 1 20 24 37 microlending funds 0 20 30 38 41

Aggregate gross loan portfolio of 9.0 20.5 42.8 79.3 microfinance organizations ($ million)a

Total deposits of microcredit deposit 0 0 0.35 0.91 2.64 organizations ($ million)

Total deposits of microcredit deposit 0 0 1,192 3,152 9,097 organizations (TJS ‘000)

Exchange rate (TJS/$) 3.04 3.20 3.43 3.47 3.45

a 2008 is actual figure from National Bank of Tajikistan data; previous years are ADB estimates using data from MixMarket and the Association of Microfinance Organizations of Tajikistan. Note: All data is as of year end. Sources: NBT. 2008. Banking Statistics Bulletin–April 2009. Dushanbe, pp. 21, 47, 68, supplemented by data submitted to ADB by NBT; MixMarket (www.mixmarket.org); AMFOT. 2008. Analysis of AMFOT Members Statistic Data: Reporting Term January 1 Till December 31 of 2007. Dushanbe; AMFOT. 2009. Analysis of AMFOT Members Statistic Data: Reporting Term January 1 Till December 31 of 2008. Dushanbe.

20 Footnote 2, p. 15. 21 Since the target for loans outstanding was TJS9.0 million, TJS0.9 million in savings deposits would need to be collected for the 10% savings–loans target to be achieved. In fact, TJS11.0 million was deposited in MFIs by the end of May 2009 (thereby exceeding the savings target by twelve times). However, loan growth exceeded the program target by an even greater multiple (36 times), so the savings–loans target was not achieved.

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Table 4: Compliance with Investment Loan Targets

Target Actual At least two deposit-taking MFIs operating in full Eleven MFIs (Amlok, Bunyodi Jam, Credit-Express, compliance with all regulatory requirements. Finansoviy Dom, Finansoviy Dom Barakat, Kiropol- Express, Muzaffariyat, Nisor Dom, Saidahmad, Service-Credit, and Spitamen Capital) were taking deposits as of 31 May 2009.

MFI outreach increased by 100%, with about 75% Outreach increased by more than 350% from the of clients being initially poor, and 35% being end of 2004 to the end of 2008 (more than 93,000 women. borrowers at the end of 2008). As of the end of 2008, the average loan size was $765a (i.e., less than per capita GDP [$795]). Approximately 45% of borrowers were women.b

MFI savings deposits will equal about 10% of loans Savings deposits (TJS11 million) totaled only 3% of outstanding. loans outstanding (TJS326 million) as of 31 May 2009.

MFI loans outstanding will reach about TJS9 million Loans outstanding totaled approximately TJS326 ($3.5 million). million ($74 million) as of 31 May 2009 (TJS273 million [$79 million] as of 31 December 2008).C

MFI loan losses will be less than 4%. Write-offs for 2008 were approximately 0.34% of gross loan portfolio.b

GDP = gross domestic product, MFI = microfinance institution. a Based on data submitted to AMFOT by 33 of its member MFIs. The aggregate gross loan portfolio of these 33 MFIs represents approximately 89% of the aggregate gross loan portfolio of all Tajik MFIs. b Based on data submitted to the MixMarket by 18 Tajik MFIs (Amlok, Asti, Borshud, Finansoviy Dom, FINCA, Furuz, Humo, Imkoniyat, IMON, Jovid, Kiropol, Madina, Maqsadi Dashgiri, Mehnatobod, Microinvest, Nasrin, Oxus, and ZAR), whose aggregate gross loan portfolio represents approximately 88% of the aggregate gross loan portfolio of all Tajik MFIs. c Note that the dollar amount declined by $5 million because of the decline in the value of the somoni against the dollar (by 27%, from 3.45 to 4.37) during the first 5 months of 2009. Sources: NBT; MixMarket (www.mixmarket.org); AMFOT. 2008. Analysis of AMFOT Members Statistic Data: Reporting Term January 1 Till December 31 of 2007. Dushanbe; AMFOT. 2009. Analysis of AMFOT Members Statistic Data: Reporting Term January 1 Till December 31 of 2008. Dushanbe.

C. Efficiency in Achieving Outcome and Outputs

33. The program is rated highly efficient. All of its four components were achieved successfully as a result of loans totaling only $8 million. As a result of the $4 million policy loan, a microfinance law and implementing regulations were adopted and changes to the tax code were made. As a result of the $4 million investment loan, the NBT and more than three dozen MFIs received capacity building assistance and more than $3 million was loaned to 14 MFIs, which used the funds to provide micro loans to more than 5,500 clients. The capacity building and arrangements for disbursing the loans to the MFIs were accomplished at a cost of less than $154,000.22

22 Total disbursements under cost categories 2 (consulting services) and 6 (project management) were $24,216 and $129,746, respectively.

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D. Preliminary Assessment of Sustainability

34. The program’s sustainability is considered most likely. The program was designed to provide financial services to the poor on a sustainable basis through several types of NBT-licensed MFIs. The program achieved this result, as there are now more than 110 MFIs. Most MFIs have good profitability and adequate capital to withstand moderate increases in delinquency. For 2008, the average OSS ratio (footnote 5) for 33 AMFOT members was 154.5%.23 The average loan delinquency rate of MFIs was also low—with PAR>3024 of 1.1% as of 31 December 2008.25 As of the same date, 17 MFIs had gross loan portfolios exceeding $500,000.

35. The principal risk to the sustainability of the microfinance sector is the potential impact of macroeconomic shocks. In particular, some MFIs have significant open foreign currency positions as a result of borrowings denominated in foreign currency (dollars, euros, or Kyrgyz som), including the loans under the program's credit line. Although many of them have reduced these open positions by indexing their somoni-denominated microfinance loans (typically, to the dollar–somoni exchange rate), there exists the risk that some MFI borrowers may not be able to repay the increased principal amounts owed if the somoni depreciates significantly.26

36. In addition, the substantial contribution of foreign remittances to the Tajik economy, which has accounted for 40%–50% of Tajikistan's gross domestic product (GDP) in recent years,27 means that some households may find it more difficult to repay their microfinance loans when remittances decline and there is reduced economic activity. As a result of the contraction in Russia's economy, remittances are expected to decline by 35% in 2009; however, the impact on MFIs is not yet clear. This will depend principally on the unknown number of MFI borrowers which rely on remittances to repay their loans.

37. MFIs are also facing additional competition from local banks which are downscaling (e.g., Agroinvestbank and Bank Eskhata) or which specialize in microfinance loans (First MicroFinanceBank).28

38. Finally, there is also the risk that the insolvency of a microcredit deposit organization (MDO), like the insolvency of any other deposit-taking organization which resulted in losses to depositors, would make it extremely difficult for the remaining MDOs to attract deposits. This is likely to be the case even if such MDOs were well-managed and well-capitalized. Thus, effective

23 AMFOT. 2009. Analysis of AMFOT Members Statistic Data: Reporting Term January 1 Till December 31 of 2008. Dushanbe. The OSS ratio for the eight reporting MFIs that participated in the program was 135.5%. 24 The ratio of portfolio at risk over 30 days (PAR>30) corresponds to the aggregate principal amount of loans having one or more scheduled payments more than 30 days overdue divided by the aggregate principal amount of all loans outstanding. 25 Based on data submitted by 15 MFIs to the MixMarket (www.mixmarket.org). The average PAR>30 ratio for the MFIs that participated in the program was 1.4% (Table A1.1). 26 Between 1 January and 30 June 2009, the somoni–dollar exchange rate increased from 3.45 to 4.40. During this period, some MFIs experienced a significant increase in delinquency while others did not. Some MFIs which borrowed under the credit line component of the investment loan had not indexed their loans to the dollar and therefore suffered significant foreign exchange losses. 27 International Monetary Fund (IMF). 2009. IMF Lends Tajikistan $116 Million. IMF Survey Magazine. Washington, DC. http://www.imf.org/external/pubs/ft/survey/ so/2009/CAR042209A.htm 28 An additional microfinance bank called AccessBank is expected to commence operations in late 2009. EBRD. 2009. Press Release: EBRD Boosts Microfinancing in Tajikistan. London. http://www.ebrd.com/new/pressrel/2009/ 090626.htm. Commercial banks have a substantial market share in microloans. For example, during the 9-month period ending 30 September 2009, Agroinvestbank disbursed 18,900 loans totaling TJS216.1 million.

13 supervision of MDOs is critically important. Especially given the NBT's limited experience in supervising MDOs, there is an unavoidable risk of supervisory errors.

E. Impact

39. The program facilitated the development of a vibrant and growing microfinance industry in Tajikistan and has had many positive impacts.

40. First, many low-income households29 now have institutional sources of credit to support the creation and expansion of entrepreneurial activities. As of the end of 2008, there were more than 93,000 loans outstanding from Tajik MFIs, benefiting approximately 450,000 people (using an estimate of five persons per household), compared to fewer than 25,000 loans at the end of 2004 (i.e., prior to when MFIs were licensed under the microfinance law enacted pursuant to the program). Many MFIs successfully target women and people living in rural areas, thereby affording rural inhabitants the opportunity to improve their economic condition. At the end of 2008, approximately 44% of all MFI loans were made to women. 30 Because some MFIs also provide so-called consumption loans, some low-income households can also borrow for nonbusiness purposes. 31 In some areas, two or more MFIs compete for clients, and this competition often results in lower costs, better service, and more product offerings. The credit line component of the program had its greatest impact in rural areas, where more than 80% of the loans funded by the program were disbursed. In 14 of the 39 regions in which loans were disbursed, few or no microfinance services had previously been provided.

41. Second, by enabling households to increase their entrepreneurial activity, microfinance lending has enabled them to increase their income as well as to diversify its sources. Although the program’s design did not include a carefully designed longitudinal survey32 (which is not surprising given the high cost of such a survey relative to the size of the program), a one-time survey of borrowers of a single MFI and non-borrowers living in the same area indicated that borrowers realized significant benefits compared with non-borrowers over a 2-year period in terms of household income; crop yields; food security; and expenditures for clothing, health care, housing, and education.33

42. Third, the emergence of MDOs means that households have more institutions in which to deposit their savings. Depositors also benefit because MDOs sometimes provide better service, offer higher interest rates on deposits, and have more convenient locations than banks.

29 The average size of loans made under the program was $558, compared to Tajikistan's 2008 per capita GDP of $795. The PMU estimated that approximately 80% of the households receiving a loan under the program were in poverty or had no income-generating activity before receiving the loan. 30 Based on data supplied to the MixMarket (www.mixmarket.org) by 18 microfinance organizations with a total market share (by number of borrowers) of 88%. An estimated 42% of the loans made by the 14 MFIs receiving funds under the program's credit line were made to women. 31 "Even customers with small businesses often seek loans for other needs, like paying for school fees or coping with health emergencies." Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch. 2008. Microfinance Meets the Market. Washington, DC: World Bank. p. 25. 32 “[A]ssessing the true relationship between micro-finance services and poverty reduction is not straightforward . . . Accurate assessment . . . requires empirically a control group identical in characteristics to the recipients of credit and engaged in the same productive activities, who have not received credit, and whose income (or other measure) can be traced through time to compare with that of the credit recipients.” John Weiss, Heather Montgomery, and Elvira Kurmanalieva. 2005. Micro-finance and Poverty Reduction in Asia. Chapter 7 in Poverty Targeting in Asia. Cheltenham: Edward Elgar. p. 253 (emphasis supplied). 33 Humo Microlending Foundation. 2005. Micro Credit Impact Assessment (PowerPoint presentation).

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43. Fourth, the growth of the microfinance sector during the program period resulted in the creation of hundreds of reasonably well-paying jobs offered by MFIs, many of which are held by women. In 2007, approximately 65% of the employees of the 39 largest MFIs were women,34 and women served as head of three of the five largest MFIs (Humo, IMON, and Microinvest).

44. Fifth, under the program, MFIs participating in the credit line component of the investment loan were required to obtain annual audited financial statements. Although this requirement was created principally to facilitate monitoring of MFIs, it had the additional benefit of contributing to the development of the Tajik audit industry, which previously had only limited experience in auditing financial institutions.

45. Sixth, the program's credit line component provided local commercial banks with valuable experience in underwriting and administering loans to Tajik MFIs, an activity previously dominated by foreign institutions.

46. Seventh, the credit line component provided 11 additional MFIs with their first experience in borrowing on commercial terms, which is considered an important step in an MFI's institutional development. Whereas most other lenders (e.g., EBRD) had previously made loans only to one or more of the five largest MFIs in Tajikistan, the program's credit line component contributed to the development of the sector by providing loans to medium-sized and smaller MFIs.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

47. Overall, the program is rated highly successful. As originally contemplated, the program resulted in an enabling policy environment and a growing microfinance sector composed of sustainable, licensed institutions supervised by a well-equipped, capable regulator. Moreover, sector growth as reflected in terms of both number of clients and aggregate principal amount of loans outstanding substantially exceeded expectations (Table 4). An annotated version of the program framework is contained in Appendix 3.

B. Lessons Learned

48. Interagency committees may be unnecessary. The program required the creation of two committees—the MPSC and the TWG—comprised mostly of representatives from the same five government agencies. The loan agreement for the investment loan required that the committees meet at prescribed intervals. However, the committees were not created on time and met only twice. Nevertheless, all program outputs were achieved.

49. Enacting legislation and adopting regulations frequently take more time than anticipated. Because a microfinance law had already been drafted when the loan was approved, and because some stakeholders believed that it could be passed within a few months, the program timetable assumed that it would be passed quickly. Instead, it took 11 months after program approval, partially because Parliament decided to hold hearings. The program timetable also anticipated that NBT regulations implementing the law would be drafted while the law was being considered by Parliament. Therefore, the regulations could be implemented quickly after the law was passed. Instead, the regulations did not become effective until 1 year after the law was passed.

34 NBT. 2008. Letter to ADB. 22 November.

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50. Inconsistent policies result in confusion and program delays. In several previous projects, ADB had not objected when the government directly appointed the project manager instead of utilizing an open recruitment process that excluded existing government staff and included public solicitation and ranking of qualified applicants. ADB initially insisted on an open recruitment process, but eventually acceded to the government’s request for direct appointment. Since the establishment of the PMU was a condition of effectiveness for the policy loan, this dispute delayed loan effectiveness by several months.

C. Recommendations

51. Although the program’s likelihood of sustainability is very good, targeted assistance in the forms of TA and funding for specific classes of MFIs (e.g., mid-sized organizations which have not reached sufficient scale to attract commercial lenders), and for specific initiatives of MFIs (such as new products), would further promote program performance and sustainability. ADB should also continue to monitor the legal and regulatory environment for microfinance in Tajikistan. No changes in the loan agreement covenants, or any other further action or follow up, are required.

52. The program performance evaluation report may be prepared immediately.

16 Appendix 1

STATISTICAL DATA ON MICROFINANCE INSTITUTIONS PARTICIPATING IN CREDIT LINE COMPONENT

Table A1.1: Basic Data

Gross Borrowers Write-off Loan Average % % OSS Ratio PAR>30 Ratio Portfolio Loan Total Total Women Women 2008 Size 2008 2007 2008 2007 2008 2007 2008 2008 2008 MFI (USD) (USD) Borshud 1,202,704 528 2,284 2,279 39% 34% 132% 106% 3.6% 0.00% Furuz 915,432 625 806 1,464 32% 41% 105% 118% 2.1% 0.76% Gender 593,054 1,172 685 506 51% 73% 115% 104% 7.4% ... Haft Ganj ...... 50% 38% 95% 98% 0.0% ... Haqiq 575,168 509 1,419 1,129 47% 33% 118% 110% 0.0% ... Imkoniyat 1,292,370 466 2,439 2,773 61% 60% 178% 185% 2.1% 0.03% Ishkoshim 169,530 239 174 286 49% 48% 90% 147% 0.0% 0.00% Kiropol 191,041 369 ... 518 ... 70% 139% 113% 0.0% 0.93% Madina 149,703 456 208 328 60% 37% 59% 75% 1.3% 0.00% Mehnatobod 175,046 530 124 330 48% 43% 140% 213% 1.9% 0.00% Oxus 7,105,248 804 6,805 8,840 46% 48% 124% 123% 0.8% 0.42% Pakhtaobod 286,712 653 309 439 39% 43% 280% 141% 0.0% ... Service-Credit 270,981 1,434 167 189 35% 42% 97% 100% 0.0% 0.00% Vorukh 281,943 504 513 559 54% 52% 240% 270% 0.0% 0.00% MFI = microfinance institution, OSS = operationanal self-sufficiency, PAR>30 = portfolio at risk over thirty days, “...“ denotes data not available. Sources: MixMarket (www.mixmarket.org); audited financial statements and unaudited data of MFIs.

Table A1.2: Data on Funds Received and Disbursed Under Credit Line

Average Category of Use of Loan Funds No. of Amount Size of Loans Trade Production Agriculture Other Received Loan (USD) Made MFI (USD) (TJS) (TJS) (TJS) (TJS) Borshud 445,000 908 490 683,629 716,442 6,868 121,276 Furuz 204,576 331 618 269,100 23,100 356,450 56,823 Gender 282,696 305 927 311,064 589,882 27,998 45,570 Haft Ganj 85,000 134 634 74,228 137,486 0 80,186 Haqiq 420,828 1,195 352 151,150 1,121,349 22,307 152,368 Imkoniyat 641,979 1,208 531 1,370,110 434,955 175,982 193,371 Ishkoshim 80,000 84 952 155,200 32,860 9,500 77,140 Kiropol 155,000 282 550 43,000 13,000 358,650 117,850 Madina 75,000 116 647 87,214 55,865 27,125 87,321 Mehnatobod 100,000 177 565 141,920 119,629 8,050 74,085 Oxus 60,000 110 545 162,100 5,100 30,450 10,178 Pakhtaobod 160,000 188 851 209,955 19,500 237,705 82,320 Service-Credit 155,000 140 1,107 533,578 0 0 0 Vorukh 160,000 241 664 177,380 28,840 258,198 85,400 Totals 3,025,078 5,419 558 4,369,628 3,298,008 1,519,283 1,183,887 MFI = microfinance institution. Sources: NBT project management unit; ADB records.

Appendix 1 17

Table A1.3: Financial Statement Data

Total Total Net Loan Fixed Total Net Assets Assets Portfolio Assets Liabilities Equity Equity Profit 12.31.07 12.31.08 12.31.08 12.31.08 12.31.08 12.31.07 12.31.08 2008 MFI (TJS) (TJS) (TJS) (TJS) (TJS) (TJS) (TJS) (TJS) Borshud 3,438,359 4,400,233 4,119,183 174,782 1,761,215 2,583,622 2,639,018 75,336 Furuz 2,494,144 4,080,700 3,211,846 488,353 2,670,897 1,263,153 1,409,803 119,823 Gender 1,707,029 2,123,521 2,047,163 13,214 982,676 1,083,904 1,140,845 56,941 Haft Ganj 2,173,913 1,945,610 ... 4,245 ...... Haqiq 1,838,240 3,067,857 1,985,423 189,023 1,477,168 1,501,448 1,590,689 63,959 Imkoniyat 2,981,498 5,463,012 4,402,096 648,286 2,679,423 1,994,495 2,783,589 1,093,853 Ishkoshim 559,046 768,866 585,199 56,857 305,401 301,934 463,466 87,902 Kiropol 499,970 885,291 811,486 22,962 777,508 90,622 107,781 103,182 Madina 226,780 553,900 511,475 27,244 284,438 76,697 269,462 16,350 Mehnatobod 343,328 672,573 603,350 55,794 347,712 174,407 324,861 106,424 Oxus 15,557,034 28,527,961 24,379,287 650,470 23,473,288 3,592,395 5,054,673 1,207,408 Pakhtaobod 453,678 1,002,075 989,702 9,321 611,992 315,898 390,083 74,185 Service-Credit 566,910 1,043,263 935,398 6,732 566,883 331,505 476,380 12,083 Vorukh 509,256 987,628 973,240 4,790 586,591 299,022 401,037 111,505 MFI = microfinance institution, “...“ denotes data not available. Note: Date format is mm.dd.yy. Sources: Audited financial statements (except Gender, Haft Ganj, and Pakhtaobod); National Bank of Tajikistan unaudited data (Gender and Pakhtaobod); Haft Ganj (unaudited data).

Table A1.4: Ratios for 2008 (or as of 31 December 2008)

Capital to Return on Return on Credit Line Fixed Assets Loans to Risk Debt to Average Average Debt to Loan to Total Assets Weighted Equity Assets Equity Portfolio Assets Assets (ROAA) (ROAE) limit in loan agreement MFI min. 70% max. 50% max. 10% min. 15% — — — Borshud 94% 37% 4% 64% 0.7 1.9% 2.9% Furuz 79% 22% 12% 44% 1.9 3.6% 9.0% Gender 96% 48% 1% 56% 0.9 3.0% 5.1% Haft Ganj ...... 0% ...... Haqiq 65% 73% 6% 80% 0.9 2.6% 4.1% Imkoniyat 81% 50% 12% 63% 1.0 25.9% 45.8% Ishkoshim 76% 47% 7% 79% 0.7 13.2% 23.0% Kiropol 92% 66% 3% 13% 7.2 14.9% 104.0% Madina 92% 51% 5% 53% 1.1 4.2% 9.4% Mehnatobod 90% 57% 8% 54% 1.1 21.0% 42.6% Oxus 85% 1% 2% 21% 4.6 5.5% 27.9% Pakhtaobod 99% 56% 1% 39% 1.6 10.2% 21.0% Service-Credit 90% 57% 1% 51% 1.2 1.5% 3.0% Vorukh 99% 57% 0% 41% 1.5 14.9% 31.9% MFI = microfinance institution, "—" denotes none, "..." denotes data not available. Sources: Audited financial statements (except Gender and Pakhtaobod); National Bank of Tajikistan (Gender and Pakhtaobod); Haft Ganj (unaudited data).

18 Appendix 2

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Loan 2000 Status of Compliance ARTICLE IV: Particular Covenants Section 4.01 (a) The Borrower shall cause the Program to be carried out with due diligence Partially complied with. and efficiency and in conformity with administrative, financial, engineering, and environmental practices. (b) In the carrying out of the Program, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 5 to this Loan Agreement. Section 4.02 The Borrower shall make available, promptly as needed, the funds, facilities, Fully complied with. services and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Program. Section 4.03 The Borrower shall ensure that the activities of its departments and agencies Partially complied with. with respect to the carrying out of the Program are conducted and coordinated in accordance with sound administrative policies and procedures. Section 4.04 (a) The Borrower shall maintain, or cause to be maintained, records and Fully complied with. documents adequate to identify the Eligible Items financed out of the proceeds of the Loan and to record the progress of the Program. (b) The Borrower shall enable the Bank’s representatives to inspect any Fully complied with. relevant records and documents referred to in para. (a) of this Section. Section 4.05 (a) The Borrower shall furnish, or cause to be furnished, to the Bank all such Fully complied with. reports and information as the Bank shall reasonably request concerning (i) the Loan, and the expenditure of the proceeds and maintenance of the service thereof; (ii) the goods financed out of the proceeds of the Loan; (iii) the Counterpart Funds and the use thereof; (iv) the implementation of the Program, including the accomplishment of the targets and carrying out of the actions set out in the Policy Letter; (v) financial and economic conditions in the territory of the Borrower and the international balance-of- payments position of the Borrower; and (vi) any other matters relating to the purposes of the Loan. (b) Without limiting the generality of the foregoing, the Borrower shall furnish, or Fully complied with. cause to be furnished, to the Bank quarterly reports on the carrying out of the Program and on the accomplishment of the targets and carrying out of the actions set out in the Policy Letter. Such reports shall be submitted in such form and in such detail and within such a period as the Bank shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter. (c) Promptly after the closing date for withdrawals from the Loan Account, but Complied with. in any event not later than three (3) months thereafter or such later date as may be agreed for this purpose between the Borrower and the Bank, the Borrower shall prepare and furnish to the Bank a report, in such form and in

Appendix 2 19

Loan 2000 Status of Compliance such detail as the Bank shall reasonably request, on the execution of the Program, including its cost, the performance by the Borrower of its obligations under this Loan Agreement and the accomplishment of the purposes of the Loan. Section 4.06 (a) It is the mutual intention of the Borrower and the Bank that no other Compliance waived.a external debt owed a creditor other than the Bank shall have any priority over the Loan by way of a lien on the assets of the Borrower. To that end, the Borrower undertakes (i) that, except as the Bank may otherwise agree, if any lien shall be created on any assets of the Borrower as security for any external debt, such lien will ipso facto equally and ratably secure the payment of the principal of, and interest charge and any other charge on, the Loan; and (ii) that the Borrower, in creating or permitting the creation of any such lien, will make express provision to that effect. (b) The provisions of para. (a) of this Section shall not apply to (i) any lien created on property, at the time of purchase thereof, solely as security for payment of the purchase price of such property; or (ii) any lien arising in the ordinary course of banking transactions and securing a debt maturing not more than one year after its date. (c) The term "assets of the Borrower" as used in para. (a) of this Section includes assets of any political subdivision or any agency of the Borrower and assets of any agency of any such political subdivision, including NBT and any other institution performing the functions of a central bank for the Borrower. Schedule 5: Program Implementation and Other Matters Coordination and Administration 1. Except as the Borrower and the Bank may otherwise agree, the Program Fully complied with. NBT, Executing Agency shall bear overall responsibility for (a) Program the Program Executing Agency, implementation, (b) ensuring the measures under the Program are carried out its assigned undertaken in line with the agreed timetable, (c) initiating withdrawals under responsibilities. the Loan, and (d) allocating and monitoring the use of Counterpart Funds. 2. (a) To ensure inter-agency coordination on Program implementation, Partially complied with. the Program Executing Agency shall be supported by the MPSC. The MPSC Although the MPSC was shall be chaired by the representative of the NBT and shall include eventually constituted in the representatives from the President’s Office, Ministry of Finance, Ministry of required form, this did not occur Justice, Ministry of State Revenue and Duties, two separate NGOs and other until June 2006, when it held its agencies of the Borrower as may be required. The Project Director shall also initial meeting. The MPSC did not be a part of MPSC and the Project Manager shall act as secretary to MPSC. meet at least once every Representatives of the Bank and other donor agencies shall participate as 3 months during the first 12 observers. The MPSC shall meet at least once every three months during the months of the project first twelve months of the Project implementation period and annually implementation period and thereafter, unless circumstances require more frequent meetings, to annually thereafter. (i) ensure that the policies and actions in connection with the Program set out in the Policy Letter and the Policy Matrix attached to the Policy Letter are carried out in accordance with the schedule of policy reforms included in the Policy Matrix; (ii) provide inter-agency coordination on important policy, legal and regulatory issues related to the establishment and operation of MFIs; and (iii) facilitate the coordination and cooperation between the Borrower, the Executing Agency, NGOs and donor agencies.

20 Appendix 2

Loan 2000 Status of Compliance (b) The Borrower shall ensure that the MPSC is maintained, with Not complied with. However, ADB composition and terms of reference satisfactory to the Bank, throughout the acceded to its nonmaintenance implementation period of the Program and the Project. after 2006. Implementation of the Policy Letter 3. The Borrower shall (i) ensure that the policies adopted and actions taken as Fully complied with. described in the Policy Letter, including the Policy Matrix, prior to the date of this Loan Agreement continue in effect for the duration of the Program period and subsequently; and (ii) promptly adopt the other policies and take the other actions indicated in the Program as specified in the Policy Letter, including the Policy Matrix, and ensure that such policies and actions continue in effect for the duration of the Program period and subsequently. Policy Dialogue 4. The Borrower shall keep the Bank informed of, and the Borrower and the Fully complied with. Bank shall from time to time exchange views on, the progress made in carrying out the Program. The Borrower shall engage in policy dialogue with the Bank, in a timely manner, on problems and constraints encountered during Program implementation and on desirable changes to overcome or mitigate such problems and constraints. 5. The Borrower shall keep the Bank informed of policy discussions with other Fully complied with. multilateral and bilateral aid agencies that have implications for implementation of the Program, and shall provide the Bank with an opportunity to comment on any resulting policy proposals. The Borrower shall take the Bank’s views into consideration before finalizing and implementing any such proposals. Use of Counterpart Funds 6. The Counterpart Funds shall be used to support the cost of reforms to be Fully complied with. initiated and implemented under the Program. Any Counterpart Funds not required for the Program shall be used first to finance the local currency costs of the Project, second the local currency costs of other projects financed by the Bank, and third to finance expenditures for the general development purposes of the Borrower. Monitoring of the Program 7. The Borrower shall ensure that NBT (i) monitors the implementation of the Not complied with. Only PMU Program and its impacts, and (ii) submits to the Bank quarterly reports on progress reports and MFI the implementation of the Policy Matrix, including accomplishment of the performance monitoring reports measures set forth in the Policy Letter and the Policy Matrix. The Borrower for Loan 2001-TAJ were and the Bank shall review the implementation of the Program every six submitted to ADB. months, and assess the impact of all relevant reforms in the social security sector and labor markets, in particular, and the economy in general.

Appendix 2 21

Loan 2001 Status of Compliance ARTICLE IV: Particular Covenants Section 4.01 (a) The Borrower shall cause the Project to be carried out with due diligence and Complied with. efficiency and in conformity with sound administrative, financial, engineering and environmental practices. (b) In the carrying out of the Project and operation of the Project facilities, Partially complied with. the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 6 to this Loan Agreement. Section 4.02 The Borrower shall make available, promptly as needed, the funds, facilities, services Complied with. and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Project and for the operation and maintenance of the Project facilities. Section 4.03 (a) In the carrying out of the Project, the Borrower shall cause competent and Complied with. qualified consultants and contractors, acceptable to the Borrower and the Bank, to be employed to an extent and upon terms and conditions satisfactory to the Borrower and the Bank. (b) The Borrower shall cause the Project to be carried out in accordance with plans, design standards, specifications, work schedules and construction methods acceptable to the Borrower and the Bank. The Borrower shall furnish, or cause to be furnished, to the Bank, promptly after their preparation, such plans, design standards, specifications and work schedules, and any material modifications subsequently made therein, in such detail as the Bank shall reasonably request. Section 4.04 The Borrower shall ensure that the activities of its departments and agencies with Complied with. respect to the carrying out of the Project and operation of the Project facilities are conducted and coordinated in accordance with sound administrative policies and procedures. Section 4.05 (a) The Borrower shall make arrangements satisfactory to the Bank for insurance of Complied with. the Project facilities to such extent and against such risks and in such amounts as shall be consistent with sound practice. (b) Without limiting the generality of the foregoing, the Borrower undertakes to insure, or cause to be insured, the goods to be imported for the Project and to be financed out of the proceeds of the Loan against hazards incident to the acquisition, transportation and delivery thereof to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely usable to replace or repair such goods. Section 4.06 (a) The Borrower shall maintain, or cause to be maintained, records and accounts Complied with. adequate to identify the goods and services and other items of expenditure financed out of the proceeds of the Loan, to disclose the use thereof in the Project, to record the progress of the Project (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, the operations and financial condition of the agencies of the Borrower responsible for the carrying out of the Project and operation of the Project facilities, or any part thereof.

22 Appendix 2

Loan 2001 Status of Compliance (b) The Borrower shall (i) maintain, or cause to be maintained, separate accounts for Partially complied with. The the Project; (ii) have such accounts and related financial statements audited audited financial statements annually, in accordance with appropriate auditing standards consistently applied, for the Project were not by independent auditors whose qualifications, experience and terms of reference always submitted within 6 are acceptable to the Bank; (iii) furnish to the Bank, as soon as available but in months of the end of each any event not later than six months after the end of each related fiscal year, related fiscal year. certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors' opinion on the use of the Loan proceeds and compliance with the covenants of this Loan Agreement as well as on the use of the procedures for imprest account/statement of expenditures), all in the English language; and (iv) furnish to the Bank such other information concerning such accounts and financial statements and the audit thereof as the Bank shall from time to time reasonably request. (c) The Borrower shall enable the Bank, upon the Bank's request, to discuss the Complied with. Borrower's financial statements for the Project and its financial affairs related to the Project from time to time with the Borrower's auditors, and shall authorize and require any representative of such auditors to participate in any such discussions requested by the Bank, provided that any such discussion shall be conducted only in the presence of an authorized officer of the Borrower unless the Borrower shall otherwise agree. Section 4.07 (a) The Borrower shall furnish, or cause to be furnished, to the Bank all such reports Complied with. and information as the Bank shall reasonably request concerning (i) the Loan, and the expenditure of the proceeds and maintenance of the service thereof; (ii) the goods and services and other items of expenditure financed out of the proceeds of the Loan; (iii) the Project; (iv) the administration, operations and financial condition of the agencies of the Borrower responsible for the carrying out of the Project and operation of the Project facilities, or any part thereof; (v) financial and economic conditions in the territory of the Borrower and the international balance-of-payments position of the Borrower; and (vi) any other matters relating to the purposes of the Loan. (b) Without limiting the generality of the foregoing, the Borrower shall furnish, or Complied with. cause to be furnished, to the Bank quarterly reports on the carrying out of the Project and on the operation and management of the Project facilities. Such reports shall be submitted in such form and in such detail and within such a period as the Bank shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter. (c) Promptly after physical completion of the Project, but in any event not later than Complied with. three (3) months thereafter or such later date as may be agreed for this purpose between the Borrower and the Bank, the Borrower shall prepare and furnish to the Bank a report, in such form and in such detail as the Bank shall reasonably request, on the execution and initial operation of the Project, including its cost, the performance by the Borrower of its obligations under this Loan Agreement and the accomplishment of the purposes of the Loan. Section 4.08 The Borrower shall enable the Bank's representatives to inspect the Project, the Complied with. goods financed out of the proceeds of the Loan, and any relevant records and documents.

Appendix 2 23

Loan 2001 Status of Compliance Section 4.09 The Borrower shall ensure that the Project facilities are operated, maintained and Complied with. repaired in accordance with sound administrative, financial, engineering, environmental, and maintenance and operational practices. Section 4.10 a (a) It is the mutual intention of the Borrower and the Bank that no other external debt Compliance waived. owed a creditor other than the Bank shall have any priority over the Loan by way of a lien on the assets of the Borrower. To that end, the Borrower undertakes (i) that, except as the Bank may otherwise agree, if any lien shall be created on any assets of the Borrower as security for any external debt, such lien will ipso facto equally and ratably secure the payment of the principal of, and interest charge and any other charge on, the Loan; and (ii) that the Borrower, in creating or permitting the creation of any such lien, will make express provision to that effect. (b) The provisions of paragraph (a) of this Section shall not apply to (i) any lien created on property, at the time of purchase thereof, solely as security for payment of the purchase price of such property; or (ii) any lien arising in the ordinary course of banking transactions and securing a debt maturing not more than one year after its date. (c) The term "assets of the Borrower" as used in paragraph (a) of this Section includes assets of any political subdivision or any agency of the Borrower and assets of any agency of any such political subdivision, including NBT and any other institution performing the functions of a central bank for the Borrower. Schedule 6: Project Implementation, Relending and Onlending, and Other Matters I. PROJECT IMPLEMENTATION Project Executing Agency 1. As the Project Executing Agency, NBT shall be responsible for the following: Complied with. (i) provide overall coordination of the Project; (ii) ensure maintenance of appropriate accounts, including records on withdrawal applications and disbursements; (iii) ensure that procurement is managed in accordance with the Bank guidelines; (iv) ensure preparation and submission of quarterly progress and other reports in formats and content agreed with the Bank; (v) ensure timely submission of audited accounts of the Project to the Bank; and (vi) serve as the focal point for the Bank’s project review and administration activities, and between the Bank and the NGOs/MFIs. Microfinance Policy Steering Committee 2. (a) To ensure interagency coordination on Project implementation, the Project Partially complied with. Executing Agency shall be supported by the MPSC. The MPSC shall be chaired Although the MPSC was by the representative of the NBT, and shall include representatives from the eventually constituted in the President’s Office, Ministry of Finance, Ministry of Justice, Ministry of State required form, this did not Revenue and Duties, two separate NGOs and other agencies of the Borrower as occur until June 2006, when may be required. The Project Director shall also be a part of the MPSC and the it held its initial meeting. In Project Manager shall act as secretary to MPSC. Representatives of the Bank addition, the MPSC did not and other donor agencies shall participate as observers. The MPSC shall meet meet at least once every 3 at least once every three months, and as often as necessary, to (i) provide inter- months. agency coordination on important policy, legal and regulatory issues related to the establishment and operation of MFIs; and (ii) facilitate the coordination and cooperation between the Borrower, NGOs and donor agencies. (b) The Borrower shall ensure that the two NGO representatives in the MPSC are Complied with. selected and appointed by the NGO community.

24 Appendix 2

Loan 2001 Status of Compliance Project Management Unit 3. The PMU shall be responsible for the day-to-day implementation and coordination Complied with. of the Project. The main functions of the PMU shall be to (i) ensure that the Project is implemented in accordance with the agreements reached with the Bank; (ii) ensure effective coordination of all activities of the central and local agencies and the NGOs involved; (iii) maintain appropriate accounts, including records on withdrawal applications and disbursements; (iv) manage procurement in accordance with the Bank guidelines; (v) prepare quarterly progress and other reports in formats agreed with the Bank; and (vi) provide support to the MPSC and the TWG. The Borrower shall ensure that adequate office space with appropriate furniture, access to communication facilities and support services, satisfactory to the Bank, are provided for the PMU by NBT at all times during Project implementation. Project Director 4. The Borrower shall ensure that NBT appoints, on a half-time basis, a Project Complied with. Director approved by the MPSC. The Project Director shall be responsible for overall coordination of Project implementation and shall countersign with the Project Manager the withdrawal applications and disbursement documents. Project Manager 5. The PMU shall be headed by a Project Manager who shall be responsible for Complied with. (i) day-to-day Project implementation activities; (ii) supervision of consultants; and (iii) reporting to the Project Director on such activities. Technical Working Group 6. (a) The TWG shall be chaired by the Project Director and comprised of such staff of Partly complied with. The NBT who are responsible for legal, regulatory, supervision and foreign TWG did not meet at least investment matters within NBT, representatives from the President’s Office, once a month during the first Ministry of Finance, Ministry of Justice, Ministry of State Revenue and Duties, year of Project two separate NGOs that are different than those represented on MPSC and implementation. consultants as required. The Project Manager shall act as secretary to TWG. The purpose of the TWG shall be to: (i) promote a legal and regulatory environment conducive to the development of MFIs; (ii) facilitate cooperation between the Borrower, NBT and NGOs in the development of MFIs and related laws and regulations; (iii) address issues concerning the licensing and operations of MFIs and reach agreement on appropriate actions to be taken; and (iv) submit assessments and recommendations on policy, legal, regulatory and operational issues regarding MFIs to the MPSC. TWG shall meet at least once a month during the first year of Project implementation and as required thereafter. (b) The Borrower shall ensure that (i) the two NGO representatives in the TWG are Complied with. selected and appointed by the NGO community, and (ii) NBT appoints an alternate staff for each of the NBT staff taking part in the TWG. (c) The Borrower shall also ensure that the TWG is maintained, with composition Not complied with. However, and terms of reference satisfactory to the Bank, throughout the Project ADB acceded to the implementation period, unless otherwise agreed between the Borrower and the nonmaintenance of the Bank. TWG.

Appendix 2 25

Loan 2001 Status of Compliance II. RELENDING AND ONLENDING Relending and Onlending Arrangements As stated in original loan agreement: 7. (a) Without prejudice to the provisions of Section 3.01 of the Loan Agreement and Complied with amended except as otherwise agreed between the Borrower and the Bank, the Borrower subparagraph (a). shall relend to NBT the proceeds of the Loan in Somoni and at zero percent

interest rate. The relending of that portion of the Loan which is allocated for a credit line to MFIs (Category 4, Allocation Table, Attachment to Schedule 3 to this Loan Agreement) shall become effective only after the MFIs are duly licensed to operate. As amended as of 24 May 2007 (changes in italics): (a) Without prejudice to the provisions of Section 3.01 of the Loan Agreement and except as otherwise agreed between the Borrower and the Bank, the Borrower shall relend to NBT the proceeds of the Loan in US Dollar and at one and a half percent per annum interest rate. The relending of that portion of the Loan which is allocated for a credit line to MFIs (Category 4, Allocation Table, Attachment to Schedule 3 to this Loan Agreement) shall become effective only after the MFIs are duly licensed to operate. As stated in original loan agreement: Complied with amended (b) The Borrower shall ensure that NBT onlends such proceeds to eligible PCBs subparagraph (b). selected in accordance with eligibility criteria agreed between the Borrower and the Bank (i) in Somoni, (ii) at a rate not less than NBT’s published discount or refinancing rate, which shall be positive in real terms, and acceptable to the Bank, (iii) initially for a term of one year and up to ten years thereafter, and (iv) under sub-loan agreements acceptable to the Bank. As amended as of 24 May 2007 (changes in italics): (b) The Borrower shall ensure that NBT onlends such proceeds to eligible PCBs selected in accordance with eligibility criteria agreed between the Borrower and the Bank (i) in US Dollar notional amounts disbursed and repaid in Somoni at the NBT's exchange rate on the date of payment, (ii) at the London interbank offered rate for six-month deposits in US dollars (the "6 months USD LIBOR") as published by the British Bankers Association (iii) for a term of up to ten years, and (iv) under sub-loan agreements acceptable to the Bank. As stated in original loan agreement: Complied with amended (c) The Borrower shall cause NBT to ensure that the PCBs further onlend the funds subparagraph (c). borrowed from NBT to eligible MFIs or sub-borrowers (i) in Somoni, (ii) at market-based interest rates that take into account PCBs’ cost of funds, administrative expenses and a reasonable risk premium to cover potential losses, (iii) within three working days of the PCBs’ receipt of the funds from NBT, (iv) initially for a term of one year and up to ten years thereafter, and (v) under credit agreements acceptable to the Bank and NBT. As amended as of 24 May 2007 (changes in italics): (c) The Borrower shall cause NBT to ensure that the PCBs further onlend the funds borrowed from NBT to eligible MFIs or sub-borrowers (i) in US Dollar notional amounts disbursed and repaid in Somoni at the NBT exchange rate on the date of payment, (ii) at market-based interest rates that take into account PCBs’ cost of funds, administrative expenses and a reasonable risk premium to cover potential losses, (iii) within three working days of the PCBs’ receipt of the funds from NBT, (iv) initially for a term of one year and up to ten years thereafter, and (v) under credit agreements acceptable to the Bank and NBT.

26 Appendix 2

Loan 2001 Status of Compliance (d) The Borrower shall also cause NBT to ensure that, prior to onlending to eligible Complied with. MFIs, the PCBs carry out their own analysis of such MFIs, take onlending decisions independently and assume the full credit risk of such onlending. (e) The Borrower shall ensure that, except as the Borrower, NBT and the Bank may Complied with. otherwise agree, (i) the maximum amount of onlending from NBT to any single PCB shall not exceed the equivalent of $500,000 for the first year and $1,000,000 thereafter; and (ii) the maximum amount of onlending from PCBs to any single MFI shall not exceed the equivalent of $250,000 for the first year and $500,000 thereafter. (f) The relending and onlending arrangements shall be reviewed jointly by the Complied with. Borrower, the Bank, the relevant PCBs and MFIs every six months or as needed, and if required, shall be adjusted accordingly. (g) The Borrower shall also ensure that the PCBs and MFIs borrowing from the Complied with. However, credit line under Part B(v) of the Project (i) maintain an accounting system and many annual audits were not records in accordance with the local accounting standards applicable to financial completed (and submitted to institutions, which shall be acceptable to the Bank, (ii) are subject to close ADB) within 6 months of the supervision of NBT and comply with NBT’s requirements on their financial end of the corresponding operations, and (iii) cause annual audits to be carried out on their financial and fiscal year, thereby delaying accounting operations by external auditors acceptable to the Bank. ADB's evaluation of compliance with Project requirements. Eligibility Criteria for PCBs 8. (a) Except as the Borrower and the Bank may otherwise agree, the PCBs which meet the following eligibility criteria shall be able to participate in the Project: The respective PCBs (i) shall be duly licensed; Fully complied with. (ii) shall be in compliance with all NBT prudential requirements applicable to Partially complied with. In PCBs; 2007, Agroinvestbank (AIB) did not comply with one prudential requirement. AIB fully complied in 2008. Amonatbank fully complied in both 2007 and 2008. (iii) shall have been rated satisfactory according to NBT on-site examination Partially complied with. In reports, issued by NBT, the past two calendar years; 2005, 2006, 2007, and 2008, AIB was not rated satisfactory because of insufficient reserves for loan losses. Amonatbank was rated satisfactory in all these years. (iv) shall have been profitable for the past two calendar years as demonstrated Fully complied with. by externally audited financial statements prepared in accordance with the International Accounting Standards; (v) shall have capital, relative to risk weighted assets, of fifteen percent; Fully complied with. (vi) shall have been profitable, as measured by return on average assets of at Partially complied with. AIB's least two percent for the past two calendar years; return on average assets (ROAA) exceeded 2% in 2006 and 2007, but was only 0.7% in 2008. Amonatbank's ROAA exceeded 2% in all 3 years.

Appendix 2 27

Loan 2001 Status of Compliance (vii) shall be in full compliance with NBT loan classification and loan Partially complied with. At the provisioning requirements, and in addition shall have set aside one percent end of 2007 and end of 2008, of loans as general reserve; (i) AIB was not in full compliance because of insufficient reserves for loan losses, and (ii) Amonatbank fully complied. (viii) shall have demonstrable capacity to analyze credit risk of MFIs; and Fully complied with. (ix) shall be in compliance with any additional criteria recommended by NBT, Not applicable; no other MPSC or TWG and approved by the Bank. criteria were imposed. (b) In addition to the above-mentioned criteria, the Borrower shall also ensure that, Fully complied with. before the funds are made available to the PCBs, such PCBs have entered into subloan agreements satisfactory to the Bank, with NBT with respect to onlending of the funds to the MFIs or sub-borrowers. 9. (a) Should a PCB be found not to be in compliance with the abovementioned Not complied with. Although criteria, NBT shall determine, with the prior approval of the Bank, whether the Agroinvestbank was not in full PCB concerned shall (i) prepare and implement an action plan for achieving compliance with the eligibility compliance, or (ii) shall be excluded from participation in the Project. criteria, NBT made no determination as to whether the bank should prepare an

action for achieving compliance or be excluded from the project. (b) Any PCB that is not in compliance with such criteria for more than three Not complied with. months shall be automatically excluded from the Project and all the subloans it has borrowed under the Project shall become immediately payable. In such a case, the subject PCB may not accelerate or otherwise require the MFI(s) to repay the funds lent by such PCB to the MFI(s), but shall use other sources of funds to repay NBT, provided that the MFI(s) to which the PCB has lent is/are in full compliance with the criteria applicable to such MFI(s). Transformation of NGO Microcredit Programs 10. (a) The Borrower shall, under Part B(i) of the Project, assist in transformation into Complied with. licensed MFIs of the existing NGO microcredit programs which meet the following criteria: The respective NGOs (i) shall be registered locally; (ii) shall have at least three years’ operational experience in Tajikistan providing microfinance services; (iii) shall have at least one year’s experience in providing credit in cash to groups and/or individuals; (iv) shall have loan losses of less than four percent; and shall have demonstrated willingness and capacity to meet the licensing and regulation requirements to be defined by NBT regulations. (b) The Borrower shall ensure that these and other selection criteria for the NGOs, which may be agreed upon the Borrower and the Bank from time to time, are strictly adhered to and applied objectively to ensure equal opportunity for participation in the Project. Participation Criteria for MFIs 11. (a) The Borrower shall ensure that, except as may be agreed otherwise between the Borrower and the Bank, the credit line allocated for MFIs under the Project shall be made available to such MFIs which have been transformed pursuant

28 Appendix 2

Loan 2001 Status of Compliance to the preceding paragraph provided that the respective MFIs: (i) shall be legally licensed by NBT; Complied with. (ii) shall have been in compliance with all NBT prudential requirements applicable to MFIs; (iii) shall have an average-loan-size-to-GDP-per-capita ratio of not more than Complied with. two hundred percent; As stated in original loan agreement: Partially complied with. One (iv) shall have at least fifty percent women microcredit clients; MFI (Furuz) had only 32% women borrowers at the end As amended as of 24 May 2007 (changes in italics): of 2007. One MFI (Borshud) (iv) shall have at least thirty five percent women microcredit clients; had only 34% women borrowers at the end of 2008. (v) shall have achieved operational sufficiency, measured by a positive self- Partially complied with. For sufficiency ratio as may be agreed between the Borrower and the Bank; 2007, Ishkoshim had an operational self-sufficiency (OSS) ratio of only 90%. For 2007 and 2008, Madina had OSS ratios of only 59% and 75%, respectively, and Haft Ganj had OSS ratios of only 95% and 98%, respectively. (vi) shall have capital, relative to risk weighted assets, of fifteen percent; Partially complied with. Kiropol's ratio for 2008 was 13%. (vii) shall be fully in compliance with NBT loan classification and loan provisioning requirements, and in addition shall have set aside one percent of loans as general reserve; (viii) shall have demonstrable capacity to analyze and manage credit risk of Complied with. MSEs and individual borrowers; and . (ix) shall be in compliance with any additional criteria recommended by NBT, Not applicable; no other MPSC or TWG, and approved by the Bank. criteria were imposed. (b) In addition to the above-mentioned criteria, the Borrower shall also ensure that, Complied with. before the funds are made available to the MFIs, such MFIs have entered into credit agreements, satisfactory to the Bank, with the PCBs with respect to further onlending of the funds to the sub-borrowers. 12. (a) Should an MFI be found not to be in compliance with the above mentioned Not complied with. Although criteria or any of the three financial ratio limits, the PCB, in consultation with five MFIs were not always in NBT and with the prior approval of the Bank, shall determine whether the MFI full compliance with the concerned shall (i) prepare and implement an action plan for achieving eligibility criteria, the NBT compliance, or (ii) shall be excluded from the participation in the Project. made no determination as to whether they should prepare an action for achieving compliance or be excluded from the Project. (b) Any MFI that is not in compliance with such criteria for more than three months Not complied with. shall be automatically excluded from the Project and all the loans it has borrowed from PCBs under the Project shall become immediately payable. The respective PCB, upon receipt of funds from such MFI, shall repay the same amount to NBT under its corresponding subloan within three working days.

Appendix 2 29

Loan 2001 Status of Compliance MFIs’ Lending to Sub-borrowers 13. The Borrower shall ensure that, except as may be otherwise agreed between the Borrower and the Bank, the MFIs use the funds borrowed from the PCBs solely for lending to the sub-borrowers, including MSEs, or for purchase of fixed assets provided that: (i) the ratio of an MFI’s total loans as a percentage of its total assets shall at no Partially complied with. One time be less than seventy percent; MFI (Haqiq) had a ratio of 65% at the end of 2008. (ii) the ratio of an MFI’s borrowings from the credit line under the Project to its Partially complied with. The total customer loans (loan portfolio) shall at no time be greater than fifty ratios at the end of 2008 of percent; and seven MFIs (Haqiq, Kiropol, Madina, Mehnatobod, Pakhtaobod, Service-Credit, and Vorukh) exceeded 50% by between 1% and 23% (Table A1.4). (iii) the ratio of an MFI’s fixed assets to its total assets shall at no time be greater Partially complied with. The than ten percent. ratios at the end of 2008 of two MFIs (Furuz and Imkoniyat, both 12%) exceeded 10%. PCBs' Lending to Sub-borrowers 14. The Borrower shall also ensure that, except as may be otherwise agreed between Not applicable. No PCB the Borrower and the Bank, the PCBs are allowed, subject to the prior approval of borrowed funds from the the Bank and NBT, to borrow funds from the credit line under the Project for credit line under the Project lending directly to the sub-borrowers, including MSEs, or for fixed-asset for lending directly to the sub- purchases provided that such PCBs: borrowers. (i) shall have an average-loan-size-to-GDP-per-capita ratio of not more than two hundred percent; (ii) shall have at least fifty per[cent] women microcredit clients; and (iii) shall have been in compliance with the ratios defined under paragraph 13 of this Schedule. III. OTHER MATTERS Liquidity Guarantee Fund 15. (a) The Borrower shall establish the LGF, under Part B(iv) of the Project, to Not complied with. The fund provide short-term funds to MFIs on terms similar to the refinance facility was never established. provided to the commercial banks by NBT. (b) The Borrower shall ensure that, to be eligible to drawdown from the LGF, MFIs are in compliance with the relevant NBT regulations and have maintained the required levels of liquidity prior to their application for funds from the LGF. (c) The Borrower shall also ensure that funds from LGF are made available to the MFIs within twenty-four hours of their application, for a period of up to ninety days. (d) Prior to the establishment of the LGF, the Borrower shall prepare, in consultation with the Bank, NBT and the MFIs, operational procedures for the LGF, including establishment of limits on the amounts that can be drawn down by the MFIs and repayment procedures.

30 Appendix 2

Loan 2001 Status of Compliance MFI Legislation 16. The Borrower shall ensure reasonable and consistent application by its respective Complied with. authorities of all laws, regulations and procedures applicable to MFIs, throughout the territory of the Borrower. MFI Supervision 17. The Borrower shall ensure that within twelve months after the Effective Date, Complied with. an MFI supervision unit comprising minimum two qualified professional staff is established within NBT. Training 18. (a) The Borrower shall ensure that the external training to be provided under Part Not complied with. The C of the Project is conducted by institutions selected and engaged in training was provided by PMU accordance with procedures acceptable to ADB, taking into account staff, not by institutions. considerations of economy and efficiency. (b) The Borrower shall also ensure that the training activities undertaken by the Project shall have no less than fifty percent women participants. Counterpart Funds 19. Without prejudice to the obligations of the Borrower under Section 4.02 of the Complied with. Loan Agreement, the Borrower shall ensure that adequate annual budgetary allocations are made and counterpart funds are released on a timely basis for the Project. Technical Assistance 20. The Borrower shall take into account the recommendations of the Technical Complied with. Assistance and take all necessary actions to ensure that an appropriate regulatory framework is in place to enable effective functioning of the MFIs and enforcement of the regulations. Supervision and Midterm Reviews 21. (a) The Borrower and the Bank shall jointly undertake (i) two semiannual reviews Complied with. in the first year of the Project implementation and until such time when such frequency is no longer considered necessary, and (ii) annual reviews thereafter. (b) The Borrower, the Bank, NBT and the relevant MFIs shall jointly undertake a comprehensive midterm review of the Project after the eighteenth month of the Project implementation period to assess the overall performance of the Project and the need, if any, for changes in its design and implementation arrangements. Environment 22. (a) The Borrower shall ensure that the Project is carried out, and all Project Complied with. facilities are constructed, operated, maintained and monitored, in accordance with the existing laws, regulations and standards of the Borrower concerning environmental protection, and the Bank's environmental guidelines. (b) The Borrower shall also ensure that appropriate environmental mitigation and monitoring activities are undertaken by NBT, the PCBs and the MFIs in their respective relending and onlending operations under the Project. Project Performance Monitoring System 23. (a) The Borrower shall ensure that (i) an integrated system of data collection and Not complied with. analysis is designed and implemented to monitor the progress of the Project in achieving its objectives, (ii) the project performance monitoring system provides the Borrower and the Bank with the necessary data and tools to

Appendix 2 31

Loan 2001 Status of Compliance monitor the Project inputs, outputs and objectives as agreed between the Borrower and the Bank, and (iii) the project performance monitoring system assesses the technical, social and economic effects of the Project, including its impact on poverty reduction, periodically through qualitative surveying, supported by the outreach indicators achieved by the MFIs. (b) The Borrower shall cause NBT to submit to the Bank an annual monitoring report on the progress of the Project in achieving its objectives. ADB = Asian Development Bank, AIB = Agroinvestbank, GDP = gross domestic product, LGF = Liquidity Guarantee Fund, MFI = microfinance institution, MPSC = microfinance policy steering committee, MSE = micro and small enterprise, NBT = National Bank of Tajikistan, NGO = nongovernment organization, OSS = operational self-sufficiency, PCB = participating commercial bank, PMU = project management unit, ROAA = return on average assets, TWG = technical working group. a ADB. 2009. Tajikistan: Request for Waiver of Negative Pledge Clause. Manila.

32 Appendix 3

PROGRAM FRAMEWORK

Performance Monitoring Risks and Design Summary Targets Mechanism Assumptions Comments Program Goal

Create a strong, Increased volume National statistics Between December commercially- of deposits in the 2004 and April 2009, viable financial sector deposits increased microfinance from TJS292 million to sector Substantial links NBT reports TJS1,913 million, the (deposits and number of types of loans) between financial institutions MFIs and increased from 2 to 5, commercial banks and the number of Reports of financial institutions Increased number commercial banks increased from 17 to and diversity of and MFIs 122. During the same financial period, the number of institutions banks remained constant at 12, the number of credit societies increased from 5 to 7, the number of MDOs increased from 0 to 18, the number of MLOs increased from 0 to 42, and the number of MLFs increased from 0 to 42.

Program Purpose

Establish a 60,000 NBT reports Economic and As of 31 December regulated households nonfinancial 2008, MFIs had more microfinance reached by MFIs MFI reports constraints do not than 93,000 clients. market where hinder poverty micro- and small Project reduction. enterprises and completion report poor households have access to financial products provided through sustainable MFIs

A. Policy Loan Purpose

Create a legal, More NGO MFIs Between 2005 and regulatory, and registered 2008, more than 50 supervisory NGOs engaged in environment that More MFIs microlending supports the licensed and registered under a law development of a regulated on microfinance

Appendix 3 33

Performance Monitoring Risks and Design Summary Targets Mechanism Assumptions Comments strong, organizations. commercially- Donor and NGO viable activity directed to The number of microfinance form MFIs licensed and regulated sector MFIs has increased each year. From 0 in 2003 and 2004, there were 21 in 2005, 55 in 2006, 70 in 2007, 92 in 2008, and 102 in April 2009.

Components/Outputs

The components and outputs for the policy loan are in the policy matrix (Appendix 4).

B. Project Loan

Purpose

Expand the At least two MFIs Audited financial Macroeconomic More than 90% of outreach and in total statements conditions favor registered MFIs are sustainability of compliance with the development believed to comply MFIs that serve legal and of financial with all legal and micro- and small regulatory institutions. regulatory enterprises and requirements NBT supervision requirements in all poor households reports Rates of inflation material respects. by transforming and currency the unregulated Outreach of MFIs MFI reports depreciation are Outreach increased by credit program to increased 100% lowered and more than 350% from licensed, stable. the end of 2004 to the regulated financial end of 2008. institutions About 75% of MFI reports, NBT MFI, NGO, and borrowers are reports customer Although the number initially poor. accounts are of borrowers who were Audited financial protected from initially poor cannot be statements, MFI extralegal taxation quantified in 2008, reports, NBT and appropriation 39% of MFI loans were reports by all state and less than $500, and local authorities. 74% of MFI loans were $1,000 or less. Competing 50% of clients are financial As of the end of 2008, women. institutions and 44% of borrowers from NGOs charge the largest 13 MFIs market rates of that report to the interest. MixMarket (www.mixmarket.org) State agencies were women. support MFI development. 10% of each As of the end of May MFI’s loan MFIs meet clients’ 2009, the 11 deposit- portfolio matched needs. taking MFIs had

34 Appendix 3

Performance Monitoring Risks and Design Summary Targets Mechanism Assumptions Comments by savings deposits equaling the deposits following percentages of their loan portfolio: Amlok, 12%; Bunyodi Jam, 89%; Credit-Express, 89%; Finansoviy Dom, 46%; Finansoviy Dom Barakat, 1%; Kiropol-Express, 28%; Muzaffariyat, 51%; Nisor Dom, 34%; Saydahmad, 23%; Service-Credit, 2%; and Spitamen Capital, 81%.

Performance relative MFIs achieve or to indicators of the 14 surpass specific MFIs participating in performance the Program's credit indicators line component is developed under shown in Table A1.4 the Program, and Table A1.1 according to (PAR>30). scheme outlined Performance was in Appendix 13 of excellent with all the RRP indicators except for the ratio of credit line debt to loan portfolio (7 of 14 MFIs exceeded the 50% maximum ratio).

Components/ Outputs 1. Legal and Regulatory Framework

1.1 Legal Transparent Documented laws The state Transparent environment registration and and procedures continues reform registration and favorable to licensing process toward a licensing procedures MFIs procedures Progress reports market-oriented were established. established and system. documented

Law on MFIs Documented laws A law on microfinance ratified by and procedures organizations was Parliament; enacted in May 2004; amended Progress reports amended tax legislation legislation was approved by enacted in December Parliament 2004.

Appendix 3 35

Performance Monitoring Risks and Design Summary Targets Mechanism Assumptions Comments 1.2 Regulations Regulations Progress reports State and local NBT regulations 135, established developed authorities agree 136, and 137 were and enforced essential to the on reasonable adopted by NBT's sound operation and consistent board of directors in of MFIs in force application of laws March 2005 and by the end of year and procedures registered by the 1 for MFIs. Ministry of Justice in May 2005. MFI customers Regulations are free of extralegal accepted by attachments participating NGOs before they become MFIs.

1.3 Community Laws and Newspapers Normative documents awareness of regulations placed relating to MFIs (e.g., all MFI laws, in public domain Publications law on microfinance regulations, organizations and and activities NBT website regulations 135, 136, and 137) are found in the legal documents (Нормативные документы) section of NBT’s website (http://nbt.tj/).

Approximately 20 MFIs Financial have posted their statements of audited financial MFIs publicized statements on the MixMarket website (www.mixmarket.org). 2. Established MFIs

2.1 Strong, well- Two deposit- External International Two deposit-taking managed taking MFIs management and NGOs remain MFIs were licensed as MFIs licensed, fully financial audit supportive during of April 2006 (18 as of operational, and the April 2009). AMFOT financially self- transformation. members had an sufficient average OSS ratio of MFIs are able to 154.5% in 2008. Functioning board attract a balance of directors of equity and debt The sub-borrower financing. agreements between Separation of the participating banks supervision from No significant tax and the participating management and other MFIs required disincentives (i) average loan size Functioning hinder the not exceeding 200% of internal audit formation and GDP, (ii) at least 35% system operation of MFIs. women customers, and (iii) a ratio of Full set of capital to risk-weighted

36 Appendix 3

Performance Monitoring Risks and Design Summary Targets Mechanism Assumptions Comments management and assets of at least 15%. financial reports Performance relative to indicators of the 14 MFIs achieve or MFIs participating in surpass specific the Program's credit performance line component is indicators shown in Table A1.4 developed under and Table A1.1 the Program, (PAR>30). according to Performance was scheme outlined excellent with all in Appendix 13 of indicators except for the RRP the ratio of credit line debt to loan portfolio (7 of 14 MFIs exceeded the 50% maximum ratio).

Most MFIs retained all of their earnings. Adequate Ten of the 14 MFIs retention of participating in the earnings sufficient program's credit line to maintain and component increased expand equity their equity base by at base least 19% from the end of 2007 to the end of 2008.

One MFI, Microinvest, has been able to Ability to attract attract an unaffiliated equity investors institutional equity and members investor, Frontiers, a Kyrgyz entity. 2.2 Diversified At least two Progress reports Procedures for At least a majority of savings and savings products eligibility and (if not all) deposit- loan products developed for access are well- taking MFIs are and other each MFI in all established and offering at least two services locations understood by savings products. developed MFIs. that meet No pilot liquidity fund customer MFIs able to has been established. needs, and access funds pilot liquidity within 24 hours guarantee fund Drop-out rates of This performance established existing target was not customers less measured. than 10% 3. Institutional Strengthening

Appendix 3 37

Performance Monitoring Risks and Design Summary Targets Mechanism Assumptions Comments 3.1 Supervision Appointment of at Progress reports NBT complies NBT has five capacity in least two more with requirements. professional staff NBT professional staff exclusively responsible established members for MFI supervision, up exclusively from two part-time staff responsible for in 2005. MFI supervision. 3.2 Supervision Accurate and Monthly reports Training is MFIs generally submit methods and timely reports submitted by MFIs appropriate and timely reports to NBT, procedures submitted to and effective. and accuracy is effectively used by NBT improving. implemented Examiner’s by trained NBT conducts reports NBT regularly NBT staff regular and conducts off-site effective off-site supervision for all MFIs and on-site and annual on-site Supervision. supervision of all MDOs.

3.3 Capable Operating Progress reports Most trained staff These performance domestic staff procedures and members remain targets will be operating manuals followed with MFIs. addressed in the MFIs performance Increased ratio of completion report of customer to staff the investment loan.

3.4 Development Training courses Progress reports These performance of and materials targets will be management prepared addressed in the and human performance resources in Basic training completion report of MFIs needs met with the investment loan. MFI resources

External training identified and attended

Clear recruitment policies

Clear performance targets and incentives for staff

4. Project Timely ADB review International and There was a 2-year Management implementation missions domestic delay in establishing consultants are the project Funds disbursed Regular reports employed on time, management unit. efficiently and from NBT, project provide effective used properly management unit, support, and Audited financial and MFIs perform statements of satisfactorily. participating banks and

38 Appendix 3

Performance Monitoring Risks and Design Summary Targets Mechanism Assumptions Comments All participating Implementation MFIs were almost institutions and management never filed on time, provide reports as arrangements and some audited required follow approved financial statements project guidelines. were never provided.

Agencies cooperate.

Adequate and capable counterpart staff members are appointed.

Adequate counterpart funds are provided on time.

ADB = Asian Development Bank, AMFOT = Association of Microfinance Organizations in Tajikistan, GDP = gross domestic product, MDO = microcredit deposit organization, MFI = microfinance institution, MLF = microlending fund, MLO = microlending organization, NBT = National Bank of Tajikistan, NGO = nongovernment organization, OSS = operational self-sufficiency, PAR>30 = portfolio at risk over 30 days, RRP = report and recommendation of the President. Sources (in addition to those specified under monitoring mechanism): AMFOT. 2008 Analysis of AMFOT Members Statistic Data: Reporting Term January 1 till December 31 of 2007. Dushanbe; NBT. 2008 Banking Statistics Bulletin— August ’08. Dushanbe.

Appendix 4 39

POLICY MATRIX

Measures to Be Monitoring Responsible Time Frame Time Frame Objective Taken Mechanism Agencies (at appraisal) (actual) A. Policy and Strategy for Microfinance 1. Formulate a Prepare a policy Policy NBT, Office of Completed policy and statement in statement, the President strategy to consultation with acceptable to develop donors and ADB, submitted microfinance existing MFIs by the services Government

Release a policy Publicity NBT, Office of Before loan statement to the documentation the President negotiations public submitted to ADB B. Favorable Legal Environment for Microfinance 1. Establish Prepare a draft Final draft NBT Completed Completed appropriate law on reviewed by legislation for microfinance ADB and other MFIs stakeholders

Adopt a law on Law acceptable Office of the 9 months after 2 months prior MFIs to ADB and President, loan to loan other Parliament effectiveness effectiveness stakeholders, (second (May 2004) ratified by tranche) Parliament, and submitted to ADB

Harmonize Amendments NBT, MPSC, 12 months after No existing prepared by Office of the loan amendments legislation with NBT and President effectiveness required the Law on reviewed by the Microfinance, TWG including, but not Office of the 18 months after limited to, the Amendments President loan Law on the ratified by effectiveness National Bank of Parliament Tajikistan, and NBT 18 months after the Law on List of loan Banks and amended effectiveness Banking legislation submitted to ADB 2. Establish a tax Provide a letter Letter of Ministry of 6 months after environment of instruction to instruction to State loan supportive of NBT clarifying NBT and Revenues and effectiveness the the tax level for copied to ADB Duties establishment each category of and MFI development of Record of NBT Program period Program MFIs Review and consultation period amend the tax meetings with code to provide the TWG and

40 Appendix 4

Measures to Be Monitoring Responsible Time Frame Time Frame Objective Taken Mechanism Agencies (at appraisal) (actual) a fair and MPSC consistent tax regime Draft NBT 18 months after appropriate to amendments loan MFIs submitted to effectiveness ADB for review 24 months after 5 months after Amendments Office of the loan loan approved by President, effectiveness effectiveness Parliament Parliament (second (December tranche) 2004)

C. Effective Regulatory Environment for Microfinance 1. Develop Develop Draft NBT 9 months after effective prudential and regulations loan regulations and nonprudential reviewed by the effectiveness enforcement regulations TWG and (second mechanisms appropriate for submitted to tranche) diverse ADB categories of MFIs

Issue an Instruction NBT 12 months after instruction for issued and loan accreditation and submitted to effectiveness licensing of MFIs ADB

Review and Regulations NBT Twelve months 10 months harmonize approved by after loan after loan regulations with NBT and effectiveness effectiveness the Law on submitted to (May 2005) Microfinance, ADB including but not limited to regulations 83 and 84 and draft resolution 19

Establish and Monthly reports NBT 12 months after maintain an MFI of MFIs being loan supervision processed effectiveness capacity comprising at Financial sector NBT 12 months after least two information for loan professional staff MFIs published effectiveness members in NBT quarterly

Regular on-site NBT Coincide with inspections licensing of conducted MFIs

Appendix 4 41

Measures to Be Monitoring Responsible Time Frame Time Frame Objective Taken Mechanism Agencies (at appraisal) (actual) D. Institutions for Microfinance Development 1. Develop an Establish an Presidential Office of the Loan Loan institutional MPSC decree issued President effectiveness effectiveness structure for and submitted (July 2004) micro-finance, Establish a to ADB and license TWG that MFIs includes the Record of NBT Program Government, meetings period NBT, and nongovernment Presidential Office of the Loan Loan organizations decree issued President effectiveness effectiveness and submitted (July 2004) to ADB

Operating Record of NBT Program license issued to meetings period two deposit- NBT taking MFIs Copy of 24 months 21 months licenses after loan after loan submitted to effectiveness effectiveness ADB (second (April 2006) tranche)

ADB = Asian Development Bank, MFI = microfinance institution, MPSC = microfinance policy steering committee, NBT = National Bank of Tajikistan, TWG = technical working group. Source: Asian Development Bank.