Document of The World Bank FOR OFFICIAL USE ONLY
Public Disclosure Authorized Report No: ICR00004184
IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-48970)
ON A
CREDIT
IN THE AMOUNT OF SDR 18.1 MILLION Public Disclosure Authorized (US$28.2 MILLION EQUIVALENT)
TO THE
THE REPUBLIC OF MALAWI
MINISTRY OF FINANCE, ECONOMY AND DEVELOMENT FOR THE
MALAWI - FINANCIAL SECTOR TECHNICAL ASSISTANCE PROJECT (P122616) Public Disclosure Authorized
May 29, 2019
Finance, Competitiveness and Innovation Global Practice Africa Region
Public Disclosure Authorized
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective
Currency Unit = Malawi Kwacha (MK) MK 726.35 = US$1 US$1 = SDR 0.71
FISCAL YEAR January 1 – December 31
ABBREVIATIONS AND ACRONYMS
ACH Automated Clearing House ADR Alternative Dispute Resolution ATM Automated Teller Machine ATS Automated Transfer System CAS Country Assistance Strategy CSD Central Securities Deposit CDS Central Depository System CPFL Consumer Protection and Financial Literacy DFID U.K. Department for International Development EFT Electronic Funds Transfer FIU Financial Intelligence Unit FM Financial Management FSAP Financial Sector Assessment Program FSDT Financial Sector Deepening Trust FSPU Financial Sector Policy Unit FSTAP Financial Sector Technical Assistance Project GCI Global Competitiveness Index GDP Gross Domestic Product GoM Government of Malawi IFMIS Integrated Financial Management Information System IFR Interim Financial Report IMF International Monetary Fund ISR Implementation Status and Results Report M&E Monitoring and Evaluation MFI Microfinance Institution MGDS Malawi Growth and Development Strategy MFSDS Malawi Financial Sector Development Strategy MFSDT Multi-Donor Financial Sector Deepening Trust MNO Mobile Network Operators MOF Ministry of Finance MSB Malawi Savings Bank MSE Malawi Stock Exchange MSMEs Micro, Small, and Medium Enterprises MTR Midterm Review M&E Monitoring and Evaluation NBFI Non-Bank Financial Institution NFIS National Financial Inclusion Strategy PAD Project Appraisal Document PDO Project Development Objective PIU Project Implementation Unit RBM Reserve Bank of Malawi RTGS Real Time Gross Settlement SACCO Savings and Credit Cooperative STEP Systematic Tracking of Exchanges in Procurement TOR Terms of Reference TPH Transactional Processing Hub TTL Task Team Leader
Vice President: Hafez Ghanem Country Director: Bella Bird Senior Global Practice Director: Sebastian-A Molineus Practice Manager: Niraj Verma Task Team Leader(s): Thilasoni Benjamin Musuku, Efrem Zephnath Chilima ICR Main Contributor(s): Sathyanadhan Achath
TABLE OF CONTENTS DATA SHEET ...... 1 ABSTRACT ...... 5 I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ...... 8 A. CONTEXT AT APPRAISAL ...... 8 B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE) ...... 14 II. OUTCOME ...... 17 A. RELEVANCE OF PDOs ...... 17 B. ACHIEVEMENT OF PDOs (EFFICACY) ...... 18 D. JUSTIFICATION OF OVERALL OUTCOME RATING ...... 22 E. OTHER OUTCOMES AND IMPACTS (IF ANY) ...... 22 III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ...... 25 A. KEY FACTORS DURING PREPARATION ...... 25 B. KEY FACTORS DURING IMPLEMENTATION ...... 27 IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME ...... 28 A. QUALITY OF MONITORING AND EVALUATION (M&E) ...... 28 B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE ...... 29 C. BANK PERFORMANCE ...... 30 D. RISK TO DEVELOPMENT OUTCOME ...... 31 V. LESSONS AND RECOMMENDATIONS ...... 33 ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ...... 36 ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION ...... 56 ANNEX 3. PROJECT COST BY COMPONENT ...... 58 ANNEX 4. EFFICIENCY ANALYSIS ...... 59 ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS...... 60 ANNEX 6. SUPPORTING DOCUMENTS (IF ANY) ...... 117 ANNEX 7. SPLIT RATING CALCULATION ...... 118 ANNEX 8. MALAWI BASELINE FINANCIAL LITERACY AND CONSUMER PROTECTION HOUSEHOLD SURVEY 119 ANNEX 9. MALAWI FOLLOW-UP FINANCIAL LITERACY AND CONSUMER PROTECTION SURVEY ...... 127
The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
DATA SHEET
BASIC INFORMATION
Product Information Project ID Project Name
P122616 Malawi - Financial Sector Technical Assistance Project
Country Financing Instrument
Malawi Investment Project Financing
Original EA Category Revised EA Category
Not Required (C) Not Required (C)
Organizations
Borrower Implementing Agency
Ministry of Finance, Economic Planning and Reserve Bank of Malawi Development
Project Development Objective (PDO)
Original PDO The project aims to increase access to finance for the currently unbanked, but bankable, population of Malawi.
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
FINANCING
Original Amount (US$) Revised Amount (US$) Actual Disbursed (US$) World Bank Financing
28,200,000 28,200,000 26,280,042 IDA-48970 Total 28,200,000 28,200,000 26,280,042
Non-World Bank Financing 0 0 0 Borrower/Recipient 0 0 0 Total 0 0 0 Total Project Cost 28,200,000 28,200,000 26,280,042
KEY DATES
Approval Effectiveness MTR Review Original Closing Actual Closing 24-Mar-2011 22-Dec-2011 03-Nov-2014 31-Aug-2016 29-Jun-2018
RESTRUCTURING AND/OR ADDITIONAL FINANCING
Date(s) Amount Disbursed (US$M) Key Revisions 29-Oct-2015 17.55 Change in Results Framework Change in Components and Cost Change in Loan Closing Date(s) Reallocation between Disbursement Categories Change in Implementation Schedule 28-Aug-2017 25.09 Change in Results Framework Change in Loan Closing Date(s) Change in Legal Covenants Change in Implementation Schedule
KEY RATINGS
Outcome Bank Performance M&E Quality Moderately Satisfactory Moderately Satisfactory Modest
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
RATINGS OF PROJECT PERFORMANCE IN ISRs
Actual No. Date ISR Archived DO Rating IP Rating Disbursements (US$M) 01 22-Sep-2011 Satisfactory Satisfactory .15
02 29-Jun-2012 Satisfactory Satisfactory 1.63
03 05-Jan-2013 Satisfactory Satisfactory 1.63
04 06-Jul-2013 Satisfactory Moderately Satisfactory 5.88
05 29-Dec-2013 Satisfactory Satisfactory 6.83
06 25-Jun-2014 Satisfactory Satisfactory 11.22
07 15-Jan-2015 Moderately Satisfactory Moderately Satisfactory 13.97
08 08-Sep-2015 Moderately Satisfactory Moderately Satisfactory 17.55
09 19-Feb-2016 Moderately Satisfactory Satisfactory 17.55
10 09-Sep-2016 Moderately Satisfactory Satisfactory 19.20
11 23-Apr-2017 Moderately Satisfactory Satisfactory 24.09
12 16-Mar-2018 Moderately Satisfactory Moderately Satisfactory 25.09
13 15-Jun-2018 Moderately Satisfactory Satisfactory 25.09
SECTORS AND THEMES
Sectors Major Sector/Sector (%)
Financial Sector 100 Public Administration - Financial Sector 100
Themes Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Private Sector Development 40
Business Enabling Environment 40
Regulation and Competition Policy 40
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
Finance 55
Financial Stability 24
Financial Sector oversight and policy/banking 12 regulation & restructuring Financial Sector Integrity 12
Financial Infrastructure and Access 31
Financial inclusion 31
Public Sector Management 6
Public Administration 6
State-owned Enterprise Reform and 6 Privatization
ADM STAFF
Role At Approval At ICR
Regional Vice President: Obiageli Katryn Ezekwesili Hafez M. H. Ghanem
Country Director: Olivier P. Godron Bella Deborah Mary Bird
Senior Global Practice Director: Marilou Jane D. Uy Sebastian-A Molineus
Practice Manager: Michael J. Fuchs Niraj Verma Thilasoni Benjamin Musuku, Task Team Leader(s): Samuel Munzele Maimbo Efrem Zephnath Chilima ICR Contributing Author: Sathyanadhan Achath
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
Abstract
The Financial Sector Technical Assistance Project (FSTAP) was approved by the World Bank Board on March 24, 2011 and became effective on December 22, 2011. The project provided credit of US$28.2 million equivalent to the Government of Malawi (GoM) to pursue market-oriented reforms in its efforts to achieve sustained economic growth and meaningful poverty reduction. The Project Development Objective (PDO) was to increase access to finance for the unbanked, but bankable, population of Malawi, through a series of initiatives aimed at financial deepening and a stable financial sector that provided efficient and broad-based financial intermediation.
The success of the project initiatives is evident by the increase in the percentage of the adult population that uses formal financial institutions; increased proportion of women within the adult population that are formally banked; new financial sector regulations that are now operational; strengthened institutional capacity of regulators and supervisors, and interoperable payment switch, technology platform for MFIs and SACCOs that has been established and is now operational, and integrated card and mobile money payments capabilities.
The project was originally scheduled to close on August 31, 2016, but was extended to July 31, 2017, and yet again to June 29, 2018, to allow completion of key activities and to achieve its intended objective.
The project was restructured during which, while the PDO remained unchanged, some indicators were revised and additional PDO intermediary indicators were added during two level-2 restructurings. This was done to strengthen the results framework at Midterm Review (MTR). One project component which was designed to support the creation of a Financial Sector Deepening Trust (FSDT) which aimed to promote financial inclusion and access as well as innovation did not materialize and in part, the results framework had therefore to be modified.
The project was completed in seven years at a total cost of US$28.2 million. The project outcomes performance rating is considered ‘Moderately Satisfactory’ even though the end-line achievement rate for five out of six PDO level indicators was either above 81 percent or surpassed the target. The project mainly provided support to strengthen institutional capacity to analyze financial sector issues and develop policies and strategies relating to state owned banks, mobile money and Non-Banking Financial Institutions (NBFIs) including micro-finance institutions, upgrading of financial market infrastructure and consumer protection mechanisms which support increased access to financial services for targeted beneficiaries.
The project also provided effective lessons that may be applicable for similar operations in the sector or in other countries. Key lessons include the following:
• Readiness for execution. For the success of a project such as the FSTAP it is vital to provide high-quality technical studies to underpin key issues and considerations such as the business case for shared infrastructure and architectural design. Ensuring advance procurement of the technical consultants can also help expedite progress on activities that entail support for financial market infrastructure.
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
• Reinforcing ownership through end-user involvement throughout project lifecycle. Projects such as FSTAP with a significant focus on financial market infrastructure can benefit from creating and sustaining a “shared platform”, a mechanism promoting understanding and offering practical guidance on identifying and avoiding pitfalls and maximizing payoffs. The shared platform can act as a home for the project or serve as an initiative that is unincorporated and does not have its own legal status but provides administrative support and oversight and financial responsibility for all activities of the project. These project responsibilities are additional to the PIU team’s day-to-day programs and responsibilities. The provision of a shared platform is therefore an intentional decision to extend and reinforce ownership of the technical solution by end-users and other stakeholders. The platform could support collaboration, leadership, governance and project development, providing the opportunity for the testing of new ideas. RBM working together with the PIU facilitated stakeholder consultation and engagement on all activities on financial market infrastructure and ensured that stakeholder engagement was infused into the project throughout its lifecycle as an iterative process. The goal was to gather views of key stakeholders and arrive at common positions of the future design of the technical solutions, through a participatory and inclusive process. In this context, a mapping and identification of stakeholders should be undertaken to obtain a complete picture of key sector players in the early stages of the project. Information systems supplied should only be certified completely delivered only after installation and satisfactory test running and training involving end-users. An exit strategy for the shared platform could be incorporation or formalization as a not-for-profit or commercial entity thereby increasing the opportunity for self-financing or alternative commercial financing.
• Deliberately investing in ongoing relationship building. When a project involves multiple vendors and stakeholders, it is critical that the implementation agency and PIU teams maintain good and productive relationship with all the vendors and stakeholders. The successful application of the shared platform requires a high level of maturity, honesty, transparency, and open and ongoing conversation between the vendors, stakeholders and project leadership. There is a need to have upfront conversations – including difficult conversations if necessary - on the nature of the technology solution and business model and what is required from everyone to make it work and succeed. The development and implementation of shared infrastructures such as a national switch is a complex process requiring the active involvement of all stakeholders and keenly supported by technical working groups that bring together both bank and non-bank financial sector actors that are responsible for and empowered to consider all project outputs such as technical studies, especially business function, technical and performance requirements; governance arrangements, rules, procedures and market practices and proposals for the target architecture of the infrastructure and operating business model. In this regard, PIU teams should focus on facilitating the transfer of good practices and sharing of lessons and experiences. There are formal and informal pathways that need to be established for consistent communication to continually build the relationship and identify and address issues early on.
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
• Proactive problem solving with preventive actions. The Implementation agency and PIU teams should stay on top of process inputs, outputs, and other information that signal trends and acting on them before they become issues. They should also involve end-users in the definition of quality and effectiveness. This is especially critical when defining the technical specifications of the technology solutions to be acquired as well as the commissioning of technical solutions.
• Project performance indicators setting and appropriate activities. A closer logic chain between the project activities and the intended outcome should be defined, and appropriate resources need to be earmarked. The relevance of the project design should be portrayed through strong articulation of activities, and a comprehensive package of a chain of interrelated actions. •
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES
A. CONTEXT AT APPRAISAL Context
1. Despite decades of development efforts supported by significant amounts of foreign aid, Malawi had experienced weak and volatile economic growth over a sustained period and had fallen behind its peers. Malawi’s growth remains an outlier even compared with that of its geographically and demographically similar peers that were at a similar stage of development in the 1990s. Malawi’s growth had been relatively volatile, with the size of fluctuations in growth per capita remaining persistently higher than the regional average since the country’s independence. Moreover, growth had been distributed unequally, with little impact on poverty. Per capita income had improved only minimally in the five decades since Malawi’s independence, and Malawi was one of the lowest per capita incomes in the world. It was therefore not surprising that poverty increased in rural areas between 2004 and 2011. Based on a cross-country comparison for 2010, Malawi was one of the poorest countries in the world, with 77.3 percent of its population living below US$1.90 per day. Moreover, it appears that whatever growth occurred was not distributed evenly across rural and urban areas and across wealth levels: between 2004 and 2011, per capita consumption declined for more than 60 percent of the rural population while increasing for almost the entire urban population (especially for those at the higher end).
2. The business environment in Malawi was challenging. The country ranked 119 out of 134 countries in the Global Competitiveness Index (GCI) and 126 for macroeconomic stability under the GCI and also ranked low for technological readiness (126). With respect to Doing Business, the 2010 survey had ranked Malawi 132 out of 183 economies. While the country had recently achieved notable reforms in Doing Business and trading across borders, much business environment work remained to be done, particularly in financial reforms. Enterprise survey data for 2009 showed access to finance as the greatest problem among the top 10 business environment constraints
3. Immediately after the 2007-2008 FSAP, the government used the FIRST Initiative to support the immediate post-FSAP follow up activities in the areas of insurance, pensions, capital markets, and microfinance activities, including the development of regulatory and supervisory frameworks related introduced financial sector laws. FIRST support also involved the preparation and adoption of the Financial Sector Development Strategy (FSDS) for 2010– 2015. The government continued to strengthen financial sector regulation and supervision utilizing several donor sources, including an IMF/Norges Bank program which helped to define the RBM’s strategies in key areas. Additional efforts were needed for RBM to build the capacity required to meet its new responsibilities for failed bank resolution, consolidated and risk-based supervision, macro-prudential analysis, market liquidity forecasting, payments system strategy, credit bureau policy, and development of supporting regulations and implementation manuals in the context of the new financial sector laws and regulations.
4. FSTAP became effective on December 22, 2011 and was implemented by the Reserve Bank of Malawi (RBM) through a subsidiary agreement signed with the Ministry of Finance. A few months thereafter, the precipitous devaluation of the Malawi kwacha in May 2012 triggered vulnerabilities in the banking sector and a liquidity situation so serious that RBM introduced an uncollateralized borrowing window. Non-Performing Loans (NPLs) rapidly followed, rising from 6.5 percent at the end of September
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
2012 to around 20 percent by December 2014. In the course of 2013, a massive public finance mismanagement scandal dubbed “cash-gate” was uncovered which involved millions of dollars of public funds being abused through fraudulent contracts through the issue of cheques to effect government payments. The prevalence of the use of cheques highlighted the need for a more robust and modern electronic funds transfer systems for government transactions and enhancing the role of the financial sector and national payments system in government payments. Again in 2013, the Cabinet resolved to divest government interest from financial institutions that government had a controlling interest. These included Malawi Savings Bank, Indebank, PRIDE and Malawi Rural Finance Corporation.
5. FSTAP was responsive to addressing the developments challenges affecting the financial sector in Malawi outlined above. The flexibility of FSTAP design enabled timely response to macro and financial sector development through third party diagnostics, encouraged government to adopt electronic funds transfer (EFT) following cash-gate, and leveraged the narrow window of opportunity offered by the government willingness to dispose of its state-owned financial institutions, and; delivered innovative interventions financial market infrastructure
Theory of Change (Results Chain)
6. In Malawi, policies and development strategies pointed out the key role of increased capacity of financial institutions to innovate and bank the unbanked and strengthened institutional capacity for financial institution regulation and supervision in bringing about the structural economic changes sought to achieve sustained economic growth and meaningful poverty reduction.
7. The project design of FSTAP was based on lesson learned from World Bank interventions in financial sector reform projects world-wide, in addition to donors’ specific experiences. Project implementation originally anticipated five years, recognizing that capacity building, dialogue and decision- making among both public and private stakeholders, drafting and implementation of new standards and regulations, and the carrying out of studies, analysis of findings, and decision-making involving follow-up take considerable coordination and time. The project deliberately adopted a focused technical design which meant that project components were not individually comprehensive in their design but formed parts of a comprehensive whole. An individual component or the project alone could not affect overall outcomes performance. As a result, development partners active in the sector came together under proposed the FSDT to support a comprehensive financial sector program, which was based on the government-endorsed Financial Sector Development Strategy (FSDS) for 2010-2015 which took a holistic approach to addressing constraints in financial sector development. See figure 1.
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
Figure 1. Results Chain
Activities Intermediate Outcomes Outcomes
Component 1 Component 1 • Strengthening legal and regulatory framework • Financial Sector Regulation and • Increase in the • Strengthening supervisory capacity of the RBM Supervisory Functions improved percentage of the adult population that use formal financial Component 2 institutions • Modernizing Real Time Gross Settlement System Component 2 • Increase in the • Designing central switch for processing payments • Financial infrastructure number of women • Improving processing efficiency for small-value improved formally banked payments • Agency banking
• Reviewing adequacy of legal framework regulations
operational Component 3 • Transactions processed by new • Strengthening financial sector regulatory Component 3 framework for consumer protection payments systems • Financial consumer protection including (a) • Enhancing institutional arrangements for and financial literacy improved Transactions volume consumer protection for financial services and value processed • Piloting consumer awareness program by Automated Transfer System; (b)
Resources:million US$28.2 Component 4 Component 4 Transactions volume • Facilitating provision of long-term finance • Ministry of Finance Financial and value processed • Strengthening Government’s capacity to Sector Policy and Governance by National Switch; formulate financing framework policies capacity strengthened, and and (c) Transactions • Developing infrastructure financing framework Framework for Finance volume and value processed by MFI Hub • Diagnostic studies for financing challenge developed • Increased number of financially literate Component 5 Component 5 population • Project Implementation Support • Implementation support provided
Page 10 of 132 Underlying Assumption: project components and FSTAP formed parts of a comprehensive Financial Sector Development Strategy 2010-2015
The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
Project Development Objectives (PDOs)
8. The PDO was to increase access to finance for the unbanked, but bankable, population of Malawi. The objective was designed to be measured through two indicators, as given in table 1.
Key Expected Outcomes and Outcome Indicators
Table 1. PDO Indicators and Outcomes End Target PDO Indicators Baseline Outcome Indicator 1: Increase in the percentage of the adult population that uses 19% 40% formal financial institutions Indicator 2: Increase in the proportion of women within the adult 17% 40% population that is formally banked
Components
9. Component 1: Financial Sector Regulation and Supervision (Estimated cost: US$5.32 million). This component assisted the Reserve Bank of Malawi (RBM) to strengthen the national financial sector regulation and supervision framework for banking, capital markets, microfinance, and the insurance and pension industries by financing a combination of reporting, diagnostic, and capacity-building technical assistance activities.
10. Component 2: Financial Infrastructure (Estimated cost: US$13.22 million). The component assisted the RBM to update the basic infrastructure for payment services by supporting the modernization of its Real Time Gross Settlement (RTGS) system; designing and developing of an interoperable central switch for processing payments; and leveraging existing technology to improve processing efficiency for small-value payments, particularly microfinance payments, and institutional strengthening at the RBM, including a review of the adequacy of the current legal framework.
11. Component 3: Financial Consumer Protection and Financial Literacy (Estimated cost: US$3.02 million). The component supported the Government’s efforts to increase public trust in the financial sector by supporting the following activities: (a) strengthening the legal and regulatory framework for financial sector consumer protection, (b) enhancing institutional arrangements for consumer protection for all financial services, and (c) developing and piloting a consumer awareness/financial literacy program to improve participation in the financial sector.
12. Component 4: Ministry of Finance’s Financial Sector Policy and Governance Capacity and Long- term Finance (Estimated cost: US$3.39 million). The objective of this component was to strengthen the capacity of the Ministry of Finance (MOF) to (a) coordinate the analysis, formulation, implementation, and monitoring of financial sector policies and regulations and (b) oversee Government interventions in the financial sector. This component also supported the establishment of a policy framework and the legal and institutional infrastructure to facilitate the provision of long-term finance, strengthen the Government’s capacity to formulate and implement policies which support long-term financing, develop
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
an infrastructure financing framework, and carry out diagnostic studies to identify short- and medium- term solutions to the long-term financing challenge in Malawi.
13. Component 5: Implementation Support (Estimated cost: US$3.26 million). This component facilitated the implementation arrangements for the project by supporting the operation of a Project Implementation Unit (PIU) at the RBM. RBM was the responsible implementing agency for the project with support from an oversight committee chaired by the MOF. The component financed PIU consultant salaries, office facilities and operating expenses. It was also supposed to support consultancy costs for administering the five-year Multi-Donor Financial Sector Deepening Trust (FSDT) to finance innovative solutions and products to promote financial access by targeted beneficiaries. The FSDT was not established.
B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE)
14. The project underwent two restructurings:1 (a) October 29, 2015 and (b) August 29, 2017.
First Restructuring (October 29, 2015)
15. Since the project became effective on December 22, 2011, it was rated Moderately Satisfactory mostly due to a number of activities lagging under Components 3 and 4 and delays encountered in procurement (especially under Component 2). As agreed during the MTR,2 the first restructuring took place on October 29, 2015. The project design (the scope, implementation arrangements or technical solutions) were considered broadly sound and appropriate throughout implementation. However, as of midterm, the Financial Sector Deepening Trust (FSDT) was not established and modifications had to be made to component fund allocations and the results framework as depicted in tables 2 and 3. It is worth underlining that some original outcome performance indicators were strongly connected to the establishment of the FSDT while others did not strictly follow the logical chain.
Table 2. Revision of Component Costs
Original Cost Revised Cost Component Name (US$, millions) (US$, millions) 1: Financial Sector Regulation and Supervision 5.32 5.66 2: Financial Infrastructure 13.22 13.68 3: Financial Consumer Protection and Financial Literacy 3.02 3.33 4: Ministry of Finance's Financial Sector Policy and Governance 3.39 3.09 Capacity and Long-term Finance 5: Implementation Support 3.26 2.45 28.21 28.21
1 Level Two restructuring applies to project modifications that are changes other than in PDO statement or safeguard category. Also, approval is delegated by the Board to the regional management to be exercised by the country directors. 2 November 3 - December 3, 2014
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
Table 3. Introduction of Additional PDO-level Indicators Indicator Revision Baseline Value End Target Value PDO Indicator 1: Increase in the 1. percentage of the adult population that No change 19% 40% uses formal financial institutions Indicator 2: Increase in the proportion of 2. women within the adult population that No change 17% 40% is formally banked Indicator 3: Agency banking regulations 3. New 0 Operational operational Indicator 4: Transactions volume (MK Moved from billion) and value processed by new intermediate Volume: 159,625 Volume: by 20% 4. payments systems (ATS, National Switch, indicator from under Value: 4,253 Value: by 10% MFI TPH) Component 2 Indicator 5: Proportion of financially 5. New 3.6% 4.8% literate population Indicator 6: Proportion of financially 6. New 3.4% 4.4% literate women in the population Note: ATS = Automated Transfer System; TPH = Transactional Processing Hub.
Revision of Intermediate Indicators
16. Key intermediate indicators were upgraded and revised to better measure the project’s broader impact beyond financial inclusion aspects related to the FSDT. These indicators emphasized financial infrastructure and financial literacy. The following new indicators were added:
• Component 2: (a) modern financial infrastructure deployed and operational; (b) increase in number, value, and volume of point of sale; Automated Teller Machine (ATM); and mobile payments; and (c) increase in number, value, and volume of interbank point of sale and ATM transactions
• Component 3: RBM institutional capacity enhanced for consumer protection supervision
• Component 4: Approved road-map for implementation of government EFT payment program
Extension of Closing Date
17. A one-year extension was allowed from August 31, 2016, to August 31, 2017, to allow completion of key activities and fully achieve the project’s intended results.
Reallocation of Funds
18. As of MTR (December 2014), the Financial Sector Deepening Trust (FSDT) was not established. This is because the co-finance for the establishment and operation of the FSDT was annulled by the donor. The FSDT was a key design feature of the project contributing to financial inclusion aspects of the PDO.
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
With this in mind, the project funds allocated to supporting FSDT activities were reallocated between components, as specified in table 4.
Table 4. Reallocation of FSDT Funds
Reallocation Category of Expenditure Original (SDR) Revised (SDR) Goods, consulting services, operating cost, trainings 16,910,000 18,050,000 Consultant services to enhance the RBM’s capacity in administering the 865,000 0 Malawi FSDT Project preparation funds refinancing 325,000 50,000 Total 18,100,000 18,100,000
Second Restructuring (August 29, 2017)
Table 5. Revision of PDO Indicator Targets Baseline End Target Original Indicator Revised Indicator Value Value Revised Targets Agency banking Indicator 3 (newly added 1. regulations 0 450 450 4) operational Transactions volume Volume: Indicator 4 (moved from and value processed 159,625; Volume: by 20% Volume: by 10% 2. intermediate indicator by new payments Value: by 10% Value: by 5% under Component 2) systems (ATS, National Value: Switch, MFI TPH) 4,253 Proportion of Indicator 5 (newly added 3. financially literate 3.60% 4.80% 4.80% 4) population Proportion of financially literate 6. Indicator 6 (newly added) 3.40% 4.40% 4.40% women in the population
Extension of Closing Date
19. A 10-month extension was provided from August 31, 2017, to June 29, 2018, to allow completion of the remaining activities and fully achieve the project’s results.
Rationale for Changes and Their Implication on the Original Theory of Change
20. The two restructurings did not have any major implications on the theory of change. This is because the package of project activities was indirectly reinforcing financial inclusion and broad-based financial intermediation by supporting the setting up new financial market infrastructure and strengthening institutional capability of the financial sector regulator and supervisor. The project was also
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assisting the NBFIs in their transition to digital strategies to drive financial inclusion through FSTAP support for the MFI technology hub. Hence the changes did not trigger modifications of the Original Theory of Change. .
II. OUTCOME
A. RELEVANCE OF PDOs
Relevance of PDO - High
21. The project was designed to support the World Bank’s Country Assistance Strategy3 (CAS) medium-term outcome of improving the business climate in Malawi, which in turn was linked to theme 1 of the Malawi Growth and Development Strategy (MGDS) of sustainable economic growth, sub-theme 2, “an enabling environment for private sector led growth.” The PDO was also relevant to the new Malawi CAS, which was approved by the World Bank Board in 2013, specifically theme 1, promoting sustainable, diversified, and inclusive growth. A CAS Performance and Learning Review4 specifically noted the importance of the project5 and how it continued “to help Malawi meet its financial inclusion targets by upgrading the national payments financial infrastructure, including the Automated Transfer System (ATS) which went live in December 2014 and National Switch which became operational in January 2015, and thereby lowering transaction costs to lower income groups.” The review also underlined the project design and the PDO, which remained relevant in the context of this review.
22. The project continued to remain relevant and flexible to accommodating the following three emerging priorities and developments: (a) in the banking sector, Basel II implementation support and provision of a resident bank supervision advisor; (b) the move toward the use of electronic funds transfers (EFTs); and (c) transaction support to look at options for Government divestiture from a number of financial institutions.
23. The regulations developed to support the implementation of new laws and the infrastructure developed under the project provided the basic building blocks to support continuous improvements in access to finance after the completion of the project.
B. ACHIEVEMENT OF PDOs (EFFICACY)
24. The overall implementation progress since effectiveness (December 2011) is considered Moderately Satisfactory because a number of directives, regulations and bills prepared under the project were still lagging behind before restructuring, as described above (paragraph 15). Nevertheless, the project achieved noteworthy achievements in its three-and-a-half years of operations up to restructuring, as described in this section.
3 Report No: 38326-MW, dated February 28, 2011 4 Malawi: Performance and Learning Review of Malawi CAS, Report No.: 95178-MW. 5 Results Area 1.2, paragraph 6, page 47 of Performance and Learning Review of Malawi CAS, Report No.: 95178-MW.
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The Banking Sector Strengthening
• Support provided to third-party bank diagnostic audits for overall health of the bank sector
• Basel II implementation supported6
• Bank supervision advisor provided for capacity building of bank supervision department
• Risk assessment conducted to access move by Government from checks to EFT and compatibility of public finance management system including Integrated Financial Management Information System (IFMIS) to ATS
• Transaction support provided to evaluate options for the Government divestiture from a number of financial institutions, resulting in the Government selling off majority stake in all financial institutions it previously controlled
• ATS developed and installed and going live in December 2014
• New interoperable National Switch procured, installed, and made operational in January 2015
Table 6. Achievements by PDO/Outcome before Restructuring Achievements
PDO Indicators End Target Actual % Increase in the percentage of adult 1 population that use formal financial 40% 33% 83% institutions Increase in the proportion of women within 2 40% 28% 70% the adult population that is formally banked 3 Agency banking regulations operational Not identified yet 379 n.a. ATS went live with all banks, Government, and Malawi Revenue Authority (MRA) onboard. ACH, CSD operational. Transactions volume and value processed by Volume: by 10% The National Switch 4 new payments systems (RTGS, National n.a. Value: by 5% system went live with 6 Switch, MFI TPH) banks on board with the ATM functionality. In 3 months, volume was at 21,019 transactions and value at MK 311,325,400. Not identified yet 38.7 per cent of adult 5 Proportion of financially literate population n.a. Malawians are financially
6 The Basel II Accord makes it mandatory for financial institutions to use standardized measurements for credit, market risk, and operational risk.
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Achievements
PDO Indicators End Target Actual % literate, according to the 2018 Malawi Financial literacy and Consumer Protection Household follow-up survey Proportion of financially literate women in Not identified yet 39.9 per cent of females 6 n.a. the population are financially literate Note: ACH = Automated Clearing House; CSD = Central Securities Deposit; TBD = To be decided.
Project Achievements after Restructuring
25. The restructuring helped the project make further progress by focusing on completing outstanding activities under Component 2 (Financial Infrastructure) and Component 3 (Financial Consumer Protection and Financial Literacy). As a result, during the past few years and in line with the PDO, adult Malawians have gained greater access to formal financial services. While only 17 percent of adult Malawians had access to formal financial services in 2013, this figure reached 29 percent in 2018. Key achievements after restructuring are described in the following paragraphs.
Strengthening of Financial Sector Regulation and Supervision
26. Banking supervision. The Parliament has passed a new Financial Crimes Bill (February 2017) which replaced the Money Laundering, Proceeds of Serious Crimes, and Terrorist Financing Act of 2006. In May and June 2017, dissemination workshops on the new law were conducted. Guidelines on regulations of Islamic Finance have also been developed. Also, the RBM has reviewed and finalized several directives/regulations on bank supervision for gazetting. As of the project closure date, a number of new directives and regulations had been gazetted or were in the process of being implemented (for the status as of June 2018, refer to the list in annex 10).
27. Capital markets supervision. Growth strategies, regulatory and hedging instruments, and an action plan for bond market development have been developed.
Financial Infrastructure
28. Strengthening the RTGS system - ATS and CSD. The ATS/CSD implementation has been completed and the system is now considered stabilized.
29. Capital markets development. The Automated Trading System for the Malawi Stock Exchange (MSE) went live on June 7, 2018.
30. Design, development, and implementation of a National Switch. All commercial banks in Malawi are integrated onto the National Switch (on ATMs), and five banks have been integrated on point of sale. The integration of mobile money services was approved for the switch: the use cases include Person-to- Person (P2P), Bill Pay, Cash-pull from bank account, and Cash-push to bank account.
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31. Support for an MFI Transaction Processing Hub. The hardware and the application services are ready for use. The data center at Globe Internet was selected for use and the application installed. The service-level agreements are finalized to cover three key relationships: hardware as a service (Haas) with Globe Internet, software as a service (Saas) with Fintech International, and service levels between participating financial institutions and the Hub Company. Seven MFIs/Savings and Credit Cooperatives (SACCOs) have also gone live.
32. Centralized National Pensions Database. The design of the database has been completed.
33. Government digital payments. All vendors are on the ground with user acceptance testing under way as of the project closure date. Integration implementation commenced and currently in progress. The expected changes relate to funding, payments, sweeping (domestic), rejections and resubmissions (cancellations and reversals), reconciliations, payments security, coding, and reports.
Financial Consumer Protection and Financial Literacy
34. A plan is in place to enact a standalone financial consumer protection law and implement a twin- peak model to consumer protection in Malawi. An inception report and a financial Consumer Protection Bill have been drafted. An Alternative Dispute Resolution (ADR) Bill was drafted and reviewed at the stakeholder workshop in June 2017. The financial Ombudsman Bill was drafted and reviewed by the stakeholders. Stakeholder consultative workshops on financial consumer protection directives were held. Also, a financial literacy survey was conducted, and the final report has been released.
MOF Financial Sector Policy, Governance Capacity, and Long-term Finance
35. The 2016–2020 National Financial Inclusion Strategy (NFIS) was launched in July 2017. The NFIS aims to increase percentage of adult population to 55 percent by 2020 from 33 percent in 2014. The strategy has identified six priority areas and specific approaches to increase financial inclusion: expansion of the reach of digital payments; expansion of savings, especially through savings groups; targeted finance for micro, small, and medium enterprises (MSMEs) and farmers; niche insurance opportunities to reduce vulnerability; effective consumer empowerment and education; and national coordination of financial inclusion. The Government has included a chapter on access to finance in the MGDS III and since launched the Malawi Financial Sector Development Strategy (MFSDS).
36. Regarding the PDO indicators, the following achievements were noted after restructuring:
Table 7. PDO Indicator Achievements after Restructuring Achievements PDO Indicators End Target Actual % Increase in % of adult population that 1 40% 39.7% 99.25% use formal financial institutions Increase in the proportion of women 2 within the adult population that is 40% 38.5% 96.30% formally banked 3 Agency banking regulations operational 450 468 104.00% Transactions volume and value 4 See sub-indicators. processed by new payments systems
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Achievements PDO Indicators End Target Actual % (RTGS, National Switch, MFI TPH) Transactions volume and value (MK, Volume: 4,349,952 Volume: 21,220,986 Volume: 488% 4a billions) processed by ATS Value: 5,011 Value: 73,415 Value: 1,465% Transactions volume and value (MK, Volume: 5,399,428 Volume: 5,390,276 Volume: 99% 4b billions) processed by National Switch Value: undefined Value: 83.51 Value 100% Five NBFIs (MFI and SACCOs) are using hub At least 5 institutions software at project Transactions volume and value 4c to go live by June closure. Currently 100% processed by MFI Hub 2018 there are 19 NBFIs (9 MFIs and 10 SACCOs) on the Hub. Proportion of financially literate 5 4.80 3.90 81% populationa Proportion of financially literate women 6 4.80 3.60 75% in the populationa Note: a. Values are an index that ranges from 0 (illiterate) to 7 (highly literate).
Efficacy Rating before Restructuring (August 28, 2011–June 25, 2015)
37. The efficacy before restructuring is rated Modest. As described above (paragraph 15), only limited progress was achieved because a number of activities were still lagging behind. This resulted in the task team continuing to rate both the achievement of PDO and the implementation progress as Moderately Unsatisfactory.
Efficacy Rating after Restructuring (June 26, 2015–June 29, 2018)
38. The efficacy after restructuring is considered Substantial as the project almost fully achieved its objectives. In some cases, the intended outcome far exceeded the expected targets.
C. EFFICIENCY
39. The efficiency is rated Substantial. The project has delivered tangible results. The project successfully advocated changes in the service delivery modalities which have been affected by the service providers, policy holders, and the Government. The key attributes are the following:
• Use of human resources. There was efficient use of human resources mainly based on the allocation of responsibilities according to each component, based on their mandate either according to policy, area of expertise, or comparative advantage. While there were preexisting entities before the project implementation, others were deliberately created (for example, Component 3: Consumer Protection and Financial Literacy) and given the statutory mandate to execute elements of the project as specified in the Project Appraisal Document (PAD). For the most part, the use of existing structures contributed to the cost-effectiveness of the project.
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• Timeliness. Training activities were centrally financed by the project, which served to cut overhead costs, and to a large extent the outputs were achieved on time. Digitization, which was one of the core components was also efficiently implemented, resulting in the overall improvement of speed of transactions to the mutual satisfaction of service providers and consumers.
D. JUSTIFICATION OF OVERALL OUTCOME RATING
40. The overall outcome rating is considered Moderately Satisfactory. To arrive at the overall outcome rating, the ICR has used the share of actual Credit disbursements, made before and after restructuring, to weigh the separate outcome ratings. The rating is based on (a) High rating for PDO relevance before and after restructuring, (b) Modest rating for efficacy before restructuring and Substantial rating after restructuring, (c) Modest rating for efficiency before restructuring and Substantial after restructuring, and (d) consideration of US$16.44 million disbursed before restructuring and US$8.65 million after restructuring. See annex 7 (Split Rating Calculation).
Table 8. Ratings Relevance Efficacy Efficiency Outcome Split Ratings of PDO Assessment Assessment Before restructuring High Modest Modest Moderately Satisfactory After restructuring High Substantial Substantial Satisfactory Overall Outcome Rating Moderately Satisfactory
E. OTHER OUTCOMES AND IMPACTS (IF ANY) Gender
41. The financial literacy program financed under the project contributed to increasing the proportion of women within the adult population that are formally banked. The proportion increased from 17 percent in March 2011 to 38.5 percent at completion of the project.
42. With the increased capacity and time, both banks and NBFIs will be able to serve more women and female entrepreneurs. It is likely that women who repay loans on time will also be able to receive larger loans for longer maturities over time.
Institutional Strengthening
43. The project contributed substantially in building the institutional capacity of agencies within the financial sector, as described in the following paragraphs:
RBM
• The project assisted the RBM in strengthening the regulation and supervision frameworks for banking, capital markets, microfinance, and pensions through research, diagnostic, and capacity-building technical assistance activities. It also assisted the RBM in replacing the RTGS system with an ATS. The ATS integrated functionality for RTGS, ACH, and instant funds transfers on a single platform. This enabled the RBM to operate for the first time both large-
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value and time-critical payments that are processed on a transaction-by-transaction basis: clearing and settlement of all small-value, high-volume or bulk retail payment instruments which can be processed on a batch basis or as instant funds transfers.
• The project also strengthened the legal and regulatory framework for financial consumer protection and enhanced institutional arrangements for consumer protection in all financial services. A Consumer Protection and Financial Literacy Unit has also been created.
• The unit responsible for financial literacy was created in the RBM and is functioning well. Its functions are to conduct surveillance on the financial sector, examining its vulnerability and reporting on financial risks.
• A supervisory framework has been completed at the RBM, and laws and manuals have also been prepared for this purpose. Newly recruited examiners would be guided by these manuals.
• Payments Systems Act 2016 has been established to ensure payment systems providers comply with the rules. Through this Act, the RBM is preparing e-money regulations, which would strengthen its supervision of payment systems.
• Creation of institutions such as the National Switch and MFI Hub is one of the major achievements of the project.
MOF
• The project strengthened the institutional capacity of the Financial Intelligence Unit (FIU) in (a) coordinating the formulation, implementation, and monitoring of financial sector policies and regulations and (b) overseeing the Government interventions in the overall financial sector.
• The FIU, an autonomous agency under the MOF, is now defining the Financial Crimes Act.
• The Financial Sector Policy Unit (FSPU) has also been created in the Economic Affairs Division of the MOF.
MFIs and SACCOs
• The Bill for MFIs and SACCOs on deposit guarantee scheme has been drafted, and its implementation will be done in phases. The project assisted in creating awareness to ensure that SACCOs would understand the new laws and regulations in the financial sector. All SACCOs were brought together for the growth and development strategy and each SACCO was asked to develop an action plan for membership mobilization.
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Capacity Building
44. The project contributed a lot in building capacity by organizing study tours and training programs. For example,
• Players involved in the supervision of SAACOs were given training in Kenya, the United States, and Canada;
• MSE staff visited some stock exchanges in the region, including Zimbabwe, to learn about ATS operations;
• Training programs were conducted on various topics such as supervision, MFI Hub, and deposit insurance. Even stakeholders like apex bodies have benefited from training programs;
• Workshops on new laws and directives in the financial sector were conducted for stakeholders. Market players, including MFIs and stock brokers, participated in the workshops to discuss the impact.
Mobilizing Private Sector Financing
45. Not applicable.
Poverty Reduction and Shared Prosperity
46. While a poverty/impact assessment is yet to be carried out, the project is likely to generate benefits for a much larger number of people who now have increased access to finance and others that are now considered ‘bankable’. This is expected to have wider implications for private sector growth, job creation, and poverty reduction.
47. The legal and regulatory framework has been strengthened for consumer protection and financial literacy. With financial education, farmers and other people are now aware that they need to save money for a rainy day.
48. They are also now better aware of getting financial services and how to administer financial products so that they can improve their livelihood. This new approach would contribute in poverty reduction. For example, with the strengthened SACCOs and MFIs, entrepreneurs will have easier access to credit for financing their businesses. This would lead to job creation which, in turn, would contribute to reducing poverty and gender imbalance.
Other Unintended Outcomes and Impacts
49. As the word has spread that the financial infrastructure is in place in Malawi, the RBM has started receiving queries from the United States and Europe and even from the International Association of Custodians of Securities for potential investments in Malawi. They are interested in knowing how safe and secure the securities issued by the RBM are and whether they are compliant with certain benchmarks such as insurance of securities.
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50. Because of the increased use of mobile payments from about 186,000 transactions in December 2012 to 4.5 million transactions in May 2018, access to finance has significantly improved and people are able to perform financial transactions even without going to banks. In particular, the rural population has benefited more from mobile technology.
51. In light of the new issues and developments in the cooperative societies, it has become necessary to amend and update the 2011 Financial Cooperatives Act. Further, the process to create a SACCO-specific Act is currently under way.
52. Because of the increased awareness on financial literacy created by the project, many secondary schools are incorporating the topic of financial literacy in their curriculum and teaching materials.
III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME
A. KEY FACTORS DURING PREPARATION
53. In the context of weak financial sector governance, the project preparation team recognized the implementation challenges and prepared the design with sound background analysis and comprehensive assessment of the Government’s commitment. Lessons learned from similar operations in other jurisdictions were also considered to assess potential risks and mitigation measures.
Lessons Learned during Project preparation and Reflected in the Design
54. Special attention was given to ensuring that the project design reflected both the World Bank’s experience in financial sector reform projects worldwide and donors’ specific experiences. More specifically, the project design reflected the following key lessons learned:
(a) Time needed for reforms. The project took into account that the implementation of reforms has multiple steps and takes a significant amount of time. Project implementation was therefore anticipated to take five years, recognizing that capacity building; dialogue and decision making among both public and private stakeholders; drafting and implementation of new standards and regulations; and the carrying out of studies, analysis of findings, and decisions regarding follow-up take considerable coordination and time.
(b) Focused technical design. The project deliberately adopted a focused technical design. It did not try to undertake all the financial sector reforms that were required in Malawi. Rather it focused only on those that were unlikely to attract support from other development partners.
(c) Ownership. The objectives of the project included the implementation of a series of policy, legal, and administrative reforms. Experience showed that such reforms can only be achieved if there is significant commitment by the Government to the objectives of the project and where World Bank programs work closely with the champions of reform in the Government and in collaboration with a broad range of stakeholders. It is noteworthy that the project supported the implementation of the MFSDS and thus had strong champions at the political and technical levels in both the MOF and the RBM, the key Government
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institutions in the sector. Furthermore, the project benefited from numerous consultations with the various stakeholders in the sector.
(d) Donor coordination. The project did not assume that a single intervention would affect overall financial intermediation. As a result, development partners active in the sector came together under the MFSDT to support a comprehensive financial sector program, which was based on the Government-endorsed FSDS and took a holistic approach to addressing constraints in financial sector development.
Risks and Risk Mitigation Measures
55. The World Bank task team carried out a risk analysis and identified critical risks and appropriate risk mitigation measures, as given in table 9.
56. The project implementation risk was assessed to be High Impact/Low Likelihood.
Table 9. Primary Risks during Project Implementation Risk Risk Mitigation Measures Rating Stakeholder risk: Local financial institutions During project implementation, and private sector investors might be training, workshops, and public reluctant to accept and/or there is lack of awareness campaigns would be used to High Impact/Low capacity to use new delivery channels of disseminate knowledge and advocate Likelihood banking products and financial services to the benefits of the new delivery be developed/supported under the project. channels for financial deepening. During project implementation, the Implementation agency risk: Staff skills and RBM PIU would be supported by 4 organizational knowledge of the RBM for consultants: project coordinator, project implementation are limited. Limited procurement specialist, financial resources and lack of systems and processes management (FM) specialist and High Impact/Low that are in line with World Bank guidelines monitoring and evaluation (M&E) Likelihood for procurement and financial management specialist. Training will be provided to could cause delays in project the RBM and MOF technical staff who implementation. would participate in the planned activities under the project.
Adequacy of Government Commitment
57. The Government had demonstrated ownership and strong commitment in developing conditions for an improved financial sector by pursuing market-oriented reforms to achieve sustained economic development and meaningful poverty reduction. Having the financial inclusion agenda under a single umbrella which harmonized and coordinated different donor-supported reforms in the financial sector was an important step in the right direction of sustaining reforms. Also, the government pursued intense hands-on involvement in mobilizing and allocating financial resources through a number of government- led development finance institutions, notably one fully government-owned commercial bank, Malawi Savings Bank (MSB, formally the Postal Bank); one nonbank government-owned financial intermediary, Malawi Rural Finance Corporation (MRFC); one government program Malawi Rural Development Fund (MARDF) which received funding from the Government through the MSB; and two government trusts,
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Small Enterprise Development Organization of Malawi (SEDOM) and Development of Malawi Trader’s Trust (DEMAT), which served small and medium enterprises. In addition, the Government had a majority shareholding of the largest commercial bank in Malawi, the National Bank of Malawi through the Government-run trust, Press Trust. Thus, the Government’s legislative reforms for the financial sector, its request for the FSAP, and then development of a comprehensive program based on the FSAP’s recommendations highlighted its continued interest and strong commitment in advancing the financial sector agenda.
B. KEY FACTORS DURING IMPLEMENTATION
Positive
58. Since effectiveness, the implementing departments had been enthusiastic in implementing their activities. Among these, notable departments included the National Payment System, Bank Supervisions, Pensions and Insurance, Microfinance and Capital Markets, Public Enterprise Reform and Monitoring Unit, FSPU, and Accountant General’s Department. This was a clear demonstration of sense of commitment and ownership. Furthermore, during the MTR exercise, the MOF and RBM reaffirmed their commitment to the project and fully appreciated the benefit of the new delivery channels for financial deepening and the development of financial markets in Malawi.
59. As the PIU was deemed an independent unit in the RBM with its own budget, bureaucratic intervention was minimal, and efficiency of implementation was higher.
Negative
60. Project implementation of the financial infrastructure initiatives was delayed by about two years were mainly associated to: i) the long tender processes of hiring consultants and finalizing the business case and technical designs of technology solutions; ii) the longer than expected process to obtain stakeholder buy-in and sign-off on evaluation reports for contracts and the architecture and technical design of infrastructure initiatives, and; iii) identified additional works on the initial technical designs or market approach when procuring technology solutions. As a result, implementation of the National Switch, ATS/CSD, and MFI Hub was delayed. At the completion of the project, because of the delay in building the MFI technology Hub, an exit strategy for the shared platform was not fully prepared. This would have helped in securing operating resources and operational sustainability even though the establishment and composition of an independent management board for the MFI Technology Hub Company was completed. Other areas impacted include non-production of material for insurance sensitization campaigns because of delays to arrive at common positions of the future design of the campaigns, through a participatory and inclusive process.
61. Implementation was also delayed in the initial stages because of the PIU staff’s lack of knowledge on the World Bank’s procurement procedures. It is important to underline that this was the first time that RBM had implemented a World Bank project. The PIU was a hybrid of RBM staff and consultants. Overall, the turnover in the PIU was not any different from any other project in the World Bank Malawi country portfolio. The labor market in Malawi is small and there is a tendency for project staff to move from project to another even though remuneration of PIU staff was always reviewed by World Bank fiduciary teams.
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62. Identifying appropriate consultants was challenging even though the hiring process began early with support of the project preparation facility. Sometimes the PIU even had to re-advertise as it did not get the right candidates after the first advertisement, and at times they even had to opt for international recruitment. Likewise, delays in the identification of vendors also affected implementation.
63. High turnover of staff because of transfers and resignations at the PIU, MOF, and RBM affected the implementation of certain activities. For example, staff attrition through transfers at the FSPU in the MOF and understaffing in the Consumer Protection and Financial Literacy (CPFL) Unit in the RBM due to significant delays in recruiting additional staff affected implementation. Two procurement specialists and two FM specialists resigned from the PIU during the project implementation, which affected continuity and processing of activities.
64. The FSDT did not materialize because the U.K. Department for International Development (DFID), involved in establishing the Trust, pulled out of the project because of internal policy changes and general public finance management concerns in Malawi.
65. On the World Bank’s side, the project has three TTLs throughout is life. However, the turnover of project TTLs was within norms of other projects in the portfolio that were approved at the same time (e.g. energy and mining projects). A special emphasis goes to having in-country support to the PIU teams and beneficiary institutions. The regular supervision missions, meetings and technical guidance helped a lot to reach the project purpose. Changes in TTLs was undertaken carefully by the World Bank and field supervision were carried out with adequate skills mix at critical project implementation periods to address problems identified. It is worth noting that the turnover in TLLs caused anxieties for the client even though this did not disrupt implementation.
IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME A. QUALITY OF MONITORING AND EVALUATION (M&E)
M&E Design
66. The monitoring system was based on key performance indicators and intermediate outcome indicators, as included in Annex 1 of the PAD. Additional changes in the Results Framework were later introduced through project restructurings to augment results monitoring to make them more realistic. New indicators were also added to monitor the financial sector and the women project beneficiaries. The PIU at the RBM was the responsible implementing agency for conducting M&E activities which regularly collected data and provided detailed reports for the overall M&E system with inputs from the designated focal points in the implementing units. These units were responsible for data collection and reporting for their respective component.
M&E Implementation
67. The project was subjected to 11 implementation support/supervision missions.7 The progress and guidance was recorded in the Implementation Status and Results Reports (ISRs) and the Aide Memoires. The task team regularly collected detailed progress data, updated current progress against the baseline,
7 See annex 6 for details (dates visited and so on).
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and highlighted issues for the World Bank management and donor’s attention. Information provided included quarterly progress and financial management reports and annual audits of project accounts. The MTR took place during November/December 2014. During the period preceding the MTR, the effectiveness of the consumer awareness programs under Component 3—Financial Consumer Protection and Financial Literacy—aiming to improve trust in the financial system and increase the usage of financial services was tested using FinScope surveys, which among other things, compared the change disaggregated by gender.
M&E Utilization
68. Appropriate data collected from the progress reports, including the MTR report, were evaluated and used to inform decision makers on certain activities. For example, restructurings and closing date extensions were based on inputs from the M&E and mission findings.
Justification of Overall Rating of Quality of M&E
69. The overall quality of M&E is considered Modest. Even though the M&E design was flexible and enabled the task team to restructure the project and adjust indicators, including target values, during implementation some of the performance indicators did not follow the logical chain. In the same vain, some performance indicators such as increase in the proportion of women within the adult population that is formally banked were impacted by factors beyond the project alone. Creating financial access to women requires specific actions to improve supply and demand of financial products. Nonetheless, timely M&E reports were prepared which kept track of project status at any given time.
B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE
70. Environmental and social safeguards compliance. The project was classified under category C, as it did not involve any activities that affected environmental or social safeguards.
71. Fiduciary compliance. The project complied with all fiduciary requirements during implementation. Internal control arrangements were in place and adequate FM, procurement, and disbursement systems were maintained.
72. Financial management. The project management team within the RBM effectively complied with the Financing Agreement covenants. The quarterly interim financial reports (IFRs) and the annual audited financial statements were submitted on time for the World Bank’s consideration. The reports were acceptable to the World Bank in form and content. The FM arrangements facilitated smooth implementation of the project as required, including funds flow and reporting. The FM arrangements were rated Satisfactory throughout the implementation period and all audited financial statements had unmodified (clean) audit opinions. Nevertheless, there were disbursement delays in resolving matters related to the IFRs. For example, it took more than two months to correct wrongly uploaded figures in the World Bank’s Client Connection, where the World Bank mistakenly uploaded ‘balances’ instead of ‘expenditure’ figures, resulting in balances on the project’s books not matching those in Client Connection.
73. Procurement. The project generally followed the procurement procedures stipulated in the Procurement Guidelines, PAD, Financing Agreement, and Project Implementation Manual. During
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implementation, no cases of ‘mis-procurement’ or unresolved complaints from bidders were recorded. Record keeping was excellent, and the project consistently used Systematic Tracking of Exchanges in Procurement (STEP) to plan, monitor, and track procurement even before STEP became mandatory in July 2017. There was also a slow start on implementation due to insufficient staffing levels at the beginning of the project and significant turnover of fiduciary staff. There were also delays in recruitment of replacements. Recruitment of procurement assistants also took time. All these delays led to extension of the project closing date.
C. BANK PERFORMANCE
Quality at Entry
74. The overall quality of the World Bank’s performance in ensuring quality at entry was Moderately Satisfactory. During preparation, the World Bank considered relevant aspects of the project, including technical, financial, economic, institutional, and procurement. Major risk factors and lessons learned from earlier projects were incorporated into the design. The project was well grounded on the realities of Malawi and its problems in the financial sector. However, there were shortcomings in the M&E Framework which were later improved during restructuring to better measure the PDO through the upgrading of some intermediate outcome indicators and introduction of new PDO-level indicators. A number of new intermediate-level indicators were also introduced.
75. An experienced and committed task team, which included the local country office staff, was constituted to provide technical support to the project. This was critically important, given the challenging business environment and the implications on implementation and monitoring of innovative activities.
Quality of Supervision
76. The quality of supervision is considered Moderately Satisfactory. From identification to around seven years of implementation, three TTLs managed the project, including one co-TTL based in the local country office, who followed up issues with the TTL and other specialists at the World Bank and did frequent checks on implementation progress. The World Bank’s full team included the TTL, technical experts, FM and procurement specialists, and consultants who consistently engaged closely with the counterparts. The task team responded appropriately and timely to all reasonable requests of the Government of Malawi (GoM). The World Bank’s technical and fiduciary teams provided regular support to focus on maximizing the project’s development impact, which resulted in adjustments, including project restructurings and extensions of the closing dates. With the inclusion of revised indicators, the task team used adequate resources, including technical experts with sectoral expertise. The task team conducted regular supervision missions, on average twice a year, to take stock of progress. The ISRs were candid, detailed, and well targeted, outlining important events and providing a clear and complete picture of the progress. The supervision team also produced clear and detailed Aide Memoires. However, the supervision missions could have done more to focus on advising the PIU teams and beneficiary institutions on assessing the efficiency of innovations carried by the project and proactivity in preparing exist strategies for the shared platforms.
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Justification of Overall Rating of Bank Performance
77. Based on the Moderately Satisfactory ratings for both, the Quality at Entry and Quality of Supervision, the overall rating of the Bank’s Performance is considered Moderately Satisfactory. Halfway into the implementation, the overall pace of the project’s key activities remained behind schedule with partial progress achieved in its PDO.
D. RISK TO DEVELOPMENT OUTCOME
78. The risk to development outcome is moderate in light of the following factors:
• The Government is fully committed to sustain the project’s achievements. The current management of the RBM is also committed to the project, especially on financial literacy and consumer protection. It is worth noting that the Government has requested for a successor World Bank project to FSTAP to enhance private enterprise growth and job creation in Malawi by increasing MSME access to financial services and improving their capabilities.
• FSTAP laid down sophisticated infrastructure such as the National Switch and the MFI Hub which the new project will leverage to increase financial institutions capability to improve financial products and innovate, as well as building the capacity of stakeholders and end- users to encourage financial product uptake. Integration of the National ID system into these systems is also key going forward.
• While financial sustainability of operations of the MFI Hub remains tenuous it is increasingly being secured as the number of MFIs and SACCOs joining keeps growing. The institution built and handed to beneficiaries (MFI Hub Company Limited) is likely to run using existing policies as owners of the assets and the liabilities of the facilities provided. Beneficiary institutions are continuing to adopt the shared platform concept after project closure thereby expanding the support base for the sustainability of the MFI Hub. Although the achievements of the MFI Hub are positive and the social and economic impact are incommensurable, this innovation is not likely to be pursued if the unit costs for joining are high. Similarly, the MFI Hub innovation is not likely to be maintained if unit costs for being involved are high. Consequently, alternative financing already being considered by the authorities to enable more MFIs and SACCO to adopt the concept needs to be continued and this should also include commercial financing options. The successor project to FSTAP will also explore improvement to the MFI Hub that aim to facilitate greater access to finance for MSMEs and linkage to the Hub.
• The integration of mobile money services on the National Switch significantly expands the support base for the sustainability of the platform and confirms the market relevance of the technical solution. The use cases integrated include Person-to-Person (P2P), Bill Pay, Cash- pull from bank account, and Cash-push to bank account. The institution built and handed to beneficiaries (National Switch Limited) is likely to run using existing policies as owners of the assets and the liabilities of the facilities provided.
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• As the regulatory framework on the financial sector is in place, there is no risk regarding its sustainability. They are embedded in a well-established institution, the RBM. They will also benefit from the existing maintenance policy at the RBM for critical infrastructure and information systems. Likewise, the ATS is housed at the RBM with adequate financial resources; its sustainability is therefore ensured. This ATS as well as the legal and regulatory framework will need to be upgraded regularly to keep up with market and technological developments. The oversight of the financial market infrastructure handed to beneficiaries also needs to be established.
• On the other hand, adoption of new budgetary units under the institutions running the facilities provided by the project need to be treated with caution and managed carefully to secure the momentum on the project’s achievements.
V. LESSONS AND RECOMMENDATIONS
79. The project offers several important lessons, some specific to Malawi and others that are broader and generally applicable. These are summarized.
o Readiness for execution. For the success of a project such as the FSTAP, it is vital to provide high- quality technical studies to underpin key issues and considerations such as the business case for shared infrastructure and architectural design. Ensuring advance procurement of the technical consultants can also help expedite progress on activities that entail support for financial market infrastructure. o Reinforcing ownership through end-user involvement throughout project lifecycle. Projects such as FSTAP with a significant focus on financial market infrastructure can benefit from creating and sustaining a “shared platform”, a mechanism promoting understanding and offering practical guidance on identifying and avoiding pitfalls and maximizing payoffs. The shared platform can act as a home for the project or serve as an initiative that is unincorporated and does not have its own legal status but provides administrative support and oversight and financial responsibility for all activities of the project. These project responsibilities are additional to the PIU team’s day-to- day programs and responsibilities. The provision of a shared platform is therefore an intentional decision to extend and reinforce ownership of the technical solution by end-users and other stakeholders. o The shared platform could support collaboration, leadership, governance and project development, providing the opportunity for the testing of new ideas. RBM working together with the PIU facilitated stakeholder consultation and engagement on all activities on financial market infrastructure and ensured that stakeholder engagement was infused into the project throughout its lifecycle as an iterative process. The goal was to gather views of key stakeholders and arrive at common positions of the future design of the technical solutions, through a participatory and inclusive process. o In this context, a mapping and identification of stakeholders should be undertaken to obtain a complete picture of key sector players in the early stages of the project. Information systems supplied should only be certified completely delivered only after installation and satisfactory test running and training involving end-users. An exit strategy for the shared platform could be
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incorporation or formalization as a not-for-profit or commercial entity thereby increasing the opportunity for self-financing or alternative commercial financing.
Facilitating stakeholder consultation, coordination, collaboration and their buy-in
With the support of project technical consultants and the PIU team, the Reserve Bank of Malawi (RBM) was able to convene a series of roundtable discussion, workshops and study tours that involved sector players on the national switch and MFI hub, including Malawi Union of Savings and Credit Cooperatives, microfinance institutions (MFIs), SACCOs and the MNOs. By providing resources directly to these sector players, their readiness for project implementation was enhanced and supported their effective participation in the finalization of the procurement approach and request for proposals, and vendor evaluation and selection process, and many other decision points throughout the project. For these market development activities, the role of the RBM could be more like a catalyst of these initiatives and less of a regulator or supervisor of the financial sector.
o Deliberately investing in ongoing relationship building. When a project involves multiple vendors and stakeholders, it is critical that the implementation agency and PIU teams maintains good and productive relationship with all the vendors and stakeholders. The successful application of the shared platform requires a high level of maturity, honesty, transparency, and open and ongoing conversation between the vendors, stakeholders and project leadership. There is a need to have upfront conversations – including difficult conversations if necessary – on the nature of the technology solution and business model and what is required from everyone to make it work and succeed. o The development and implementation of shared infrastructures such as a national switch is a complex process requiring the active involvement of all stakeholders and keenly supported by technical working groups that bring together both bank and non-bank financial sector actors that are responsible for and empowered to consider all project outputs such as technical studies, especially business function, technical and performance requirements; governance arrangements, rules, procedures and market practices and proposals for the target architecture of the infrastructure and operating business model. In this regard, PIU teams should focus on facilitating the transfer of good practices and sharing of lessons and experiences. There are formal and informal pathways that need to be established for consistent communication to continually build the relationship and identify and address issues early on. o Proactive problem solving with preventive actions. The Implementation agency and PIU teams should stay on top of process inputs, outputs, and other information that signal trends and acting on them before they become issues. They should also involve end-users in the definition of quality and effectiveness. This is especially critical when defining the technical specifications of the technology solutions to be acquired as well as commissioning of the solutions. o Special emphasis goes to ensuring continuity in participation by key stakeholders and actors throughout the project lifecycle and at critical project implementation periods to act on trends and other signals before they become issues. The decision-making process needs to be streamlined to avoid implementation delays. This can be achieved by reducing layers involved in the approval process and documentation of decisions.
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o Likewise, retention of adequate skills mixes on the PIU teams and shared platform (financial sector specialists including financial technology experts, business analyst, procurement and financial management) is key to improving efficiency and effectiveness of project execution and has implications on the implementation and monitoring of innovative activities. Implementation support missions should aim at advising the PIU teams on continuing assessments of ongoing innovation and the preparation of exist strategies for the shared platform. o Project performance indicators setting and appropriate activities. A closer logic chain between the project activities and the intended outcome should be defined, and appropriate resources need to be earmarked. The relevance of the project design should be portrayed through strong articulation of activities, and a comprehensive package of a chain of interrelated actions.
.
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ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS
A. RESULTS INDICATORS
A.1 PDO Indicators
Objective/Outcome: Increase the percentage of financial institution Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion PDO Indicator One: Increase Percentage 19.00 40.00 40.00 50.40 in the percentage of the adult population that use formal 24-Mar-2011 24-Mar-2011 29-Jun-2018 30-May-2018 financial institutions.
PDO Indicator Two: Increase Percentage 17.00 40.00 40.00 38.50 in the proportion of women within the adult population 24-Mar-2011 24-Mar-2011 29-Jun-2018 30-May-2018 that is formally banked.
Comments (achievements against targets): Comments: Access to informal financial services declined to 45% in 20 18 from 53% in 20 14 implying, in part, that there is increased reliance on formal services (i.e. people have been moving away from friends and family, unregulated financial institutions, and savings and loan groups)
Unlinked Indicators Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion
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PDO Indicator Three: Agency Text 0 450 450 468 banking regulations operational 03-Dec-2012 03-Dec-2012 29-Jun-2018 28-Feb-2018
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion PDO Indicator Four: Text See sub-indicator See sub-indicator See sub-indicator See sub-indicator Transactions volume and below below below below value processed by new payments systems (ATS, 24-Mar-2011 24-Mar-2011 29-Jun-2018 30-Apr-2018 National Switch, MFI TPH)
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Sub-indicator Four (a): Text Volume: 2,080,441 Volume: 4,349,952 Volume: 4,349,952 Volume: 21,220,986 Transactions volume and Value (MK bn): 3,415 (209%) (209%) Value (MK bn): 73,415 value processed by ATS Value (MK bn): 5,011 Value (MK bn): 5,011 (numeric/percentage, (147%) (147%) custom)
24-Mar-2011 24-Mar-2011 29-Jun-2018 30-Apr-2018
Comments (achievements against targets):
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Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Sub-indicator Four (b): Text None: no Volume: 5,399,428 Volume: 5,399,428 Volume: 5,390,276 Transactions volume and interoperable switch (936%) (936%) Value (MK bn): 83.51 value processed by National existed Value (MK bn): Value (MK bn): Switch (numeric/percentage, Deliberately not Deliberately not custom) defined defined
24-Mar-2011 24-Mar-2011 29-Jun-2018 31-Dec-2017
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion
Sub-indicator Four (c): Text None: no MFI Hub At least 5 institutions At least 5 institutions Being implemented Transactions volume and existed to go live by June 2018 to go live by June 2018 value processed by MFI Hub (numeric/percentage, 24-Mar-2011 24-Mar-2011 29-Jun-2018 31-Dec-2017 custom)
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion
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PDO Indicator Five: Number 3.60 4.80 4.80 3.90 Proportion of financially literate population (text, 29-Aug-2014 29-Aug-2014 29-Jun-2018 30-May-2018 custom) (The values are an index that ranges from 0 (illiterate) to 7 (highly literate) based on a baseline survey
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion PDO Indicator Six: Proportion Number 3.40 4.40 4.40 3.60 of financially literate women in the population (text, 29-Aug-2014 29-Aug-2014 29-Jun-2018 30-May-2018 custom) - (The values are an index that ranges from 0 (illiterate) to 7 (highly literate)
Comments (achievements against targets):
A.2 Intermediate Results Indicators
Component: 1: Financial Sector Regulation and Supervision
Indicator Name Unit of Measure Baseline Original Target Formally Revised Actual Achieved at
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Target Completion Indictor One: Key regulations Text Existing regulatory 2nd group of key Key regulations and Regulations related to and supervision manuals framework needs to regulations/ supervision manuals the 10 laws that were issued to support be upgraded in order supervision manuals developed and issued passed from March implementation of the 10 to support the issued to support 2009 have either been new financial laws which implementation of the implementation of 10 issued or are at have beenpassed recently or 7 new laws passed in new financial laws gazetting stage to be passed over the life of the last 2 years, in which had passed at the project. addition to the 3 new the start and over the bills that are expected life of the project to be passed later
24-Mar-2011 24-Mar-2011 29-Jun-2018 03-Apr-2018
Indicator Two: Automated Text Offsite and macro- Analytical tools for Analytical tools for The Bank Supervision tools for offsite surveillance prudential analysis is offsite monitoring and offsite monitoring and Application (BSA) was and macro-prudential not supported by analysis used in day- analysis used in day- enhanced to include analysis designed, acquired automated analytical to-day work. Stability to-day work. non-bank financial and implemented. tools using Report updated and institutions; the comprehensive published at least enhancement was reliable and timely Annually Stability Report completed in June data updated and 2017. published at least Annually Financial stability reports are being published
24-Mar-2011 24-Mar-2011 29-Jun-2018 03-Apr-2018
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Indicator Three: RBM Text No automated 100% staff Trained 100% of staff trained All relevant staff staff trained in uses of analytical tools are trained in the analytical tools and available and staff do enhanced BSA regarding new not have hands on regulations (text, custom experience using them breakdown) 24-Mar-2011 24-Mar-2011 29-Jun-2018 03-Apr-2018
Comments (achievements against targets):
Component: 2: Financial Infrastructure
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Indicator five: Number of Text a) Proposed National All banks on National a) 6 banks on National a) All 9 banks on participating members of all Switch not yet Switch. Switch. National Switch and 3 payment systems (text, operational All banks on ATS b) 6 banks on ATS live on ATMs and POS custom) b) Proposed ATS not MFIs and FCs on the c) Five MFIs and FCs b) All 9 banks on ATS. yet operational MFI TPH on the MFI TPH Government and MRA c) Proposed MFI TPH are viewing members not yet operational c) 16 MFIs and FC on the MFI TPH pilot to go live by 29th June 2018. Five of them to go live end June 2018
22-Dec-2011 24-Mar-2011 29-Jun-2018 30-Apr-2018
Comments (achievements against targets):
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Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Indicator Six: Increased Text See below See below See below See below number, value, volume of POS, ATMs and mobile 31-Dec-2012 24-Mar-2011 29-Jun-2018 30-May-2018 payments (text, custom)
Sub-indicator Six (a): Text Number: 688 Original Target was Number: - Number: 1,576 Number, value, volume of Vol: 183,248 different before the Vol: 245,570 (134 %) Vol: 2,556,541 POS (text, custom component was breakdown) Value (MK mn): 3,548 subdivided. Value (MK mn): 6,287 Value (MK mn): (177 %) 101,907
31-Dec-2012 24-Mar-2011 29-Jun-2018 30-May-2018
Sub-indicator Six (b): Text Number: 373 Original Target was Number: Not defined Number: 481 Number, value, volume of Volume: 17,217,584 different before the Volume: 23,073,209 Volume: 136,907,780 ATMs (interbank) (numeric, component was (134%) custom breakdown) Value (MK bn): 0.170 subdivided. Value: (MK bn) 2,417 Value (MK bn): 0.302 (177%)
31-Dec-2012 24-Mar-2011 29-Jun-2018 30-May-2018
Sub-indicator (c1): Number, Text Number: 185,758 Original Target was Number: Not defined Number: 4,581,992 value, volume of MNO-led Volume: 698,419 different before the Volume: 11,717,526 Volume: 333,395,067 mobile payments (text, component was (1,678%) custom breakdown) Value (MK bn): 1.40 subdivided. Value (MK bn): 1,022 Value (MK bn): 158.28
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(11,337%)
31-Dec-2012 24-Mar-2011 29-Jun-2018 30-May-2018
Sub-indicator (c2): Number, Text Number: 176,907 Original Target was Number: --- Number: 952,702 value, volume of Bank-led Volume: 3,633,484 different before the Volume: 4,869,216 Volume: 75,072,703 mobile payments (text, component was (134%) custom breakdown) Value (MK mn): 3,235 subdivided. Value (MK mn): Value (MK mn): 5,731 462,439 (177%)
31-Dec-2012 24-Mar-2011 29-Jun-2018 30-May-2018
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Indicator 7: Approved road- Text No roadmap for National Switch live Broad-based The EFT roadmap map for implementation of implementation of and operational. ownership and finalized and its government EFT payment government EFT acceptance of an 18- implementation program (text, custom) payment program month action plan for commenced. MNOs and MFI Hub government EFT Contracts for the integrated on the payment program development of National Switch various interfaces to secure government All (60%) payment payment streams have interfaces under the been signed and are Government EFT
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Action Plan being implemented. implemented
22-Dec-2011 29-Jun-2018 29-Jun-2018 03-Apr-2018
Comments (achievements against targets):
Component: 3: Financial Consumer Protection and Financial Literacy
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Indicator 8: Legal and Text The Financial Services Action plan on Action plan on Third (final) priority regulatory framework for Act includes some financial consumer financial consumer regulations drafted; consumer protection major provisions on protection with protection with these included market prepared and presented to consumer protection, priorities for legal and priorities for legal and conduct risk-based Cabinet (text, custom) and gives the RBM regulatory reform regulatory reform supervisory authority to regulate implemented in implemented in guidelines. and supervise priority phases priority phases consumer protection issues in financial services.
22-Dec-2011 29-Jun-2018 29-Jun-2018 03-Apr-2018
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion
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Indicator 9: Institutional Text RBM's consumer Priority measures of Priority measures of The CPFL drafted arrangements for consumer protection unit (CPFL) institutional institutional Alternative Dispute protection in all financial has been created (but strengthening strengthening Resolution (ADR) Bill services implemented not staffed) within the program implemented program implemented for the Cabinet as a Microfinance and including sending the including sending the step towards the Capital Markets unit ADR Bill to Cabinet ADR Bill to Cabinet adoption of a Twin- Peak model to financial consumer protection
22-Dec-2011 29-Jun-2018 29-Jun-2018 03-Apr-2018
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Indicator 10: Increased Text Consumer rights in Consumer rights Consumer rights During the baseline, awareness of rights as financial services is a awareness: awareness: 36.2% of the financial consumers among nascent concept and Baseline+15% Baseline+15% population was not population reached by measurement of aware of government financial literacy campaign awareness of the agencies that can be (text, custom) rights needs to be Financial literacy Financial literacy approached for developed through campaign: 100% of campaign: 100% of financial services Baseline survey. No targeted population targeted population related complaints systematic financial reached reached literacy campaign has been conducted in Malawi.
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22-Dec-2011 29-Jun-2018 29-Jun-2018 03-Apr-2018
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Indicator 11: RBM Text No training or All existing staff All existing staff Except for staff institutional capacity has developed processes trained (i.e. individual trained (i.e. individual employed in the two been enhanced for consumer and procedures to structured training, structured training, years prior to the ICR, protection supervision (text, staff attachments, study attachments, study 100% of staff in the custom) tours, local training tours, local training consumer protection workshops) workshops) unit was trained
Furthermore, no training was planned for the 8-month extension period to June 2018
22-Dec-2011 31-Aug-2017 31-Aug-2017 30-May-2018
Comments (achievements against targets):
Component: 4: Ministry of Finance's Financial Sector Policy and Governance Capacity and Long-term Finance
Indicator Name Unit of Measure Baseline Original Target Formally Revised Actual Achieved at
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Target Completion Indicator 12: State ownership Text No explicit state- State ownership policy State ownership policy Ownership regulations policy in financial sector ownership policy has implemented issuance implemented issuance for statutory bodies in developed, published, and been issued of parastatal of parastatal Malawi, SOE implemented (text, custom) guarantees, guarantees, guidelines on indemnities, and indemnities, and overdraft limits, letters of consent and letters of consent and feedback from the comfort under comfort under Ministry of Justice implementation implementation Developed SOE guidelines on overdraft limits, issuance of parastatal guarantees, indemnities, and letters of consent and comfort.
22-Dec-2011 31-Aug-2018 31-Aug-2018 03-Apr-2018
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Indicator 13: Core functions Text Role of Ministry of 100% of FSPU staff 100% of FSPU staff No training was of the FSPU (Financial Sector Finance in financial trained and annual trained and annual planned for the 8- Policy Unit) executed by sector policy business plan targets business plan targets month extension
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appropriately trained staff formulation and met met period to June 2018 (text, custom) monitoring is limited The FSPU has since been combined with Government Pensions to form the Pensions and Financial Sector Policy Division headed by a Director.
22-Dec-2011 31-Aug-2017 31-Aug-2017 03-Apr-2018
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Indicator 13: Core functions Text Role of Ministry of 100% of FSPU staff 100% of FSPU staff No training was of the FSPU (Financial Sector Finance in financial trained and annual trained and annual planned for the 8- Policy Unit) executed by sector policy business plan targets business plan targets month extension appropriately trained staff formulation and met met period to June 2018 (text, custom) monitoring is limited The FSPU has since been combined with Government Pensions to form the Pensions and Financial Sector Policy Division headed
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by a Director.
22-Dec-2011 31-Aug-2017 31-Aug-2017 03-Apr-2018
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Indicator 14: Policy Text Long term financing is Policy framework Policy framework Issues paper on long frameworks for provision of a nascent concept in adopted adopted term finance was long term financing Malawi and no developed and long developed; including (i) systematic analysis term finance policy equity and debt/leasing has been carried out Detailed sectoral Detailed sectoral was drafted. reviews completed reviews completed financing, (ii) PPP for on the subject matter infrastructure, and (iii) (pensions, insurance, (pensions, insurance, development of long term credit guarantees, and credit guarantees, and A consultancy on long savings leasing studies) leasing studies) term finance guarantee scheme was completed and an action plan on the same was drafted. A framework for investment of pension funds was also developed.
Development of a leasing framework did
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not proceed as a thorough and analytical study of the Malawi market was not completed due to poor quality work, which led to the cancellation of the contract
22-Dec-2011 31-Aug-2017 31-Aug-2017 30-May-2018
Comments (achievements against targets):
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B. KEY OUTPUTS BY COMPONENT
Output before Restructuring
Component 1: Financial Sector Regulation and Supervision
World Bank Supervision
• Review of the Anti-Money Laundering Act completed
• Draft Anti-Money Laundering Bill submitted to the Government
• Consultancies completed for drafting problem bank resolution framework and regulatory framework for mobile banking
• Third-party diagnostic audits for commercial banks completed and reports conducted
• Bank supervision resident advisor recruited
• Deposit Insurance Scheme Bill finalized and sent for Cabinet approval
• Call reports modified to take into account Agent Banking, Basel II, and Mobile Banking on adoption and dissemination workshops for the draft Anti-Money Laundering Bill
Capital Markets Supervision
• Frameworks and supervision manuals for capital markets completed
• Regulatory frameworks reviewed and capital markets development plan completed
• Directives for Securities Stabilization Fund developed
SACCOs’ and MFIs’ Supervision
• Consultancies completed for
o Supervisory Capacity Assessment of Malawi Microfinance Network
o Malawi Union of Savings and Credit Cooperatives
o Capacity Development Plan
Pension and Insurance Supervision
• Pension and Insurance Supervision framework reviewed and final report submitted
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• Consultant recruited to develop regulatory framework and supervision manuals for health insurance and casualty products
• Consultancy to design offsite and macro-prudential analytical tools finalized
Component 2: Financial Infrastructure
Strengthening the RTGS system
• Consultant hired to conduct technical analysis of the Malawi banking industry
• Implementation completed for ATS and CSD
Support for an MFI Processing Hub
• Commencement of preparatory meetings for the MFI Processing Hub—one internal (RBM) and one external stakeholder meeting conducted
• MFI-TPH Project Steering Committee constituted
• TORs for the Steering Committee adopted
• TORs for the two subcommittees—business and technical—drafted
• Learning visit to Ecuador undertaken (October 2014)
Component 3: Financial Consumer Protection and Financial Literacy
Enhance institutional arrangements for financial consumer protection
• Philippines study tour on consumer protection and education practices completed
• Mechanism established for handling, monitoring, and resolving consumer complaints
Developing a consumer awareness/financial literacy program
• Financial education programs developed for secondary school students
• Presentations made during two Financial Literacy weeks
• Baseline Financial Literacy and Consumer Survey completed and disseminated (annex 8)
• Micro, Small, and Medium Enterprises Survey completed and report disseminated
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Component 4: Ministry of Finance’s Financial Sector Policy Formulation, Governance Capacity and Long- term Finance
Strengthening Government financial sector policy formulation capacity
• Office equipment provided to the MOF
• One Toyota Fortuner 4x4 station wagon vehicle made available
• Office equipment delivered (server, five laptops, one LCD projector; two heavy-duty photocopiers, one scanner, eight desktops, eight UPS, one external hard drive, 14 anti- viruses and one color printer)
Strengthening Government’s oversight capacity for stat- owned financial institutions
• Feasibility study for the establishment of a development bank in Malawi concluded
Component 5: Implementation Support
Institutional and implementation arrangements
• The PIU continued to be located in the RBM and was fully staffed.
• Work plans and procurement plans were submitted on time and M&E functions were strengthened.
• Two Project Steering Committee meetings took place.
• Technical Working Group meetings took place on a regular basis.
Outputs after Restructuring
Component 1: Strengthening Financial Sector Regulation and Supervision
• Eighteen Regulations and Directives published
• Twenty-five Directives finalized and gazetted
• New Financial Crimes Bill passed by the Parliament replacing the Money Laundering, Proceeds of Serious Crimes, and Terrorist Financing Act
• Guidelines on Regulations of Islamic Finance developed
• Directives/Regulations on bank supervision for gazetting passed by the RBM
• Growth strategies and regulatory and hedging instruments developed for the bond market
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Component 2: Financial Infrastructure
Design, development, and implementation of a National Switch
• Implementation of the National Switch completed
• Contract awarded to supply, install, and commission the National Switch
• Hardware configuration and software installation completed
• User training for the RBM and commercial banks conducted
• The National Switch business plan completed
• Integration of the MSE ATS to the RBM’s ATS/CSD completed
• ATS for the MSE went live
• All commercial banks integrated into the National Switch (on ATMs)
• Five banks integrated on point of sale achieved
• MFI MFI Hub completed
Component 3: Financial Consumer Protection and Financial Literacy
• Inception report and a Financial Consumer Protection Bill drafted
• Alternative Dispute Resolution Bill drafted and reviewed
• Financial Ombudsman Bill drafted and reviewed
• Stakeholder consultative workshops on financial consumer protection directives held
• Financial literacy survey conducted (annex 9)
Component 4: Ministry of Finance’s Financial Sector Policy, Governance Capacity and Long-term Finance
• The 2016–2020 NFIS launched
• Chapter on access to finance in the MGDS III included by the Government
• MFSDS launched by the Government
Component 5: Implementation Support
• Implementation arrangements facilitated
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• Support provided for the operation of PIU at the RBM
• Operating expenses financed (PIU consultant salaries and office facilities)
• Consultancy costs financed for administering the five-year MFSDT which financed innovative solutions to access finance
• Steering Committee met regularly
• The project’s accounting system remained sound for transaction processing and reporting
• The project’s unaudited IFRs and audited financial statements developed
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ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION
A. TASK TEAM MEMBERS
Name Role Preparation Supervision/ICR Thilasoni Benjamin Musuku, Efrem Zephnath Task Team Leader(s) Chilima Steven Maclean Mhone, Anthony Aggrey Procurement Specialist(s) Msendema Trust Chamukuwa Chimaliro Financial Management Specialist Steven R. Dimitriyev Team Member Brian G. Mtonya Team Member Valeria Salomao Garcia Team Member Michael Corlett Team Member Evans Makini Osano Team Member Rosamund Clare Grady Team Member Siegfried Zottel Team Member Zione Edith Kansinde Team Member Fiona Elizabeth Stewart Team Member Mercy Chimpokosera-Mseu Environmental Specialist Jan Philipp Nolte Team Member Tamara Juvenile Mwafongo Team Member Violette Mwikali Wambua Social Specialist William Nyambo Mwanza Team Member
B. STAFF TIME AND COST
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Staff Time and Cost Stage of Project Cycle No. of staff weeks US$ (including travel and consultant costs) Preparation FY11 70.971 156,807.22 FY12 6.100 60,092.21
Total 77.07 216,899.43
Supervision/ICR FY11 8.232 32,976.10 FY12 15.450 92,617.59 FY13 29.744 142,300.03 FY14 51.507 189,020.24 FY15 64.900 291,897.50 FY16 43.995 189,950.41 FY17 26.580 138,601.00 FY18 22.790 150,139.26 FY19 23.010 153,933.94 Total 286.21 1,381,436.07
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ANNEX 3. PROJECT COST BY COMPONENT
Amount at Actual at Percentage of Components Approval Project Closing Approval (US$, millions) (US$, millions) (US$, millions) 1: Financial Sector Regulation and Supervision 5.32 5.66 106 2: Financial Infrastructure 13.22 13.68 103 3: Financial Consumer Protection and 3.02 3.33 110 Financial Literacy 4: Ministry of Finance’s Financial Sector Policy and Governance Capacity and Long-term 3.39 3.09 91 Finance 5: Implementation Support 3.26 2.45 75 Total 28.21 28.21 100
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ANNEX 4. EFFICIENCY ANALYSIS
Kindly see Section II. C.
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ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS
IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA CREDIT NO: 4897-MW)
ON A CREDIT IN THE AMOUNT OF SDR18.1 MILLION (US$28.2 MILLION EQUIVALENT)
TO THE REPUBLIC OF MALAWI
FOR THE MALAWI FINANCIAL SECTOR TECHNICAL ASSISTANCE PROJECT (FSTAP)
June 2018
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FISCAL YEAR January 1 to December 31
ABBREVIATIONS AND ACRONYMS
ADR Alternative Dispute Resolution ATS Automated Transfer System CAS Country Assessment Strategy CPFL Consumer Protection and Financial Literacy CSD Central Securities Depository EFT Electronic Funds Transfer FC Financial Cooperative FIRST Financial Sector Reform and Strengthening FSAC Financial Sector Appeals Committee FSAP Financial Sector Assessment Program FSDS Financial Sector Development Strategy FSPU Financial Sector Policy Unit ICR Implementation Completion Report IFR Interim Financial Report ISM Implementation Support Mission M&E Monitoring and Evaluation MalTIS Malawi Traffic Information System MAMN Malawi Microfinance Network MFI Microfinance Institution MNO Mobile Network Operator MOFEPD Ministry of Finance, Economic Planning and Development MTR Mid Term Review MUSCCO Malawi Union of Savings and Credit Cooperatives NS National Switch PDO Project Development Objective PIU Project Implementation Unit PPA Project Planning Advance PPP Public Private Partnership RTGS Real Time Gross Settlement system SACCO Savings and Credit Cooperative SDR/XDR Special Drawing Rights ST Secretary to the Treasury STEP Systematic Tracking of Exchanges in Procurement TPH Transaction Processing Hub TTL Task Team Leader
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Table of Contents A. BASIC INFORMATION ...... 62 B. KEY DATES ...... 62 C. RATINGS SUMMARY ...... 62 D. SECTOR AND THEME CODES ...... 63 E. BORROWER STAFF ...... 63 F. RESULTS FRAMEWORK ANALYSIS ...... 65 1.0 PROJECT CONTEXT, DEVELOPMENT OBJECTIVES, AND DESIGN ...... 75
1.1 CONTEXT AT APPRAISAL ...... 75 1.1.1 Country and Macroeconomic Background ...... 75 1.1.2 Background to the Financial Sector ...... 75 1.1.3 Rationale for World Bank Assistance ...... 76 1.2 ORIGINAL PDO AND KEY INDICATORS (AS APPROVED) ...... 76 1.3 REVISED PDO (AS APPROVED BY ORIGINAL APPROVING AUTHORITY) AND KEY INDICATORS, AND REASONS/JUSTIFICATIONS ...... 78 1.4 MAIN BENEFICIARIES ...... 79 1.5 ORIGINAL COMPONENTS (AS APPROVED) ...... 79 1.5.1 Component 1: Financial sector regulation and supervision ...... 79 1.5.2 Component 2: Financial infrastructure ...... 80 1.5.3 Component 3: Financial consumer protection and financial literacy ...... 80 1.5.4 Component 4: Ministry of Finance financial sector policy and governance capacity and long-term finance ...... 80 1.5.5 Component 5: Implementation support ...... 81 1.6 REVISED COMPONENTS ...... 82 1.7 OTHER SIGNIFICANT CHANGES ...... 82 2.0 KEY FACTORS AFFECTING IMPLEMENTATION AND OUTCOMES ...... 82
2.1 PROJECT PREPARATION, DESIGN AND QUALITY AT ENTRY ...... 82 2.1.1 Soundness of background analysis ...... 82 2.1.2 Assessment of project design ...... 83 2.1.3 Adequacy of Government’s commitment, stakeholder involvement, and/or participatory processes ...... 83 2.1.4 Assessment of risks ...... 84 2.2 IMPLEMENTATION ...... 84 2.2.1 Delays in No Objections from the World Bank ...... 84 2.2.2 Misunderstanding of the nature of capacity building under the Project ...... 85 2.2.3 High staff attrition and understaffing ...... 85 2.2.4 Slow speed by decision-making authorities ...... 85
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2.2.5 Underestimation of activity costs and duration during project planning phase ...... 86 2.2.6 Poor planning during implementation ...... 87 2.2.7 Extension of the closing date ...... 87 2.3 M&E DESIGN, IMPLEMENTATION, AND UTILIZATION...... 87 2.4 SAFEGUARDS AND FIDUCIARY COMPLIANCE ...... 87 2.4.1 Financial Management ...... 87 2.4.2 Procurement ...... 88 2.4.3 Safeguards ...... 88 2.5 POST-COMPLETION OPERATION/NEXT PHASE ...... 89 3.0 ASSESSMENT OF OUTCOMES ...... 90
3.1 RELEVANCE OF OBJECTIVES, DESIGN, AND IMPLEMENTATION ...... 90 3.1.1 Relevance of Objectives: High...... 90 3.1.2 Relevance of Design: High ...... 90 3.1.3 Relevance of implementation against original PDO indicators: Substantial ...... 90 3.2 ACHIEVEMENT OF PROJECT DEVELOPMENT OBJECTIVES ...... 91 3.3 EFFICIENCY ...... 92 3.4 JUSTIFICATION FOR OVERALL OUTCOME RATING ...... 92 3.5 OVERARCHING THEMES, OTHER OUTCOMES AND IMPACTS ...... 93 4.0 ASSESSMENT OF RISK TO DEVELOPMENT OUTCOME ...... 93 5.0 ASSESSMENT OF BANK AND BORROWER PERFORMANCE ...... 94
5.1 BANK PERFORMANCE ...... 94 5.1.1 Bank Performance in Ensuring Quality at Entry ...... 94 5.1.2 Quality of Support ...... 94 5.1.3 Justification of Rating for Overall World Bank Performance ...... 95 5.2 BORROWER PERFORMANCE ...... 95 5.2.1 Government Performance ...... 95 5.2.2 Implementing Agency Performance ...... 96 5.2.3 Justification of Rating for Overall Borrower Performance ...... 96 6.0 LESSONS LEARNED ...... 96
6.1 PROJECT PREPARATION PHASE: ...... 96 6.2 IMPLEMENTATION PHASE: ...... 97 6.3 CAPACITY BUILDING ...... 98 6.4 POST-IMPLEMENTATION PHASE: ...... 98 7.0 ANNEXES ...... 99
7.1 GROWTH STATISTICS ...... 99 7.2 PROJECT ASSESSMENT USING THE DAC CRITERIA ...... 99 7.2.1 Relevance ...... 99 7.2.2 Effectiveness ...... 101
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7.2.3 Efficiency ...... 102 7.2.4 Impact ...... 104 7.2.5 Sustainability ...... 105 7.3 PROJECT ASSESSMENT BY COMPONENT ...... 106 7.3.1 Component 1: Financial sector regulation and supervision ...... 106 7.3.2 Component 2: Financial infrastructure ...... 107 7.3.3 Component 3: Financial consumer protection and financial literacy ...... 108 7.3.4 Component 4: Ministry of Finance financial sector policy and governance capacity and long-term finance ...... 109 7.3.5 Component 5: Implementation support ...... 110 7.4 LEGAL COVENANTS AS OUTLINED IN THE FINANCING AGREEMENT ...... 110 7.5 STATUS OF DIRECTIVES, REGULATIONS AND BILLS PREPARED DURING THE LIFE OF FSTAP ...... 111
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A. BASIC INFORMATION Financial Sector Technical Country: Malawi Project Name: Assistance Project (FSTAP) Project ID: P122616 L/C/TF Number(s): IDA - 48970 ICR Date: 30 June 2018 ICR Type: Core ICR Government of Malawi Lending Instrument: Special Investment Loan Borrower: (GOM) Original Total US$28.20 million Disbursed Amount: US$25.09 million Commitment: Revised Amount: Not revised Environment Category: C Implementing Agencies: Reserve Bank of Malawi (RBM) Co-financiers and Other External Partners: None
B. KEY DATES Process Date Process Original Date Revised/Actual Date(s) Concept Review: Effectiveness: 22-Dec-2011 Appraisal: 03-Feb-2011 Restructuring(s): Approval: 24-Mar-2011 Mid-term Review: 04-Nov-2011 Closing: 31-Aug-2016 29-Jun-2018
C. RATINGS SUMMARY C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Moderate World Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory
C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) World Bank Ratings Borrower Ratings
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Moderately Quality at Entry: Moderately Satisfactory Government: Unsatisfactory Moderately Implementing Quality of Supervision: Satisfactory Unsatisfactory Agency/Agencies: Overall Bank Moderately Overall Borrower Moderately Satisfactory Performance: Unsatisfactory Performance:
C.3 Quality at Entry and Implementation Performance Indicators QAG Assessments Implementation Performance Indicators Ratings (if any) Potential Problem Project at any time (Yes/No): No Government: None Implementing Problem Project at any time (Yes/No): No None Agency/Agencies: Project Development Objective (PDO) rating Moderately
before Closing/Inactive status: Satisfactory* *Based on the ISM of January 2018
D. SECTOR AND THEME CODES Sector Code (as % of the total World Bank financing) Ratings Ratings Public Administration – Financial Sector 100% Theme Code (as % of total World Bank financing) Private Sector Development Finance Public Sector Management
E. BORROWER STAFF Positions At ICR At Approval ST/Chair of the Project Ben Botolo Steering Committee RBM Governor/Head of Dalitso Kabambe (PhD) Implementing Agency FSTAP Project Manager Joseph Milner
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FSTAP M&E Specialist Zex Kalipalire
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RESULTS FRAMEWORK ANALYSIS FSTAP PDO Indicators
PDO Indicator 1: Increase in the percentage of the adult population that use formal financial institutions (percentage, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value 19.00 33.00 39.70 40.00 Date achieved 24-Mar-2011 31-Dec-2017 29-Jun-2018 29-Jun-2018 Comments (incl. % Access to informal financial services declined to 45% in 2018 from 53% in 2014 achievement) implying, in part, that there is increased reliance on formal services (i.e. people have been moving away from friends and family, unregulated financial institutions, and savings and loan groups)
PDO Indicator 2: Increase in the proportion of women within the adult population that is formally banked (percentage, custom breakdown) Indicator Baseline Actual (Previous) Actual (Current) End Target Value 17.00 28.00 38.50 40.00 Date achieved 24-Mar-2011 31-Dec-2017 29-Jun-2018 29-Jun-2018 Comments (incl. % Access to formal financial services is higher for men than for women and the larger achievement) proportion of women access their services from informal means (48.6%) compared to men where only 40 percent access informal services.
PDO Indicator 3: Agency banking regulations (numeric, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value 0 435 468 450 Date achieved 03-Dec-2012 31-Dec-2017 28-Feb-2018 29-Jun-2018 Comments (incl. % An increase in agency banking agreements represents an increase in availability of achievement) banking services especially in areas where banking services were not available and, therefore, impacting positively on financial inclusion.
PDO Indicator 4: Transactions volume and value processed by new payments systems (ATS, National Switch, MFI TPH) Indicator Baseline Actual (Previous) Actual (Current) End Target See sub-indicator See sub-indicator See sub-indicator See sub-indicator See sub-indicator below below below below below
Sub-indicator 4(a): Transactions volume and value processed by ATS (numeric/percentage, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value Volume: Volume: Volume: Volume: 2,080,441 19,623,963 21,220,986 4,349,952 Value (MK bn): Value (MK bn): Value (MK bn): Value (MK bn): 3,415 66,238 73,415 5,011 Date achieved 24-Mar-2011 31-Dec-2017 30-Apr-2018 29-Jun-2018
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Sub-indicator 4(b): Transactions volume and value processed by National Switch (numeric/percentage, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value None: no Volume: Volume: Volume: interoperable switch 2,830,355 5,390,276 5,399,428 existed Value (MK bn): Value (MK bn): Value (MK bn): 38.62 83.51 Deliberately not defined but tracked Date achieved 24-Mar-2011 31-Dec-2016 31-Dec-2017 29-Jun-2018 Comments (incl. % The National Switch is a volume business as such no targets are set for values. The achievement) volume of transactions is more likely to double once the two Mobile Money Service Providers (i.e. TNM Mpamba and Airtel Money) are integrated into the Switch. The MFI Hub will also result in significant growth in volumes.
Sub-indicator 4(c): Transactions volume and value processed by MFI Hub (numeric/percentage, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value None: no MFI Hub Implementation of Five non-bank At least 5 existed MFI Hub was financial institutions to go underway institutions (MFI live by June 2018 and SACCOs) using the hub software. Three more to go-live before end July 2018. Date achieved 24-Mar-2011 31-Dec-2017 27-Jun-2018 29-Jun-2018 Comments (incl. % No records are available yet of transactions processed by the MFI Hub when it went live achievement) with four institutions on 22nd June and the fifth on 27th June 2018. System customization and installation was completed and Trainer of Trainer training for sixteen financial institutions was completed.
PDO Indicator 5: Proportion of financially literate population (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative 3.6 3.6 3.9 4.8 or qualitative) Date achieved 29-Aug-2014 31-Dec-2017 29-Jun-2018 29-Jun-2018 Comments (incl. % The values are an index that ranges from 0 (illiterate) to 7 (highly literate). The results achievement) from the index shows that the population is more knowledgeable in financial literacy concepts as there has been an increase from the 2014 FSTAP baseline to the 2018 Follow-up Survey. On the other hand, the financially literate population (proportion of the population answering over 4 out of 7 questions correct) increased by almost 10 percentage points from 28.3% in 2014 to 37.5% in 2018.
PDO Indicator 6: Proportion of financially literate women in the population (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative 3.4 3.4 3.6 4.4 or qualitative) Date achieved 29-Aug-2014 31-Dec-2017 29-Jun-2018 29-Jun-2018
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Comments (incl. % The values are an index that ranges from 0 (illiterate) to 7 (highly literate). The results achievement) from the index shows that the women population is more knowledgeable in financial literacy concepts as there has been an increase from the 2014 FSTAP baseline to the 2018 Follow-up Survey. On the other hand, the financially literate women population (proportion of the women population answering over 4 out of 7 questions correct) increased by almost 13 percentage points from 22.9% in 2014 to 36.1% in 2018.
a) Intermediate Outcome Indicators
Indicator 1: Key regulations and supervision manuals issued to support implementation of the 10 new financial laws which have been passed recently or to be passed over the life of the project (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative or Existing regulatory Regulations related to Regulations Key regulations and qualitative) framework needs to the 10 laws that were related to the 10 supervision be upgraded in order passed from March laws that were manuals developed to support the 2009 have either been passed from March and issued to implementation of issued or are at 2009 have either support the 7 new laws gazetting stage been issued or are implementation of passed in the last 2 at gazetting stage 10 new financial years, in addition to laws which had the 3 new bills that passed at the start are expected to be and over the life of passed later the project Date achieved 24-Mar-2011 31-Dec-2017 29-Jun-2018 29-Jun-2018 Comments (incl. % The 7 new laws that were passed before the start of FSTAP are Banking Act, Insurance achievement) Act, Microfinance Act, Securities Act, Financial Services Act, Credit Reference Bureau Act, and the National ID Act. The pending bills at the start of the project, Financial Cooperatives, Pensions, and Payment Systems, were passed into law over the life of FSTAP.
Indicator 2: Automated tools for offsite surveillance and macro-prudential analysis designed, acquired and implemented (text, custom breakdown) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative or Offsite and macro- The Bank Supervision The Bank Analytical tools for qualitative) prudential analysis is Application (BSA) was Supervision offsite monitoring not supported by enhanced to include Application (BSA) and analysis used in automated analytical non-bank financial was enhanced to day-to-day work. tools using institutions; the include non-bank Stability Report comprehensive enhancement was financial updated and reliable and timely completed in June institutions; the published at least data 2017. enhancement was Annually completed in June Financial stability 2017. reports are regularly published. Financial stability reports are regularly published Date achieved 24-Mar-2011 31-Dec-2017 29-Jun-2018 29-Jun-2018 Comments (incl. % The reports are available on achievement) https://www.rbm.mw/FinancialStability/FinancialStabilityReports/
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Indicator 3: RBM staff trained in uses of analytical tools and regarding new regulations (text, custom breakdown) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative or No automated All relevant staff All relevant staff 100% of staff qualitative) analytical tools are trained in the trained in the trained available and staff do enhanced BSA enhanced BSA not have hands on experience using them Date achieved 24-Mar-2011 31-Dec-2017 29-Jun-2018 29-Jun-2018 Comments (incl. % BSA training was not planned for 2018 as the BSA enhancement was completed in 2017. achievement) FSTAP procured 30 laptops on which the BSA application was installed to allow access to the BSA by staff at all times.
Indicator 4: Modern financial infrastructure deployed and operational (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative or See sub-indicator See sub-indicator See sub-indicator See sub-indicator qualitative) below below below below
Sub-indicator (a): National Switch deployed and operational (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative or Outdated financial National Switch live National Switch National Switch live qualitative) infrastructure. and operational live and and operational. operational. MNOs and MFI Hub Interoperability integrated on the has been achieved National Switch. for ATMs and POS. The MFI Hub has been integrated on the National Switch. Date achieved 22-Dec-2011 31-Dec-2017 29-Jun-2018 29-Jun-2018
Sub-indicator (b): ATS/CSD deployed and operational (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative or Outdated financial ATS live since ATS live since ATS live and qualitative) infrastructure. December 2014 and December 2014 operational. operating smoothly and operating smoothly Date achieved 22-Dec-2011 31-Dec-2017 29-Jun-2018 29-Jun-2018
Sub-indicator (c): Microfinance Transaction Hub deployed and operational (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative or Outdated financial Contracts for MFI Hub Data migration and Installation, qualitative) infrastructure. were signed. The verification commissioning and solution (provided completed for 16 stabilization of MFI through software as a pilot institutions. Transaction
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service and hardware System (software) Processing Hub as a service) was under installed and User (TPH) solution. implementation. Acceptable completed and Requirements UAT training gathering completed. conducted to nine System run-through MFIs and SACCOs. and data migration template agreed with all users Date achieved 22-Dec-2011 31-Dec-2017 29-Jun-2018 29-Jun-2018
Indicator 5: Number of participating members of all 3 payment systems (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value Proposed National All 9 banks on National All 9 banks on 6 banks on National Switch not yet Switch and live on National Switch Switch. operational ATMs and POS and live on ATMs and POS Proposed ATS not yet All 9 banks on ATS. All 9 banks on ATS. 6 banks on ATS operational Government and MRA Government and are viewing members MRA are viewing members Proposed MFI TPH 21 MFIs and FC have 16 MFIs and FC are Five MFIs and FCs not yet operational committed to join the on the MFI TPH on the MFI TPH MFI TPH in the first pilot phase and cohort five of them went live by 27th June 2018 Date achieved 22-Dec-2011 31-Dec-2017 29-Jun-2018 29-Jun-2018
Indicator 6: Increased number, value, volume of POS, ATMs and mobile payments (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative or See sub-indicator See sub-indicator See sub-indicator See sub-indicator qualitative) below below below below
Sub-indicator (a): Number, value, volume of POS (text, custom breakdown) Indicator Baseline Actual (Previous) Actual (Current) End Target Value Number: 688 Number: 1,474 Number: 1,576 Vol.: Vol.: Vol.: Vol.: 183,248 2,267,636 2,556,541 245,570 Value (MK mn): Value (MK mn): Value (MK mn): Value (MK mn): 3,548 87,863 101,907 6,286 Date achieved 31-Dec-2012 31-Dec-2017 30-May-2018 29-Jun-2018
Sub-indicator (b): Number, value, volume of ATMs (interbank) (numeric, custom breakdown) Indicator Baseline Actual (Previous) Actual (Current) End Target Value Number: 373 Number: 466 Number: 481 Number: Not defined Volume: Volume: Volume: Volume: 23,073,209 17,217,584 129,607,815 136,907,780 Value (MK bn):
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Value (MK bn): Value (MK bn): 2,220 Value: (MK bn) 0.302 0.170 2,417 Date achieved 31-Dec-2013 31-Dec-2017 30-May-2018 29-Jun-2018 Comments (incl. % The figures presented under this sub-indicator include the interbank transactions under achievement) PDO Indicator 4
Sub-indicator (c1): Number, value, volume of MNO-led mobile payments (text, custom breakdown) Indicator Baseline Actual (Previous) Actual (Current) End Target Value Number: 185,758 Number: 4,581,992 Number: 4,581,992 Number: Not defined Volume: 698,419 Volume: Volume: Volume: 11,717,526 Value (MK bn): 328,796,294 333,395,067 Value (MK bn): 158.28 1.40 Value (MK bn): 1,022 Value (MK bn): 1,022 Date achieved 31-Dec-2012 31-Dec-2017 30-May-2018 29-Jun-2018
Sub-indicator (c2): Number, value, volume of Bank-led mobile payments (text, custom breakdown) Indicator Baseline Actual (Previous) Actual (Current) End Target Value Number: 176,907 Number: 429,557 Number: 952,702 Number: Volume: Volume: 67,588,417 Volume: Volume: 4,869,216 3,633,484 Value (MK mn): 75,072,703 Value (MK mn): 5,731 Value (MK mn): 381,325 Value (MK mn): 3,235 462,439 Date achieved 31-Dec-2012 31-Dec-2017 30-May-2018 29-Jun-2018
Indicator 7: Approved road-map for implementation of government EFT payment program (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative No roadmap for Implementation of The EFT roadmap Broad-based or qualitative) implementation of EFT draft roadmap finalized and its ownership and government EFT commenced with: implementation acceptance of an payment program development and commenced. 18-month action approval of TORs for Contracts for the plan for the development of development of government EFT various interfaces to various interfaces payment program secure government to secure All (60%) payment payment streams, government interfaces under and contracts drafted. payment streams the Government have been signed EFT Action Plan and are being implemented implemented. Date achieved 22-Dec-2011 31-Dec-2017 29-Jun-2018 29-Jun-2018 Comments (incl. % Contracts were signed with SWIFT, Oracle, NITEL, Softech, Montran and GLOBE to achievement) provide various interfaces for IFMIS, Flexcube, ATS and government HRMIS
Indicator 8: Legal and regulatory framework for consumer protection prepared and presented to Cabinet (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative or The Financial Developed an action Third (final) Action plan on qualitative) Services Act includes plan for financial priority financial consumer
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some major consumer protection regulations protection with provisions on (outlining legal and drafted; these priorities for legal and consumer protection, regulatory reforms to included market regulatory reform and gives the RBM enhance consumer conduct risk-based implemented in authority to regulate protection) supervisory priority phases and supervise guidelines. Transparency and consumer protection Disclosure Directives issues in financial drafted for: insurance, services. investment, pension, savings products and credit products Drafted Directives on: Fair treatment of financial consumers, and Advertisement of financial products and services Complaints handling procedure/guideline reviewed and printed. Date achieved 22-Dec-2011 31-Dec-2017 29-Jun-2018 29-Jun-2018
Indicator 9: Institutional arrangements for consumer protection in all financial services implemented Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative RBM's consumer The Consumer The CPFL drafted Priority measures or qualitative) protection unit Protection and the Financial of institutional (CPFL) has been Financial Literacy Ombudsman Bill strengthening created (but not (CPFL) unit was and the Financial program staffed) within the created and staff Consumer implemented Microfinance and trained. Protection Bill for including sending Capital Markets unit the Cabinet as a the Financial The unit commenced step towards the Ombudsman Bill handling complaints adoption of a and the Financial that consumers felt Twin-Peak model Consumer were not satisfactorily to financial Protection Bill to resolved by service consumer Cabinet providers. protection CPFL also developed guidelines and started market conduct supervision of financial institutions Date achieved 22-Dec-2011 31-Dec-2017 29-Jun-2018 29-Jun-2018 Comments (incl. % The ADR Bill has been drafted by a consultant and stakeholder consultations were achievement) completed. It has since been submitted to MOF for processing.
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Indicator 10: Increased awareness of rights as financial consumers among population reached by financial literacy campaign (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative Consumer rights in Developed and Awareness of RBM Consumer rights or qualitative) financial services is a implementing a and its Consumer awareness: nascent concept and strategy on financial protection unit Baseline+15% measurement of literacy; increased by 10 Financial literacy awareness of the percentage points Developed campaign: 100% rights needs to be (74.2% to 84%) secondary school of targeted developed through and 3 percentage financial education population Baseline survey. No points (12.5% to source books; reached systematic financial 16%) respectively. Intensified mass literacy campaign media financial No systematic has been conducted literacy programs, assessment of the in Malawi. including on campaign electronic payments; coverage took Conducted place secondary school financial capability survey. Date achieved 22-Dec-2011 31-Dec-2017 29-Jun-2018 29-Jun-2018 Comments (incl. % Despite increased awareness of Financial Consumer Protection institutions, 36.2% (in achievement) 2014) of consumers who had conflicts with their financial providers were not aware of the existence of these consumer protection agencies; this compares to 44% in 2018.
Indicator 11: RBM institutional capacity has been enhanced for consumer protection supervision (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative No training or Except for staff Except for staff All existing staff or qualitative) developed processes employed in the two employed in the trained (i.e. and procedures to years prior to the ICR, two years prior to individual staff 100% of staff in the the ICR, 100% of structured consumer protection staff in the training, unit was trained consumer attachments, protection unit study tours, local was trained training workshops) Furthermore, no training was planned for the 8- month extension period to June 2018 Date achieved 22-Dec-2011 31-Aug-2017 29-Jun-2018 29-Jun-2018
Indicator 12: State ownership policy in financial sector developed, published, and implemented (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative No explicit state- Ownership Ownership State ownership or qualitative) ownership policy has regulations for regulations for policy been issued statutory bodies in statutory bodies implemented
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Malawi was drafted in Malawi, SOE and revised based on guidelines on feedback from the overdraft limits, Ministry of Justice issuance of parastatal Developed SOE guarantees, guidelines on indemnities, and overdraft limits, letters of consent issuance of parastatal and comfort guarantees, under indemnities, and implementation letters of consent and comfort. Date achieved 22-Dec-2011 31-Aug-2017 29-Jun-2018 29-Jun-2018 Under FSTAP, the Financial Services Appeals Committee (FSAC) was operationalized to hear appeals by financial institutions on decisions made by the Registrar of financial institutions. Rules of procedure for the operations of the committee were also established.
Indicator 13: Core functions of the FSPU (Financial Sector Policy Unit) executed by appropriately trained staff (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative Role of Ministry of The FSPU was No training was 100% of FSPU or qualitative) Finance in financial established and the planned for the 8- staff trained and sector policy business plan was month extension annual business formulation and developed by the period to June plan targets met monitoring is limited Long Term Advisor for 2018 the unit and adopted The FSPU has by the Ministry. since been All FSPU staff combined with participated in Government various capacity Pensions to form building initiatives the Pensions and (training and study Financial Sector tours) Policy Division headed by a Director. Date achieved 22-Dec-2011 31-Aug-2017 29-Jun-2018 31-Aug-2017
Indicator 14: Policy frameworks for provision of long term financing developed; including (i) equity and debt/leasing financing, (ii) PPP for infrastructure, and (iii) development of long term savings and investment institutions (e.g. pension funds) (text, custom) Indicator Baseline Actual (Previous) Actual (Current) End Target Value (quantitative Long term financing Issues paper on long- A meeting of Policy framework or qualitative) is a nascent concept term finance was Principal adopted in Malawi and no developed and long- Secretaries took Detailed sectoral systematic analysis term finance policy place in June 2018 reviews has been carried out was drafted. as a step in the completed requirements of (pensions,
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on the subject A consultancy on Policy framework insurance, credit matter long-term finance adoption. guarantees, and guarantee scheme leasing studies) Detailed sectoral was completed and reviews were an action plan on the completed for same was drafted. A pensions, credit framework for guarantees and investment of Islamic finance. A pension funds was study on leasing also developed. finance was Development of a cancelled due to leasing framework underperformance did not proceed as a by the consultant. thorough and No study was analytical study of the undertaken on Malawi market was insurance. not completed due to poor quality work, which led to the cancellation of the contract Date achieved 22-Dec-2011 31-Aug-2017 29-Jun-2018 31-Aug-2017
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PROJECT CONTEXT, DEVELOPMENT OBJECTIVES, AND DESIGN
Context at Appraisal
1.1.1 Country and Macroeconomic Background
1. Whereas the Malawi economy registered low GDP growth rates averaging 2 percent per annum between 1999 and 2004, uncharacteristically high maize harvest in 2007 led to GDP growth of 8.3 percent and 8.9 percent in 2008 and 2009, respectively (Annex 7.1). At the time of appraisal, when the global economy was reeling from effects of the 2008 global financial crisis, Malawi achieved relatively high economic growth registering a six-year average of 6 percent. The Malawi economy was little affected albeit from second round effects by the global financial crisis mainly because its financial and capital markets were not integrated into the world market.
1.1.2 Background to the Financial Sector
2. The 2008 Financial Sector Assessment Program (FSAP) established that Malawi’s financial sector was relatively small, highly concentrated and servicing a narrow clientele thereby not making full contribution to economic growth and poverty reduction. The non-bank financial (NBF) sector was underdeveloped and comprised a few private pension funds, life insurance companies, microfinance institutions (MFIs) and financial cooperatives. Collectively, all formal financial institutions reached only 26 percent of the population with 19 percent served informally and over half (55%) of the population being financially excluded.
3. Growth of the sector was inhibited by a number of interrelated factors that would require an integrated approach to deal with. The factors included
(a) underdeveloped regulations (particularly for the NBF sector);
(b) low capacity to implement risk-based supervision;
(c) overemphasis on compliance with regulatory requirements;
(d) lack of product diversity and limited competition;
(e) lack of shared market infrastructure to allow inter-institution transactions switching limiting outreach and gains from economies of scale;
(f) lack of information on the market;
(g) hands-on government involvement in mobilizing and allocating financial resources; and
(h) poor quality of firm and household demand for financial services.
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1.1.3 Rationale for World Bank Assistance
4. The complex nature of the growth inhibiting factors for the financial sector required the design and implementation of a more detailed technical assistance aimed specifically at strengthening financial sector regulation and supervision of the sector. Thus, immediately after the 2008 FSAP, GOM showed resolve to clear the bottlenecks and committed to follow a consistent and comprehensive path to the development of the sector by, among other things, undertaking some post-FSAP activities including: using FIRST Initiative’s Non-Bank Financial Institutions Capacity Building Project to support immediate post- FSAP follow-up activities. Under that program, GOM prepared and adopted the Financial Sector Development Strategy (2010-2015); developed the National Strategy for Financial Inclusion (NSFI) (2010- 2014); used the IMF/Norges Bank program to define RBM’s strategies in key areas encompassing a broad- based modernization program, revising the National Payment System Vision and Strategy framework (2010-2013), and setting up a multi-stakeholder National Taskforce on Consumer Financial Education (NTCFE).
5. The activities by GOM were aimed at building a financial sector that would support inclusive and sustainable growth. The World Bank became the lead partner in the gap identification process. Accordingly, areas that were identified and formed the basis of the FSTAP were in the areas of: legal and regulatory reforms; financial sector infrastructure; financial literacy and consumer protection; and the role of Government in the financial sector. These areas supported the priorities of the Malawi Growth and Development Strategy (MGDS) launched in 2006, the Country Assistance Strategy (CAS) (2007-2010) and the Country Economic Memorandum (CEM) (2009). The CAS supported the country’s economic development strategy, which aimed at putting in place a foundation for longer term economic growth through improved infrastructure and investment climate. The successor CAS continued to support the MGDS agenda. The CEM recognized the importance of the financial sector in agricultural development and recommended that policies to improve access to banking services and finance be prioritized and urgently addressed.
Original PDO and Key Indicators (as approved)
6. The overall development objective of the project, as stated in the Project Appraisal Document (PAD), was to increase access to finance for the currently unbanked, but bankable, population of Malawi.
7. Key performance indicators at the PDO level were (i) increase in the percentage of the adult population that use formal financial institutions; and (ii) increase in the proportion of women within the adult population that is formally banked. The primary methodology for measuring PDO level results was through the FinScope Demand Side Survey tool developed by the FinMark Trust and first used in Malawi in 2008. The methodology not only enabled the assessment of the landscape on financial access in Malawi, but also provided benchmarks through repeat individual based representative surveys that enabled the impact of access related policy interventions to be assessed.
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8. The two PDO indicators were complemented by the following indicators for the intermediate results:
Financial sector regulation and supervisory functions improved
(a) Key regulations and supervision manuals issued to support implementation of the 10 new financial laws that have been passed recently or are to be passed over the life of the project
(b) Automated tools for offsite surveillance and macro-prudential analysis designed, acquired and implemented
(c) RBM staff trained in the use of analytical tools regarding new regulations
Financial infrastructure improved
(a) Transactions volume and value processed by new payments systems (RTGS, National Switch (NS), MFI Transaction Processing Hub (TPH))
(b) Number of participating members of all three payments systems
(c) New RTGS, NS and MFI-TPH systems in operation consistent with system integration requirements and interoperable (NS)
Financial consumer protection and financial literacy improved
(a) Legal and regulatory framework for consumer protection prepared and presented to Cabinet
(b) Institutional arrangements for consumer protection in all financial services implemented
(c) Increased awareness of rights as financial consumers among population reached by financial literacy campaign
Ministry of Finance Financial Sector Policy and Governance Capacity Strengthened and Framework for Long-Term Finance
(a) State ownership policy in financial sector developed, published, and implemented
(b) Core functions of the Financial Sector Policy Unit (FSPU) executed by appropriately trained staff
(c) Policy frameworks for the provision of long term financing which should include (i) equity and debt/leasing financing, (ii) PPP for infrastructure, (iii) long-term savings and investment institutions (e.g. pension funds) developed
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Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justifications
9. The PDO was not revised during the implementation period, but the Key Indicators were revised during the Level Two restructuring of the project during the Mid-Term Review in November 2014. The restructuring resulted in the dropping of the Malawi Financial Sector Deepening Trust (MFSDT) and subsequent reallocation of funds meant for its establishment. Though the restructuring did not change the PDO, some outcome indicators were revised to increase their relevance and to be consistent with the broader level of interventions supported by the project. Thus, the revision amplified outcomes such as financial access, stability, infrastructure and financial literacy rather than the initial drive to bank the unbanked. Indicators that were introduced at restructuring included:
PDO level
(a) Agency banking regulations operational (i.e. number of banking agency agreements)
(b) Transactions volume and value processed by new payments systems (RTGS, NS, MFI TPH)
(c) Proportion of financially literate women in the population
Financial sector regulation and supervisory functions improved
(a) Laws reviewed and drafted
Financial infrastructure improved
(a) Number, value, volume of interbank point of sale (POS) and automated teller machines (ATMs)
(b) Volume and value of transactions on mobile payment schemes (mobile network operator (MNO) led)
(c) Volume and value of transactions on mobile payment schemes (bank-led)
(d) Implementation of Government electronic funds transfer (EFT) program
(e) Capital Market Infrastructure (central securities depository (CSD) for equities, automated trading system and surveillance system)
Financial consumer protection and financial literacy improved
(a) Draft consumer protection law
(b) RBM institutional capacity has been enhanced for consumer protection supervision
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Ministry of Finance Financial Sector Policy and Governance Capacity Strengthened and Framework for Long-Term Finance
(a) Approved road-map for implementation of government EFT payment program
Main Beneficiaries
10. The project’s primary end-beneficiaries are the financially excluded population i.e. adults who have managed their lives without using any kind of financial product (formal or informal). The direct project beneficiaries will be all persons gaining access to use of formal financial institutions. Institution- wise, the project does not target any specific group of financial institutions but smaller banks and the non- bank financial institutions including micro-finance institutions are beneficiaries.
Original Components (as approved)
11. The project consisted of five components, including project management:
• Component 1: Financial sector regulation and supervision
• Component 2: Financial infrastructure
• Component 3: Financial consumer protection and financial literacy
• Component 4: MOF financial sector policy and governance capacity and long-term finance
• Component 5: Implementation support
1.1.4 Component 1: Financial sector regulation and supervision
12. Component 1 assisted the RBM to strengthen the regulation and supervision frameworks for banking, capital markets, microfinance, and pensions by financing a combination of research, diagnostic, and capacity building technical assistance activities. It built on preparatory work (primarily diagnostics, preparation of new regulations and supervision manuals) undertaken with FIRST Initiative support; an IMF/Norges Bank program, which helped to define RBM’s strategies in key areas; and to complement a USAID initiative to finance back-office automation (including regulatory reporting) for MFIs. Specific activities included: (i) Strengthening the legal and regulatory framework with regard to bank supervision; capital markets supervision; MFI and SACCO supervision; insurance supervision; pensions supervision; and administrative law; and (ii) Strengthening the supervisory capacity of the RBM. Specific activities included:
(a) the design of new or amended call reports for banks, MFIs and SACCOs, pension administrators, insurance companies, and stock brokers;
(b) development of off-site analysis tools for banking, insurance, MFIs and SACCOs, pensions, and capital markets;
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(c) development of macro-prudential analytical tools to automate the analysis of macroeconomic and financial sector data required to prepare periodic financial sector stability reports; and
(d) building capacity of RBM supervisory and research staff.
1.1.5 Component 2: Financial infrastructure
13. This Component aimed at assisting the RBM to update the basic infrastructure for payment services by supporting the strengthening of its RTGS system; the design and development of an interoperable central switch for processing payments; leveraging technology to improve processing efficiency for small value payments particularly microfinance payments; and institutional capacity building at the RBM, including a review of current regulations and legislation. Specific activities included
(a) Strengthening the RBM in the area of RTGS systems, with a CSD to be among the components of the new RTGS;
(b) Designing, developing and implementing a National Switch;
(c) Support for an MFI transaction processing hub;
(d) Support for the development of securities settlement and non-bank agency networks; and
(e) Support for consumer education and promotional campaigns to increase public understanding of payment products and services.
14. Some of the aspects covered included supporting public awareness of the functioning of new Credit Reference Bureau and, implications of the national switch in terms of convenience and cost of service. This Component also covered relevant training workshops for credit and payment service providers and RBM staff on credit bureau and shared infrastructure supervision.
1.1.6 Component 3: Financial consumer protection and financial literacy
15. Component 3 supported Government’s efforts to increase public trust in using the financial sector by supporting the following activities: (i) strengthening the legal and regulatory framework for financial consumer protection; (ii) enhancing institutional arrangements for consumer protection in all financial services; and (iii) developing a consumer awareness / financial literacy program. This component took into account the results of the work undertaken by World Bank’s global program on consumer protection and financial literacy in several countries worldwide.
1.1.7 Component 4: Ministry of Finance financial sector policy and governance capacity and long- term finance
16. The objective of Component 4 was to strengthen the capacity of Ministry of Finance, Economic Planning and Development (MOFEPD) to: (i) coordinate the formulation, implementation, and monitoring of financial sector policies and regulations, and (ii) oversee Government interventions in the financial
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sector. Working closely with the Financial Sector Policy Unit (FSPU) and the Public Enterprises Reform and Monitoring Unit (PERMU) at MOFEPD, the project financed the following activities:
(a) provision of technical advisory services for the development of financial sector policies (including for long-term finance), and an ownership policy of state-owned financial institutions and programs;
(b) staff capacity building through specialized on-the-job training, study tours, attachments, and specialized training;
(c) procurement of goods and equipment; and
(d) publication/dissemination of relevant policy work.
17. The Component also supported the establishment of a policy framework and a legal and institutional infrastructure that facilitate the provision of long-term finance. The policy framework would address institutional, funding, and private sector involvement issues; the role of the public sector; and, sustainability of long-term financing infrastructure. More specifically, the project intended to support (i) preparation of a long-term finance policy and regulatory framework and implementation support; (ii) cost- benefit study of lengthening the maturity of Government debt; (iii) institutional review of the operations and the investment policies of pension funds and life insurance companies; (iv) assessment of the capacity of the capital markets to support the issuance of equities and bonds and examination of options for restructuring the Malawi Stock Exchange (MSE); (v) establishment of a framework for leasing; (vi) feasibility study for establishing a development bank that is efficient, sustainable, and complements private sector lending, and (vii) diagnostic studies examining the pros and cons and the applicability of a long-term finance guarantee scheme.
1.1.8 Component 5: Implementation support
18. Component 5 supported the establishment of a Project Implementation Unit (PIU) at RBM and an oversight committee chaired by the MOFEPD. More specifically this component funded the following activities: (i) provision of a Procurement Specialist, Financial Management Specialist, Monitoring and Evaluation (M&E) Specialist, a Project Manager and support staff; (ii) incremental operational costs and limited office equipment necessary for project implementation support; and (iii) annual auditing actions by independent external auditors.
19. This Component was also to finance, up to the closure of the project, the consultancy costs for administering a five-year multi-donor funded Malawi Financial Sector Deepening Trust (MFSDT) whose funds were to finance innovative solutions to addressing access to finance constraints. MFSDT was to be financed through grants by development partners (initially DFID and USAID). Government’s contribution to the MFSDT through FSTAP was to meet consultancy costs associated with administering the MFSDT including the costs of Procurement Specialist, Financial Management Specialist, M&E Specialist, Project Manager and support staff.
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Revised Components
20. The original components were never revised during project implementation.
Other significant changes
(a) Reallocated resources from Component 5 meant for the establishment of and funding of related consultancy costs for administering a five-year multi-donor funded MFSDT. The MFDST sub-project was dropped from FSTAP.
(b) The first Level 2 restructuring extended the implementation period by 12 months from 1st September 2015 to 31st August 2016 and the second and final Level 2 restructuring extended the project by 10 months from 1st September 2017 to 29th June 2018.
(c) The project funded third party diagnostic audits of all commercial banks and funded the restructuring of three government financial institutions namely Malawi Savings Bank, Pride Malawi and IndeBank.
(d) Moved the implementation, from Component 3 to Component 4, of the activity that involved the development of procedures for the financial sector appeals system and establishment of the Financial Services Appeals Committee (FSAC) in line with the Financial Services Act.
(e) Transferred funds from Component 1 to 2 for implementation of an automated trading system for the MSE though coordination remained under Component 1.
(f) Upgraded CSD ecosystem i.e. CSD for equities and CSD for government securities.
(g) Engaged a resident advisor for bank supervision for a period of one year.
2.0 KEY FACTORS AFFECTING IMPLEMENTATION AND OUTCOMES
Project Preparation, Design and Quality at Entry
2.1.1 Soundness of background analysis
21. Preparation of the project was based on a thorough analysis of issues arising from various diagnostic studies, surveys and other analytical reports on the country’s competitiveness. The ICR found the background material and analysis to be sound. Key analyses came out of the following studies: 2008 FinScope Demand Survey for Malawi, 2009 FinScope Supply Side Study, joint 2007 World Bank/IMF FSAP, 2010 Micro-Finance Assessment Report, and 2010 Central Bank Modernization (Norges Bank Occasional Paper). FSAP revealed financial sector vulnerabilities and developmental needs that were to be addressed by the project.
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2.1.2 Assessment of project design
22. The technical merits of the project design was examined by World Bank staff over the course of project preparation and were considered sound and in line with international practice. Furthermore, the project design reflected lessons of the World Bank and other donors from around the world on projects of a similar nature. Project design incorporated the following lessons:
(a) Time needed for reforms: The design took into account the fact that implementation of reforms has multiple steps and takes a significant amount of time. The five-year period for implementation recognized that capacity building, dialogue and decision-making among both public and private stakeholders, drafting and implementation of new standards and regulations, and the carrying out of studies, analysis of findings, and decisions regarding follow-up take considerable coordination and time.
(b) Focused technical design: The project deliberately adopted a focused technical design. It did not try to undertake all the financial sector reforms that are required in Malawi. Rather it focused only on those that are unlikely to attract support from other development partners. Each intervention had basic objectives, clear actions, and expected results.
(c) Ownership: FSTAP was designed to support Government in the implementation of a series of policy, legal and administrative reforms in the Malawi Financial Sector Development Strategy (FSDS) and thus it had strong champions at the political and technical levels in both the MOFEPD and the RBM, which are the key Government institutions in the sector. Furthermore, the project benefited from numerous consultations with the various stakeholders in the sector. Experience shows that such reforms can only be achieved if there is significant commitment by Government to the objectives of the project and where World Bank programs work closely with champions of reform in Government, and in collaboration with a broad range of stakeholders. This is evidenced by the reforms in Ghana when implementing its Financial Sector Strategic Plan; Kenya in implementing the Comprehensive Financial Sector Reform and Development Strategy; and in Albania under the World Bank 2014 Development Policy Loan to support implementation of Financial Sector Modernization.
(d) Partner coordination: The project assumed that no single intervention can affect overall financial intermediation. As a result, it was designed that other development partners active in the sector could come together under MFSDT to support a comprehensive financial sector program based on the Government-endorsed FSDS and take a holistic approach to addressing constraints in financial sector development. The establishment of MFSDT was abandoned due to lack of donor commitment.
2.1.3 Adequacy of Government’s commitment, stakeholder involvement, and/or participatory processes
23. GOM was committed to pursuing market-oriented reforms to achieve inclusive and sustainable economic growth through the private sector as an engine of growth supported by a well-built and supportive financial sector. The commitment was evident in various strategies including: the FSDS (2010-
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2015), NSFI (2010-2014), MGDS (2010-2015). Furthermore, there was undisputed GOM commitment as evidenced by on-going legislative reforms for the financial sector, its request for an FSAP, and development of a comprehensive program based on FSAP’s recommendations. FSTAP, therefore, emanated from the funding request from GOM to have a technical assistance project to support its economic reform agenda and to address the constraints faced by the financial sector as identified by the diagnostic studies (in particular 2008 FSAP). Moving the implementation to RBM as an implementing agency and setting up a PIU, rather than use Government personnel was also a sign of commitment on the side of the borrower.
24. This commitment notwithstanding and due to lack of foresight at project design, the non-direct involvement of the Ministry of Justice, either as a component or as an implementing agency, created a myriad of problems during implementation. Major among the problems were the delays in reviewing draft laws, regulations and directives and gazetting of the same; it is now recognized that had the Ministry of Justice been directly involved from the inception, the review and gazetting process would have been much easier.
2.1.4 Assessment of risks
25. There were two project preparation risks, which were deemed High Impact/Low Likelihood. These risks were donor risk in supporting the project and the other relating to possibility of poor collaboration and coordination between RBM and MOFEPD. The main donors were realigning their assistance strategies and programs to Government’s strategy and, therefore, pledged support for the project as it was based on identified priorities of the FSDS. Decisions by donors to pull out their pledged support for the implementation of MFSDT resulted in reallocation of funds to activities in other components.
26. For implementation, two risks, stakeholder risk and implementation agency risk (both High Impact/Low Likelihood), were also identified during the project preparation phase. Stakeholder risk was in relation to possible reluctance (or lack of capacity) by local financial institutions and private sector investors to accept new delivery channels of banking products and financial services supported under the project. As per plan, these were mitigated through training, workshops and awareness campaigns to disseminate knowledge and advocate the benefits of the new delivery channels for financial deepening. The implementation agency risk was in relation to staff skills gap and RBM’s capacity to manage the project due to limited resources and lack of systems and processes aligned to World Bank guidelines for procurement and financial management. The risk was mitigated by formation of the PIU comprising consultants in M&E, and in the fiduciary functions of financial management and procurement to support the Project Manager who was seconded from RBM.
Implementation
2.1.5 Delays in No Objections from the World Bank
27. There were significant delays by the World Bank in granting no objections to TORs, specifications and evaluation reports for contracts requiring prior review by the World Bank. This was particularly evident during the period before the Mid-Term Review and during the 12-month no-cost extension period resulting in delays in commencement of implementation for projects such as National Switch, ATS/CSD and MFI Hub projects. In the specific case of development of pensions awareness materials, a delay of
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over 12 months in granting a no objection led to the abandonment of the activity. The delays in granting no objections were sometimes a direct consequence of challenges in following established lines of communication among the World Bank, its technical experts, implementing departments and the PIU whereby at times World Bank experts would communicate directly to implementing departments without due regard to the established channel of going through the TTL and the PIU.
2.1.6 Misunderstanding of the nature of capacity building under the Project
28. FSTAP was largely viewed by the Components as a project meant for capacity building through training, study tours and attachments. Therefore, there was unmerited focus on capacity building (particularly in structured training courses) to the disadvantage of implementation of other work plan activities. Absence of a properly conducted training needs assessment exacerbated the issue. Specifically for RBM, there were double approvals of training by RBM Executive Management (i.e. at the time of sending the plans to FSTAP PSC and when the officers were about to undergo the training) which brought uncertainty as training could even be turned down at the second approval stage when the PSC already approved and a No Objection granted from the World Bank. At times, the project was perceived as not equally distributing resource among departments i.e. favoring other departments more than others on the number of officers benefiting from the capacity building initiative. It has to be recognized though that other units were newly established and required such support e.g. Financial Sector Policy Unit in MOFEPD and Consumer Protection and Financial Literacy Unit in RBM.
2.1.7 High staff attrition and understaffing
29. The PIU faced serious staffing challenges from the start of the project to a period close to the Mid- Term Review and again during the period of no-cost extension. For the period prior to the Mid-Term Review, this affected all functional areas of the PIU as all Specialist positions were filled with new staff. As an impact mitigation measure, the World Bank and Government agreed to create and recruit additional staff to assist in the Procurement and Financial Management functions, and provide a two-month payout to PIU consultants who would remain to the end of the project. Staff attrition through transfers was also an issue of concern within the newly established Financial Sector Policy Unit (FSPU) in the MOFEPD’s Economic Affairs Division8.
30. There was also understaffing in the Consumer Protection and Financial Literacy (CPFL) Unit in RBM due to significant delays in recruiting additional staff for the unit. This delay happened despite the formation of the unit almost at the start of FSTAP, such that implementation of activities for the unit was delayed resulting in late rollout of a national financial literacy campaign. The understaffing challenges, which still remain unresolved, also caused delays in implementation of activities under RBM’s Capital Markets Unit and the Financial Markets Department.
2.1.8 Slow speed by decision-making authorities
31. Steering Committees on the MFI Hub and the National Switch: In the case of the MFI Hub, much of the delays emanated from the need to accommodate various players in the Hub Project owing to heterogeneity in terms of size (clientele and capitalization) and influence and divergence of views and
8 The unit has since been combined with government pensions to form Pensions and Financial Sector Policy Division
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objectives. The two apex institutions, MAMN and MUSCCO, failed to provide the necessary leadership and did not exhibit signs of owning the Hub project. In fact, infighting between the two apex bodies often led to problems of attendance in steering committee meetings. The CEO of MUSCCO chaired the steering committee, opted out and later came back as a member of the committee only to opt out again a few meetings later.
32. On the National Switch, the shareholders of National Switch Limited (NSL) delegated the implementation of the switch project to a steering committee comprising the banks, RBM, GOM and FSTAP. The steering committee was chaired by National Bank of Malawi representative and was co- chaired by RBM. In terms of decision making, however, the committee escalated all issues to the Board of NSL. In most cases, board members did not attend board meetings and their proxies further delegated the responsibility to lower ranking officers who would attend the meetings or not depending on pressure of work in their respective offices. As a result, decisions taken by the board would be revisited at subsequent meetings and changed or even reversed. This aspect delayed, for example, the implementation of MNO integration as the board approved the integration but later on reversed it only to re-approve it at another meeting.
33. Government on the EFT project for Government payments: There was inadequate commitment on EFT Risk Assessment Study on the part of Government as evidenced by prolonged periods of silence especially when the consultant issued a report. Resultantly, the EFT contract was prolonged from the end date of 30th November 2014 to 31st March 2016 thereby delaying commencement of other priority activities for the Government EFT project. Again, a workshop was held on 4th February 2017 to discuss the EFT implementation roadmap and resolved that Government should clean up the draft roadmap and circulate the clean version to members; it took over a year to have the roadmap ready. Further delays were also experienced in the approval of TORs for the various interfaces by the EFT Steering Committee. Following the delayed approval of the TORs, implementation was slow due to tardy decision making, vested interests and lack of leadership on the project.
34. Delayed decisions in granting no-cost extensions by the World Bank: There were significant time lags between the time a request for no-cost extensions was sent to the World Bank and the time such extension was granted. This was in part due to the long chain of approvals associated with the World Bank hierarchy. During the period between the request and approval, the project could not negotiate and sign any contracts and the TTL could not grant no objections thereby delaying implementation, particularly, for activities that were at contract signing stage.
2.1.9 Underestimation of activity costs and duration during project planning phase
35. Most of the activities in the project were under budgeted at project preparation such that approach, scope and scale were modified during implementation. These modifications included changes from use of consultants to development through inter-departmental workshops, which also provided an opportunity to share experiences; scaled down implementation e.g. the level of capacity building to MAMN and MUSCCO; and dropping activities e.g. surveillance system for capital markets.
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2.1.10 Poor planning during implementation
36. Implementing departments exhibited over ambitiousness and over estimation of capacity to implement more activities than what was possible. This was more evident in Component 3 and Component 1 (under Pension and Insurance Supervision) where more workshops were planned and less were conducted. Where possible, FSTAP advised departments to streamline proposed activities citing capacity issues but departments insisted and provided justification to maintain activities in the work plan only to result in failure to implement at year end.
2.1.11 Extension of the closing date
37. The project’s disbursements did not immediately pick up following effectiveness of the project on 22nd December 2011. In the same vein, implementation of program activities was slow. It was clear in the run up to MTR that by the close of the five-year project implementation period, most activities would still be outstanding. Thus, the MTR recommended that approval for a no-cost extension be sought from the World Bank as early as possible to ensure little, if any, disruption to implementation.
38. The project extension, which was a level two restructuring, was meant mainly for MFI Hub implementation but a number of activities were also implemented alongside the MFI Hub. Notwithstanding the obvious consequence of ending with a meagre absorption rate, the wholesale implementation of remaining activities raises the issue of lack of seriousness for both the World Bank and Government in controlling the nature of activities that can be implemented under an extension.
Safeguards and Fiduciary Compliance
2.1.12 Financial Management
39. The financial management function of the project performed to the satisfaction of the World Bank and Government as the PIU kept good records of financial management; the project complied with the financial covenants stated in the financing agreement; and external audits were made on time and complied with World Bank requirements. All audits for the period 2012 to 2016 were unqualified. The staff within the financial management function of the project was also adequately qualified and conversant with procedures for World Bank funded projects. The project benefited a lot from support and mentoring provided by the World Bank Financial Management Specialist and refresher sessions provided by the World Bank Country Office.
40. The financial management function had some challenges including resignations of the first Financial Management Specialist in 2012 and his successor in 2017; substantial delays in clearing IFRs by the World Bank; and inconsistent and inadequate internal audits were also major challenges for the function. The project faced reconciliation challenges on its operating account with NBS Bank; this problem forced the project to migrate the operating account to Standard Bank and phased out cheque payments. Standard Bank offers e-banking facilities through its Business Online system. FSTAP became the first World Bank supported project in Malawi to move its financial operations to an electronic platform and realize the associated benefits. While the migration entailed developing a new set of guidelines for users, it significantly improved financial management processes.
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41. Currency movement was a major issue in financial management during implementation. The Malawi Kwacha was devalued against major currencies in May 2012 and that had a positive effect on components that had large proportions of their expenditures in the local currency and resulted in huge savings. At project level, however, exchange rate movement between the US Dollar and the Special Drawing Rights (SDR) affected FSTAP negatively, leading to a whooping US$2 million loss. The project therefore moved from budgeting on the total project amount of US$28.2 million to planning based on the available balance after the exchange loss. Whereas other World Bank projects get additional financing to cover exchange losses, FSTAP was not granted that opportunity even though there were activities that would have benefitted from the additional financing.
2.1.13 Procurement
42. The procurement function was overseen by a Procurement Specialist at the PIU. The first Procurement Specialist (PS) resigned from the project in February 2014, the time when the officer for the newly created position of Assistant Procurement Specialist took up her position. FSTAP recruited another Procurement Specialist in August 2014 who left the project in March 2017. The PIU ensured implementing departments followed the agreed procurement guidelines and procedures. The overall performance of the procurement function was satisfactory for most of the implementation period. However, implementing departments unanimously criticized the World Bank for slow turnaround of no-objections.
43. The World Bank through its Procurement Clinics built the capacity of the procurement function at the PIU. The PIU procurement function in turn managed to build capacity of components in the development of TORs and specifications through a TORs development workshop. The project failed to build capacity of departments in contracts management and did not follow the approval processes for procurement as stipulated in the PAD where RBM IPC (tendering committee) was to be approving the procurements. The procedures were not followed, partly, due to anticipated delays in procurement that the process could have caused. Until the coming of STEP, there was lack of computerization of procurement for most part of the procurement period (2011-2017).
2.1.14 Safeguards
44. The project was classified as a Category C. In that regard, the project did not require any safeguard screening.
M&E Design, Implementation, and Utilization
45. As stated in the PAD, the overall development objective of the project was to “increase access to finance for the currently unbanked, but bankable, population of Malawi.” As was the nature of the project’s interventions, most intermediate results indicators were descriptive in nature and not conclusively defined. Some indicators were revised at MTR and others at internal reviews. The PIU was responsible for data collection and reporting for the overall M&E system with inputs from the designated focal points in implementing departments.
46. The project implemented activities that were to increase access to finance by the entire population through usage of services in all formal financial institutions including MFIs and SACCOs. This scope of activity implementation was much broader than the stipulation of the PDO. However, efforts
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during the 2014 restructuring to formulate a more appropriate PDO were futile as the change would entail a Level One restructuring requiring World Bank Board’s approval. In order to get around this difficulty, additional indicators were added to the existing PDO level indicators to better describe the broader scope of the project.
47. As was common at the time of project preparation that the PAD may not contain a comprehensive results framework to correctly measure the objectives, the World Bank engaged a consultant in January 2016 to independently assess the adequacy of and enhance FSTAP’s M&E System after the MTR. Despite the adequacy of TORs for the M&E Specialist position, a well-developed M&E manual and related M&E Plan, the project departed from the frequency and timing of agreed surveys resulting in information gaps in the framework. For example, a baseline survey, which was supposed to be conducted before or at the start of the project, was conducted almost halfway into the project. A consumer awareness program was not yet rolled out at mid-term (until 2016) despite that being a period for a rigorous impact evaluation to assess its effectiveness. A decision was therefore made to continue using FinScope surveys to measure the PDO and the impact evaluation activity was dropped. This meant an opportunity was lost to have a comprehensive mid-term assessment of the achievement of the PDO. However, the Finscope survey, which was conducted at around the MTR, provided important feedback to the project. To assess the PDO achievement, the project has included some questions from the Finscope survey to measure the PDO.
Post-completion Operation/Next Phase
48. After the closure of the project, a number of institutions will continue to operate independently using structures created under FSTAP (e.g. National Switch and MFI Hub Company) whose creation was financed by the project. Again, FSTAP supported the setting-up of key financial infrastructure (e.g. the Centralized National Pensions Database and MSE’s automated trading system) and without Phase II of the project, it would be a challenge to leverage on these significant achievements to further advance the digital finance and financial inclusion agenda as stipulated in the MGDS III and the Financial Inclusion Strategy. The next phase could include the establishment of MFSDT, which was not implemented under the current project. Furthermore, ICT systems procured under the project will continue to be used by the various departments in RBM and Government. FSTAP started the financial literacy initiatives and RBM is leveraging on it to continue its development objectives.
49. Government has demonstrated commitment to ensuring completion of FSTAP supported outputs. For example, using its own resources, the work on regulatory reviews will continue post-implementation to ensure that Bills and regulations drafted under the project are passed into law and gazetted. These include the DIS Bill, Financial Consumer Protection Bill and the ADR Bill. Despite commitment to sustain legal and infrastructure investments, institutional sustainability of FSAC remains a challenge.
50. The successor project could dedicate the initial years in fine tuning the existing systems through add-ons to increase usage. These add-ons could include availability of interbank funds transfer facilities at ATMs, interface of the tax collection system to the POS environment and interfacing the Malawi Traffic Information System (MalTIS) and the Collateral Registry to the financial sector backbone. Considering that Malawians in the diaspora assist their families in Malawi through money transfers and that the cost of transferring money to Malawi is relatively high, the project could look at bringing all money transfer agents to Natswitch to tap on the platform’s efficiencies. The project could further leverage on the national switch platform and support the implementation of a new IFMIS to enhance the Government EFT
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initiative and improve service delivery, reduce transaction costs to achieve better public finance management.
51. Since financial sector is cross-cutting and is a catalyst for development, harnessing and leveraging on what has been achieved would lead to increased activity and productivity in micro, small and medium scale enterprises spurring the need for more agricultural mechanization financing, housing/mortgage financing, energy, entrepreneurship, among others.
ASSESSMENT OF OUTCOMES
Relevance of Objectives, Design, and Implementation
2.1.15 Relevance of Objectives: High
52. The PDO was to increase access to finance for the currently unbanked, but bankable, population of Malawi. For the purposes of this project, the PDO was clearly understood by all as not limited to accessing banking services but all formal financial services. That formed the basis of including other PDO level indicators during the 2014 restructuring.
53. The project was the only Malawi World Bank funded project that solely was aimed at addressing the challenges faced by the financial sector as identified during the 2008 FSAP. Given that Level 2 restructuring did not change the objectives, the project continued to show relevance in addressing emerging financial sector issues (e.g. public sector financial management, diagnostics and restructuring of financial institutions such as Malawi Savings Bank) and relevance to the medium term agenda for the country i.e. MGDS and Financial Sector Development Strategy (FSDS).
2.1.16 Relevance of Design: High
54. FSTAP design reflected a comprehensive diagnosis of development priorities related to the financial sector by the 2008 FSAP. The design was highly relevant to country priorities at the time of appraisal and it remained relevant throughout implementation of the project. The design of the components is also relevant today in the context of the specific priorities of Government.
55. The project implementation arrangement where staff of the implementing agency and consultants formed a PIU was tested throughout the project implementation period and proved to be a success. However, delays in staffing the newly established unit for Consumer Protection and Financial Literacy, and understaffing in the Capital Markets Division and the Financial Markets Department was an issue during most of the implementation period and not necessarily the design of the project. The implementing agency had the capacity to implement the project but it lacked the experience, as it had never implemented a sector-wide World Bank funded project of this magnitude.
2.1.17 Relevance of implementation against original PDO indicators: Substantial
Relevance of implementation against revised PDO indicators: High
56. Implementation: Implementation of the project was consistent with the activities designed at approval, as well as those approved at restructuring including the additional PDO indicators. The positive
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results by the project could not have been achieved if the World Bank and Government did not work together to resolve key challenges during implementation. The activities implemented responded to the PDO and were aligned to the current priorities, suggesting relevance of the implementation.
57. The project exhibited a flexible approach to emerging needs. During the course of implementation the project responded to key emerging financial sector issues:
(a) financed third party diagnostic audits for all commercial banks that gave confidence to the stability of the banking sub-sector and systemic risk issues
(b) procured hardware for the Collateral Registry at the Registrar General’s Department to register movable assets in a bid to further increase access to finance by individuals and MSMEs
(c) supported the strengthening of the public sector financial management framework by financing the risk assessment for EFT for Government payments and related learning visit. The project was to finance the interfacing of various Government systems to IFMIS to secure transactions
(d) supported the restructuring of Government financial institutions by diluting the shareholding by Government in Malawi Savings Bank, Pride Malawi and IndeBank.
Achievement of Project Development Objectives
Rating of Efficacy: High
58. Achievement of the PDO is rated high; detailed components’ achievements are discussed in Annex 2. As demonstrated in the Results Framework, almost all of the PDO (and intermediate) indicators have been achieved and in some cases even exceeded.
59. On the other hand, the following challenges affected the speed of achievement of the objectives:
• Assessing impact of training was extremely difficult
• Inordinate delays in securing no objections
• Delayed pick up of activity implementation
• Understaffing in certain units of implementing departments
• Inadequate capacity of the Consumer Protection and Financial Literacy unit to rollout the Financial Literacy Programme
• High turnover of staff in the PIU and MOFEPD during the first half of project implementation
• Prolonged period to achieve consensus under infrastructure projects (e.g. under NatSwitch and MFI Hub projects) leading to delays in commencement of implementation
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• Delayed and sometimes lengthy approval processes of activities by RBM Executive Management
• FSTAP was mostly viewed as a funding envelop rather than a technical support project hence there was over emphasis on individual training type of capacity building
• Delays in planned integration to the Switch
Efficiency
Rating of Efficiency: Moderate
60. FSTAP efficiently used human resources by utilizing the existence of current structures in the Pensions and Financial Sector Policy Division of MOFEPD
61. Funding requests for activities (training/workshops) were swiftly responded to
62. Under the national switch, transactions are fast and easy, settlement between banks is done by midnight to the mutual satisfaction of the transacting banks
Justification for Overall Outcome Rating
Rating: Satisfactory
63. Overall, the project is rated Satisfactory. This is reflected in the achievement of the PDO with moderate shortcomings related to efficiency as it took longer to achieve the project’s development objectives (not within the initial five-year period). While the causal link between FSTAP activities and the indicators was not established through a rigorous impact assessment, targets for most outcome indicators were achieved. The speed of achievement would unlikely have happened with the same success in the absence of the project. Notable achievements include
• undertaking legal and regulatory reviews for supervision;
• upgrading payment infrastructure thereby enabling and reducing cost of interoperability for industry players and consumers;
• setting up consumer protection and complaints handling systems and drafting of laws and regulations for the same;
• improving Government policy for the financial sector through the establishment of a unit to focus on financial sector policy; and
• providing support to public sector financial management through the Government EFT project.
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Overarching Themes, Other Outcomes and Impacts
(a) Poverty Impacts, Gender Aspects, and Social Development
64. All interventions and all M&E indicators in the project were also gender neutral except for PDO Indicator 2 (increase in the proportion of women within the adult population that is formally banked) which was measuring impact of the activities on women. The project is more likely to impact positively on poverty levels of affected population. In the short term, the poverty reduction effect may be limited and attribution could be a challenge due to a greater focus on development of financial institutions and government agencies.
(b) Institutional Change/Strengthening
65. Institutional strengthening through capacity building is one of the most notable achievements particularly to MOFEPD and implementing agency’s departments. Through FSTAP a number of short specialized courses, two Masters Degrees, learning visits and attachments were conducted. In terms of institutional change, the project established and capacitated the Financial Sector Policy Unit within MOFEPD, which was later combined with Pensions to form the Pensions and Financial Sector Policy Division. The project also capacitated the newly established Consumer Protection and Financial Literacy unit in RBM.
(c) Other Unintended Outcomes and Impacts
66. None that has been observed
ASSESSMENT OF RISK TO DEVELOPMENT OUTCOME
Rating: Moderate
67. The overall risk at the time of the ICR that the development outcomes or the expected outcomes will not be realized or maintained is Moderate.
68. The coordination risk, between RBM and MOFEPD that was identified at project preparation phase, was well mitigated. The risk was in relation to concerns about possible poor collaboration and coordination between the two institutions. Good coordination throughout the life of the project saw RBM confirming its role as a financial policy implementer with the MOFEPD as a policy driver. Despite good collaboration between RBM and MOFEPD, involvement of the Ministry of Justice (MOJ) as an implementing department could have made the process of developing and approving financial sector legislation faster and efficient. The project could also have built capacity of MOJ unlike the current situation where MOFEPD was tasked to proactively follow up with MOJ on review and gazetting of legal instruments.
69. The other risk, which was anticipated during implementation, was the stakeholder risk whose likelihood was low despite having high impact. This risk concerns reluctance by financial institutions and private sector investors to accept and use new delivery channels of financial products and services developed under the project. During project implementation, training, workshops and public awareness campaigns was used to disseminate knowledge and advocate the benefits of the new delivery channels
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for financial deepening. Financial sector players and merchants confirmed their interest in the new delivery channels.
3.0 ASSESSMENT OF BANK AND BORROWER PERFORMANCE
Bank Performance
3.1.1 Bank Performance in Ensuring Quality at Entry
Rating: Satisfactory
70. The World Bank facilitated the preparation of the project by drafting a number of supporting documents that informed project design. Though the design and focus of the project was largely informed by the 2008 FSAP, drafting of the documents was a complex undertaking. The documents, including the PAD, clearly articulated the issues Malawi’s financial sector was facing such that the project objectives were coherent with the theory of change. The appraisal was clear enough in identifying the implementation risks and incorporating lessons from other World Bank projects. However, it was noted that the design of the project focused on engagement and use of consultants and less on building the capacity of locals to perform the activities earmarked for consultants.
71. The fiduciary aspects were well articulated from the entry stage including a detailed procurement plan with timeline of activities. The blending of staff from the implementing agency with project specific consultants proved a success. Finally, the World Bank facilitated the commencement of project implementation by engaging staff of another technical assistance project, BESTAP, during PPA and initial phase of implementation. Despite the good intention to facilitate commencement of implementation, BESTAP under-budgeted most of the activities in the project and it also did not do much in planning for the baseline survey, which was conducted almost midway through the initial five-year implementation period.
3.1.2 Quality of Support
Rating: Moderately Satisfactory
72. The supervision missions took place regularly throughout the life of the project and they were noteworthy as they identified problems and proposed corrective measures. This is best illustrated by a Moderately Unsatisfactory (MU) rating for Component 3 in two ISMs leading to reallocation of resources to other components. To facilitate implementation in Component 3, a change in the implementation approach of some outstanding activities was made e.g. use of existing in-house (inter departmental) skills through workshops instead of using consultants. ISMs were adequately reported in the aide memoires.
73. The project benefited a lot through an arrangement where the World Bank provided a co-TTL in the country office who followed up issues with the TTL and other specialists at the World Bank and also took frequent checks on implementation either directly or through the PIU. However, despite this arrangement, there were significant delays in the granting of no objections and that resulted in delayed commencement of some activities. It was also noted that the TTL was quick to provide feedback on requests for no objections when on ISM visits in Malawi. This suggests that for more efficient
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implementation and ease of follow-up, TTLs should be in-country to see the impact of their decisions on the operations of the project.
74. On the fiduciary front, the project had a very good relationship with the World Bank’s finance team with regard to support on financial reporting. However, there were notable delays in some instances in resolving matters related to interim financial reports (IFRs). There was, for example, a delay of more than nine (9) months to correct wrongly uploaded figures in Client Connection where the World Bank, instead of uploading expenditure figures, uploaded balances. Owing to this error, balances on FSTAP books were different from those in Client Connection. The error led to the queuing of three subsequent IFRs whose approvals waited for a resolution of the error. As a result, disbursement of project funds was delayed leading to embarrassing deferments in honouring project obligations and execution of activities. The World Bank is encouraged to improve in this area.
3.1.3 Justification of Rating for Overall World Bank Performance
Rating: Moderately Satisfactory
75. This rating combines the score for the quality at entry and quality of supervision. Rating for quality at entry was Satisfactory and quality of supervision was rated Moderately Satisfactory, thus the overall Bank performance was Moderately Satisfactory.
Borrower Performance
3.1.4 Government Performance
Rating: Moderately Unsatisfactory
76. The commitment of GOM to the project in supporting the national agenda was very high during the design of the project. This commitment deteriorated during the phase half of the 5-year period, which was characterized by high staff attrition in the newly established Financial Sector Policy Unit and at the head of institution (ST) level. GOM acted slowly in restructuring of state financial institutions and in ensuring that policies and Bills were reviewed and passed into law. To date, a number of Bills, Regulations, Directives and Strategies remain in draft form (refer to list in Annex 3). The Financial Services Appeals Committee (FSAC) has not been operational since the expiry of the term for the first committee members, raising questions of sustainability of FSTAP initiatives.
77. Staff attrition improved during the period after the MTR and staff capacity building was high on Government’s agenda until during the period of the first level two restructuring. The initial restructuring period was characterized by quick implementation of consultancies and conducting of workshops. Government also exhibited commitment in steering the project as was evidenced by resumption of Project Steering Committee meetings albeit less frequent.
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3.1.5 Implementing Agency Performance
Rating: Satisfactory
78. RBM was mandated by the subsidiary agreement to implement the project through the PIU whose staff complement included RBM staff and project contract consultants. The leadership of the PIU was provided by a Director seconded from RBM; RBM also seconded a Finance Officer to the PIU. Procurement, Financial Management and M&E specialist positions were all filled by staff recruited by the project through standard World Bank procedures for recruiting consultants. As was the case with Government, the PIU also experienced high attrition of contract staff during the period to MTR. High staff attrition resurfaced towards the end of the project, but its impact was subdued considering that the bulk of the activities had already been implemented. There were no significant delays in disbursement and, despite the changes in staffing for procurement and fiduciary functions, the project kept high standards by following World Bank procedures. Inter-agency coordination and review of progress was through Technical Working Groups and meetings with technical managers of implementing institutions while the oversight function was provided by the PSC. RBM’s Internal Audit Department provided internal audit services to the project on an ad hoc basis resulting in some significant changes to the operations and processes of the project.
3.1.6 Justification of Rating for Overall Borrower Performance
Rating: Moderately Satisfactory
79. This rating combines the score for Government (Moderately Unsatisfactory) and implementing agencies’ (Moderately Satisfactory) performance. The OPCS ICR guidelines recommends that when the rating for one dimension is in the Satisfactory range and the other is in the Unsatisfactory range (as is the case here), the overall Borrower performance is rated Moderately Satisfactory if the outcome is rated in the Satisfactory rate (also as is the case here). Therefore, the overall borrower performance for the project is Moderately Satisfactory.
4.0 LESSONS LEARNED
80. A project of this nature involving multiple components with different focus areas is likely to generate some lessons that can be used in the design and implementation of future projects. Lessons distilled are diverse and by no means exhaustive. The lessons are categorized into three: (1) Project Preparation Phase; (2) Implementation Phase; (3) Capacity building; and (4) Post Implementation Phase as follows:
4.1 Project Preparation Phase:
• Strong analytical foundations are necessary to build successful projects. FSTAP had strong support from MOFEPD largely due to the strength of diagnostic studies and assessments that underpinned FSTAP. These assessments included 2008 FSAP, 2008 FinScope Demand Survey for Malawi, Financial Sector Development Strategy (2010-2015) and IMF/Norges Bank program, which helped RBM to define its strategic priorities.
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• Strong participation of stakeholders at the project preparation phase. There was slow pick- up in implementation of activities by departments that were created during or after project preparation phase (i.e. FSPU and CPFL) when the PAD had already been developed. FSTAP commenced when the departments had no staff and this forced the departments to play catch up over the life of the project. On another note, some of the activities in the PAD did not come from stakeholders but from diagnostic reviews and, therefore, it took time for stakeholders to assimilate the ideas e.g. the MFI Transaction Hub.
• Need to allocate more time for buy-in on complex infrastructure projects e.g. Hub, NatSwitch, through advocacy, sensitization, training and orientation by focusing less on consultancies and more on building much-needed local capacity. Moreover, capacity building should focus more on attachments and learning visits than formal training.
• NatSwitch experience: the implementation of Natswitch involved recruitment of a consultant to supervise implementation of the national switch, among others. The same consultant drew technical specifications, Request for Proposals (RFPs) and Bidding Documents for the national switch. During implementation, the consultant was left to make high end decisions and stakeholders just accepted the decisions. As a result, an expensive model for the national switch was chosen. There is, therefore, need at both the preparatory and implementation stages, to incorporate lessons from other complex infrastructure project from other countries.
4.2 Implementation Phase:
• Projects should build contingency measures for dealing with delays by the World Bank in granting no objections. While this may no longer be an issue with the introduction of the World Bank’s Systematic Tracking of Exchanges in Procurement (STEP), there are certain instances that call for granting of no objections outside STEP.
• Build stronger coalitions with government to leverage (Government) support to avoid implementation delays (for instance, the Government EFT project should have started much earlier and closed while FSTAP was still running.
• Adequate staffing is critical in implementing institutions if projects are to be implemented in a timely manner. FSTAP experienced significant delays in implementation due to understaffing in most implementing departments in RBM and Government.
• Implementation of projects requires constant availability of skilled and professional staff/personnel. This was not the case with FSTAP PIU. There is, therefore, need to develop a proper incentive structure to retain staff in the PIU for the duration of the project. Further, World Bank supported projects should be encouraged to share information on staff as a way of ensuring only staff with clean records move from one project to next.
• Approval processes for project activities should be streamlined by reducing points of approval to ensure quick implementation of activities considering that projects have
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timelines and strict targets. FSTAP and RBM should work together to streamline the approval process before rolling out FSTAP’s successor project.
• Supply side interventions should be complimented with other demand inducing services. Experience has shown that while Government and RBM worked together in improving the supply side of financial services, there has been inadequate response on the demand side. This is due to a number of factors:
o insufficient financial literacy on the part of customers
o limited information on what the financial industry is offering to customers
o product affordability (i.e. high interest spread) and poor quality of services offered by providers
4.3 Capacity Building
• There is need for proper planning of capacity building where stakeholders should work together and develop a Capacity Building Road Map. The road map, with planned modifications, should be adhered to during implementation of the project. This can avoid a situation of confusion and demoralization among other cadres of staff.
• While the hiring of Consultants was, for the most part, helpful, training offered to departments and stakeholders should be relevant to the activities being implemented by the project to reduce over reliance on consultants, and the project should allow training in emerging areas (e.g. cyber-crime, virtual currency). Again, consultants should not be left out to make high-end decisions as was the case in the National Switch.
4.4 Post-Implementation Phase:
• When designing a successor program, there is need for more inclusive internal analyses of stakeholder requirements. This will ease the speed of implementation of the activities that will be included in the PAD. It was noted during implementation of FSTAP that departments were surprised on the originality of some of the activities that were in the PAD.
• Sustainability is key to all operations that have been established under any project. A case in point is the FSAC, whose membership is still in limbo two years on because Government is failing to find suitable members. FSAC was created to fulfil a purpose and the fact that it has not been operational for two only implies that Government does not see the need for FSAC. It is also important to be strategic where high value investments are concerned to ensure sustainability of such investments. In the case of Natswitch, the procurement model where software and hardware were procured outright and are not assets of Natswitch is an expensive and outdated model. Natswitch is now reeling with unsustainably high support and maintenance costs when there no cost recovery structures in place. The MFI hub, which was procured on “as a service basis” is on track to be a sustainable venture.
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• While RBM is commended for seconding staff to the project, it would have made more sense if more staff had been seconded to the project. Procurement and M&E are specialized areas that required seconded staff but RBM inadvertently did not second staff in these areas to the detriment of RBM and the project. RBM would have built capacity in those areas, which would also have benefited the project as well as the successor.
• Whereas handouts should be discouraged, the starter pack that was given to the first 20 players to join the MFI Hub was a necessary package aimed at incentivizing small players in the microfinance sector to participate. Similar offers should be considered for other projects dealing with a heterogeneous group of stakeholders as the more entrenched self- interest overrides national interest and such incentives become the tipping point for stakeholders to shift their interest.
5.0 ANNEXES
5.1 Growth Statistics
GDP Growth Maize Production** Year (Constant Inflation (%)* Prices)* Tonnage Change, % 2005 1,225 -29.31 2006 6.7 13.9 2,611 113.14 2007 8.6 8.0 3,226 23.55 2008 8.3 8.7 2,635 -18.32 2009 8.9 8.4 3,583 35.98 2010 6.7 7.4 3,420 -4.55 2011 3.2 7.6 3,699 8.16 2012 2.1 21.3 3,620 -2.14 Source: *Annual Economic Reports (Malawi), **United States Department of Agriculture.
5.2 Project Assessment using the DAC Criteria
81. Consistent with the Terms of Reference of the Assessment, the overall project performance was evaluated against the five OECD/DAC criteria of Relevance, Effectiveness, Efficiency, Impact, and Sustainability.
5.2.1 Relevance
82. FSTAP’s relevance was analyzed with respect to its alignment to international and national development agenda, with specific reference to financial inclusion. Having done the analysis, the assessment finds that FSTAP was highly relevant to the international and local development context and also well linked to the various financial inclusion policies as follows:
5.2.1.1 Alignment to International development agendas
83. In recent years, there has been a global movement towards financial inclusion as part of a broader strategy to reduce poverty, encourage economic development, and promote stability and security. While
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Africa is the world’s second fastest growing region after Asia with annual GDP growth rates in excess of 5% over the last decade (AfDB, 2013), that growth has not translated into inclusive growth. Malawi is no exception as over half (55%) of the population was financially excluded as recently as 2008. Against this background, Malawi along with seven other African countries9, made national commitments at the G-20 Los Cabos Summit (June 2012)10 to achieve a higher level of financial inclusion, including through targeted interventions to improve access to finance for MSMEs. However, in making this commitment, it was recognized that for sustained and inclusive development to thrive, a great deal of innovation and thinking was needed to ensure that appropriate financial services and instruments are put in place for the benefit of the poor and other vulnerable groups. Accordingly, during the last two decades, there have been many global initiatives aimed at restructuring the financial sector so that it is strategically positioned to promote financial inclusion. Within this broad framework, therefore, FSTAP was a focused attempt to restructure the financial sector to make it more accommodative to financial inclusion. Most significantly, this was on the backdrop of interrelated systemic shortcomings, viz: underdeveloped regulation; low capacity to implement risk-based supervision; lack of product diversification; limited competition, lack of shared market infrastructure (interoperability).
84. Furthermore, Malawi subscribes to the Millennium Development Goals (now called the Sustainable Development Goals) which are international development goals that developing countries collectively aspire to achieve. The MDGS 3 specifically obligates Malawi to plan and track key indicators of social, economic and political participation and guide the building of equitable societies. FSTAP epitomized this commitment at the country level. It did so by supporting Government’s commitment to reducing inequalities in accessing productive resources and development opportunities. All this aimed at contributing positively to the acceleration and attainment of SDGs.
5.2.1.2 Alignment to national development agendas
85. The assessment also finds that FSTAP is highly relevant to the Malawian development context and also well linked to national development policies, such as the MGDS; the Education Sector wide Approaches (ESWAp) and other policies pertaining to financial inclusion and human rights, among others. Even more importantly, FSTAP was implemented in line with Malawi law, which specifically provides for the ‘inclusiveness’ of all people through Section 20(1) of the Constitution, stipulating that ‘Discrimination of persons in any form is prohibited’ and that ‘all persons are, under any law, guaranteed equal and effective protection against discrimination on grounds of race, colour, sex, language, religion, political or other opinion, nationality, ethnic or social origin, disability, property or other status’.
86. Key informant interviews with various stakeholders unequivocally show that the FSTAP design has been responsive to the challenges of financial inclusion in Malawi by strengthening financial sector regulation framework so that the sector were strategically positioned to accommodate the growth and increasing sophistication of the industry. This was evidenced by the wide ranging capacity building opportunity implementers were exposed to and the various directives and regulatory frameworks that have emanated from such exposures.
9 The other countries being Kenya, Nigeria, Rwanda, South Africa, Tanzania, Uganda and Zambia 10 Los Cabos Financial Inclusion Event, http://www.g20mexico.org/index.php/en/press-releases/459-evento-deinclusion- financiera-en-los-cabos (accessed on 9 September, 2017).
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5.2.1.3 Alignment with existing implementation structures and avoidance of parallel structures
87. The project was also relevant in that it avoided creating parallel structures, rather it focused on strengthening the existing structures. For example, the PIU was endorsed by GOM and RBM and was housed within the RBM premises. This strategic positioning facilitated communication and responsiveness to emerging issues. The PIU also collaborated closely with the relevant offices in operationalizing the PAD. This is more based on the abundance of evidence indicating that the implementing partners were very strong in their own individual domains and technical platforms. FSTAP’s alignment with existent structures was also evident in the high awareness levels of the project and its objectives by all stakeholders. The project’s assimilation with existing structures has been a major attribute in the sense that although some departments/units, such as CPFL, virtually emerged after the PAD was rolled out, they were seamlessly accommodated in project activities. Stakeholders could easily be reached and advised thereby ensuring sustainability of the financial inclusion concepts. In sum, the project’s focus on strengthening the existing structures other than creating new ones further underlined its relevance.
5.2.2 Effectiveness
88. The assessment has managed to capture notable evidence of project effectiveness on three fronts: Stakeholder level (capacity building); regulatory level (improved regulatory framework) and operational level (improved infrastructure).
5.2.2.1 Improved capacity in departments
89. One major expected result of the project was to build capacity of the implementing partners so they could strategically position themselves to facilitate the growth of the financial sector, particularly with regard to enforcing compliance. Inherent in this result, therefore was the increased capacity of departments in RBM and other stakeholders to plan, foster, coordinate, implement and sustain the increased demand for formal financial services. The findings of the assessment show that although there were frequent delays, especially with regard to securing World Bank’s no objections, the project’s capacity building targets, were, on the whole, achieved and this was consistent across all the five components of the project. Generally, key informants indicated that through training and learning visits, their capacity had been enhanced to initiate appropriate directives and laws. Notable exceptions were recorded in Component 3 (Financial Consumer Protection and Financial Literacy), for example, where due to staffing issues and the fact that the division was created way after the PAD had already been developed, the division did not benefit optimally from capacity building opportunities.
5.2.2.2 Improved regulatory framework
90. Another immediate and direct outcome of the capacity building component of the project is the improved capacity to develop directives and laws among stakeholders. This has resulted in a significantly
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improved regulatory framework and a high compliance level among stakeholder. Below is a sample of pieces of regulations generated:
Component Passed Regulations/Directives Component 1 • Created Money Laundering and Proceeds of Serious Crimes Act • Financial Crimes Act • BESTAP Project Component 2 • Released a directive on interoperability of retail payment systems • Issued new Operational Rules for the RTGS and ACH • Introduced Central Depository Interface Component 3 • Creation of Umbrella Law on Consumer Protection • Creation of Financial Ombudsman (FO) to replace RBM • Gazetted disclosure (on credit products, complaints handling • Standardized Financial Terminology Component 4 • Deposit Insurance Scheme • Third Party Motor Vehicle Scheme • Financial Sector Development Strategy • Road Map for Digital Payments • Long Term Financing Policy • Microfinance Policies
91. The improved regulatory environment was largely due to the inclusive approach that was adopted in the development of the directives and regulations. For example, the project engaged Consultants and technical experts (such as Judges) during the development process. Even more crucially, the released directives and regulations were accompanied with user orientation. All these initiatives contributed to the high stakeholder compliance levels.
5.2.2.3 Improved infrastructure
92. The assessment results show that commensurate with trends in capacity building and regulatory framework, corresponding changes were registered in the infrastructure component. The project had a dedicated component for strengthening the basic infrastructure for the modernization of payments services, particularly the RTGS and the ACH which has more functionalities than the one implemented in 2005 (Component 2). The implementation of the ATS/CSD, National Switch and MFI Hub projects including all supportive elements is the largest infrastructure component made possible by FSTAP. This infrastructure will stand out to have changed and tremendously improved the payments system terrain in Malawi. Again, other components under FSTAP also benefitted with some form of infrastructure, particularly servers and computer equipment.
5.2.3 Efficiency
93. FSTAP efficiency has been assessed with regard to how well the project resources were utilized to achieve project outcomes, and how timely the project outputs were achieved. Furthermore, the degree to which the components leveraged partnerships to achieve efficiency and economies of scale has also been assessed. Drawing on these criteria, the assessment has established that FSTAP was hugely efficient. The project delivered results that are immediately visible. The project has been able to advocate for
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changes in service delivery modalities which have been effected by service providers and policy holders, including Government. The key efficacy attributes can be showcased as follows:
5.2.3.1 Use of human resources
94. Overall, data from desk review and key informant interviews illustrate a very efficient use of human resources. This view was mainly based on the allocation of responsibilities according to Components, based on their mandate either according to policy, area of expertise or competitive advantage. While others were preexisting entities prior to the implementation of FSTAP, others were deliberately created (for example Component 3: CPFL) and given the statutory mandate to execute elements of the project as specified in the PAD. For the most part, the use of existing structures contributed to the cost-effectiveness of the project.
5.2.3.2 Timeliness
95. With respect to project activities, some training and activities were centrally financed by the project. This served to cut some overhead costs. Moreover, a closer analysis of the consolidated work plans and the annual reports of the project show that to a large extent the outputs were achieved on time. Digitization, which was core component of FSTAP was also efficiently implemented resulting in the overall improvement of speed of transactions to the mutual satisfaction of service providers and consumers.
96. Nevertheless, notwithstanding the overall efficient manner in which FSTAP was implemented, there were, nevertheless some challenges, which undermined its efficiency. These revolved around the bureaucratic and operational aspects of the project. We examine at least three (no objection delays, the National Switch contract issues and uncertainties surrounding the MFI Hub):
5.2.3.3 World Bank delays in granting no objections
97. Inordinate delays in securing a statement of no objection from the World Bank was consistently highlighted in all components as contributing to implementation delays. Related to this was the perceived rigidity of the World Bank to delay/withhold approval for aspects that were already in the work plan11.
5.2.3.4 National Switch contracting issues
98. FSTAP followed governance procedures on procurement and disbursement during the implementation. In this regard, it is fair to say that FSTAP was efficiently executed. Nevertheless, with hindsight, a number of efficiency shortfalls at the design stage come to light. These largely revolve around the manner the national switch contract was developed and negotiated and also constitute the major weakness of the National Switch project. For example, although FSTAP observed correct procedures, the contract with the national switch vendor was generally poor. A quick assessment of the contract shows that the contract has loopholes, which the vendor exploited to his maximum advantage. For example, by April 2017, the vendor had already claimed and been paid 95% of the contract sum because the payments were tied to unrealistic implementation milestones. At the time, the national switch was not yet fully
11 A typical example of this rigidity was manifested in the NPS division of the Reserve Bank whereas the division was taken to task to justify migration to SWIFT, notwithstanding the evidence that it was a planned activity.
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operational with MFIs, SACCOs and MNO not fully integrated. The problem was to a large extent due to over-reliance on a consultant who did not represent the interests of national switch fully. Ideally, the contract should have provided for well-articulated deliverables that minimized disparities between the RFP and the Contract and paid the vendor amounts that were commensurate with what had been achieved.
5.2.3.5 Uncertainties surrounding the MFI Hub
99. Whereas the MFI Hub Project has now been embraced by all stakeholders, at concept, design and feasibility stages the project was so controversial that there were too many inconsistencies in understanding (even among RBM staff), which brought about uncertainties in the launch of the initiative thereby negatively affecting momentum and timeliness of the project. The national switch project was rolled out first on the understanding that lessons would be learnt and applied to the implementation of the MFI Hub project. This plan did not assist in launching and driving the MFI Hub project. Some of the efficiency challenges that contributed to inertia in the launch of the MFI Hub project included:
• stakeholders were not aware of the funds that were allocated to the project, leading to unhealthy speculation and expectations on funding for the initiative
• since the project was championed by RBM, stakeholders in the MFI and SACCO sector had negative perceptions of the project, leading to initial resistance from some quarters
• over involvement of RBM in the initiative meant, to some industry players at least, the project would be plagued by bureaucracy
5.2.4 Impact
100. FSTAP has generally brought about positive impacts in the strengthening of the financial sector to make it sound and responsive to anticipated growth. Impressive improvements have been registered in all the key result areas as per project components. However, by far, the greatest improvement has been registered in increased level of volumes transacting in the financial sector. Drawing on the observation by the assessment team and through discussion with key informants, a number of intended and unintended project impacts were revealed. These included:
• the proliferation of new and diverse products on the market (e.g. National Bank of Malawi’s MO626) leading to increased volumes, economies of scale and productivity to the overall satisfaction owing to infrastructure upgrades;
• the improvement in compliance among stakeholders and the increased demand for quality service among consumers against the high level inclusiveness of under FSTAP;
• reaching previously unserved (mostly rural) areas through the introduction of various transacting platforms (ATM’s, POS, etc) and interoperability; and
• significant reductions in risk and improvements in efficiency among industry players as a result of clarity in directives and regulatory frameworks.
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101. The above positive impacts notwithstanding, the project also registered some negative impacts, such as:
• inertia in rolling out the MFI Hub project created an unnecessary crisis of confidence and disillusionment in the MFI and SACCO community;
• high volumes of capacity building opportunities and associated travel allowances related to the project made money motives to outweigh project objectives leading, in some cases, to delayed implementation as people became more critical of travel requests. Furthermore, capacity building under FSTAP was increasingly viewed as an incentive scheme rather than capacity building integral to the financial inclusion agenda; and
• vendors on the domestic market became unrealistically exorbitant as they exploited to their advantage the World Bank label to inflate their prices and, in the process, distorting the market.
5.2.5 Sustainability
102. The assessment sought to determine the nature of exit strategies incorporated into FSTAP. It also assessed the extent to which the strategies had been sufficiently elaborated in the initial planning and launching of the project. Drawing on observations and interviews with key informants, the assessment has noted a number of key factors that were taken into consideration from the start to ensure a more sustainable model:
• First and foremost, the temporary nature of FSTAP was made clear to all stakeholders at the outset. The assessment has been able to establish that all stakeholders were abundantly aware that the project was simply a mechanism for strengthening the financial sector to make it robust enough to engender financial inclusion and was hence of limited duration. This resulted in clear clarification of expectations among stakeholders on what the project could and could not deliver.
• Under the elaborate capacity building regime the project focused on empowering service providers with practical skills and consumers with practical information on how to navigate the sophistications of a developing financial industry. With this information, both the service providers and the consumers have been able to know their respective roles and rights which would be instrumental for the anticipated growth of the financial sector.
• FSTAP focused on creating synergies among stakeholders who hitherto operated independently and in silos. Following on FSTAP, lasting and mutually reinforcing networks have been created among financial sector players.
103. There are, however, some issues of concern that threaten the sustainability of the gains of the project. These largely revolve around the sustainability of the national switch. Findings of the assessment
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show that, overall, the sustainability of the national switch cannot be immediately guaranteed on the following grounds:
• The national switch, is, after all, a loan, which will need to be repaid. However, much as stakeholders (Commercial banks and customers) are deriving unpreceded benefits from it, there has not been focused reflection among the main players (Government and the commercial banks) on how they will sustain it beyond FSTAP. Lack of dialogue on this aspect, threatens sustainability of national switch.
• As the financial sector grows (i.e. with additional users, the coming of the MFI Hub, and MNOs) there will be need for capital expenditures to accommodate the growth. These have not been determined so that the national switch is strategically positioned to anticipate and make arrangements to accommodate such eventualities.
• Technology is constantly evolving. Like all physical and technological investments, national switch will inevitably suffer depreciation requiring mandatory periodic technological upgrades. The costs of this depreciation and their implications have not been adequately explored and built into the viability picture after FSTAP, for sustainability purposes.
• The foregoing point is compounded by the fact that the national switch machines are too complicated and cumbersome for local technical expertise. On account of this, the national switch is dependent on the supplier, HP, who has already made indications that the machines are no longer in production. Currently, prospects of national switch weaning off the supplier are remote and could jeopardize sustainability of the national switch.
5.3 Project Assessment by Component
104. FSTAP assisted in:
5.3.1 Component 1: Financial sector regulation and supervision
(a) modernizing (monthly) core reporting
(b) the production of BSA reports
(c) determining which other departments need to be taken on board
(d) the review of directives resulting in 75%-80% improvement in compliance
(e) enhancement of the legal framework
• Creation of the Money Laundering and Proceeds Act
• Financial Crimes Act
• BESTAP project
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(f) numerous learning visits
• Deposit Insurance Scheme
• Stress Testing
• BASEL II
(g) enabling department to conduct stress tests for banks
(h) international training and capacity building
• staff attended core courses specialized in banking supervision (ordinarily the courses are prohibitively expensive owing to the fact that they are well structured and proceed according to levels whereby one has to pass structured exams to proceed to the next level)
(i) BASU rated as the best performing department during TWG meetings
(j) Equipment (laptops)
5.3.2 Component 2: Financial infrastructure
5.3.2.1 ICT
(a) High level ICT capacity building received under FSTAP
(b) Recommended the MITASS (ATS/CST) and installed the network
(c) Participated in user meetings (with banks)
(d) Participated in the engagement of vendor MONTRAN that proved to be more helpful and cheaper to run than RTGS
(e) Forced to up the game because of the complex system
(f) Provided stable ICT and NPS infrastructure with minimum downtime
5.3.2.2 NPS
(a) Took over the clearance system from BAM
(b) Introduced the Central Depository Interface (Delivery vs Payment) – the first of its kind in the country
(c) Introduced a flexible interface with commercial banks
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(d) Non-traditional participants brought on board (e.g. MRA, and Government) – who can now view their balances in real time
(e) Facilitated system migration from VPN to SWIFT
(f) Took over the responsibility of BAM regarding cheque clearing (introduced a new cheque clearing system)
(g) Linking/hooking commercial banks into MITASS
(h) Consolidated gains from the ACH by introducing additional payment streams like credit transfers and direct debits besides cheques
(i) Strengthened the legal and regulatory environment in the payments arena through operationalization of the Payments Systems Act
(j) FSTAP provided a platform for improved project management skills as the ATS/CSD was implemented efficiently and stabilized within a record two months. There were also no contractual issues with any vendor under the ATS/CSD Project.
5.3.3 Component 3: Financial consumer protection and financial literacy
(a) The legal and regulatory framework has been strengthened (Insurance, Pension, Savings and Investment, Umbrella Law on Consumer Protection)
(b) FSTAP has created an enabling environment for the development of the state of the art in the MACSU supervision. This will take the country to the next level
(c) FSTAP has provided the foundation for key pieces of infrastructure (e.g the Hub)
(d) CSD
(e) Stock Market
(f) Capital Market
(g) Fair treatment of financial consumers improved
(h) Gazetted disclosure (on credit products, complaints handling)
(i) Creation of Financial Ombudsman (FO) to replace RBM.
(j) Outreach activities on Financial Literacy
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(k) Formed an inclusive Technical & Steering Committee to carry out consultative processes on Financial Literacy and Consumer Protection comprising the following:
• Academia
• Medical
• National Payment System
• Banking and Currency Management
• Financial Markets
• Pension and Insurance
5.3.4 Component 4: Ministry of Finance financial sector policy and governance capacity and long- term finance
105. The majority of FSTAP’s targets under Component 4 in the Project’s Results Framework were achieved. Even if some targets were slightly under-achieved, the rate of activities’ implementation was generally very high, such as:
(a) Creation of the Financial Sector section
(b) Improved coordination between the RBM and Government
(c) A lot of capacity building:
• Deposit insurance scheme
• Third Party Motor vehicle Scheme
• Lawyers trained in economics
(d) FSTAP funding to complete various policies and financial sector strategies:
• Financial Sector Development Strategy
• Road Map for Digital Payments
• Long Term Financing Policy
• Microfinance Policies
(e) Proper regulations instituted
(f) Issued various directives
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(g) Brought infrastructure
(h) Facilitated ATS & CSD
(i) Facilitated the establishment of the National Switch
(j) Facilitated digitized payments
(k) Funding for the hire of Consultants
5.3.5 Component 5: Implementation support
(a) Facilitated the review of the regulatory frameworks and introducing new frameworks
(b) Enforcing action and implementation through financial resources, clear objectives, smart goals and tight timelines
(c) Reconditioning the RTGS to 100% operating level
(d) Operationalising the National Switch and ensuring fully fledged local ownership of the Switch by the local banks
(e) Facilitated the release of several directives and law
(f) Facilitated the establishment of a dedicated Financial Sector Department in the Ministry of Finance, which is now up and running
(g) Capacity building:
• RBM
• Government
• Industry Associations
• MAMN, MUSCCO, BAM
Legal Covenants as Outlined in the Financing Agreement
Loan/Credit/TF Description Finance Agreement: Schedule 2 Sec.IV.B1(b) of FA | Description: The project implementation funds that have been budgeted for the consultancy costs for the IDA-48970 proposed Financial Sector Deepening Trust will only be disbursed after the Trust has been established. | Frequency: Quarterly Finance Agreement: -Schedule, Sec.IA.1(b) of PA | Description: By not later than 12/31/11 establish and operationalize the FSTAP PIU, and thereafter ensure that the responsibilities IDA-48970 carried out by the BESTAP PIU are efficiently transferred to the PIU. | Due Date: 31-Dec- 2011
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Loan/Credit/TF Description Finance Agreement: Schedule 2 Sec.1.E of FA | Description: No withdrawal shall be made for payments prior to the date of the FA; and for consultant services for the MFDT unless IDA-48970 and until it has been established referred to in Sec.I.E of Sch.2 for the FA | Frequency: Quarterly Finance Agreement: Sec. II. B1 of PA | Description: Maintain adequate financial IDA-48970 management system and records; prepare financial statements of operations, resources and expenditures of the project. | Frequency: Quarterly Finance Agreement: Sec. II. B2 of PA | Description: Submit to the Bank audited financial IDA-48970 statements not later than 6 months after the end of the project. | Frequency: Yearly Finance Agreement: Sec. II. B2 of PA | Description: Furnish unaudited interim financial IDA-48970 reports (IFRs) no later than 45 days after the end of each accounting quarter. | Frequency: Quarterly
Status of Directives, Regulations and Bills Prepared during the Life of FSTAP
DETAILS OF DIRECTIVES, REGULATIONS, BILLS STATUS REGULATIONS AND DIRECTIVES PUBLISHED 1. Financial Services (Agent Banking) Regulations, 2017 Published12 2. Financial Services (Capital Adequacy for Banks) Directive, 2017 /12 3. Financial Services (Annual Audit of Banks) Directive, 2017 /12 4. Financial Services (Disclosure of Information by Banks) Directive, 2017 /12 5. Financial Services (Fit and Proper Requirements for Shareholders, Directors and /12 Senior Management Officials of Banks) Directive, 2017 6. Financial Services (Licensing of Banks) Directive, 2017 /12 7. Financial Services (Transactions of Banks with Related Parties) Directive, 2017 /12 8. Financial Services (Supervisory Levy for Banks) Regulations, 2017 /12 9. Financial Services (Submission of Information by Banks) Directive, 2017 /12 10. Financial Services (Prudential Liquidity Requirements for Banks) Directive, 2017 /12 11. Financial Services (Prompt Corrective Action for Banks) Directive, 2017 /12 12. Financial Services (Information Management Requirements for Banks) Directive, /12 2017 13. Financial Services (Foreign Currency Lending Ratio) Directive, 2017 /12 14. Banking (Premises Inspection) Directive, 2017 /12 15. Financial Services (Financial Asset Classification for Banks) Directive, 2018 /12 16. Financial Services (Regulation of Commodities Exchanges) Directive, 2018 /12 17. Financial Services (Disclosure Requirements for Credit Products) Directive, 2018 /12 PUBLISHED REGULATIONS AND DIRECTIVES UNDER PRINTING AT THE GOVERNMENT PRINT Bills 1. Banking (Amendment) Bill Under printing13 2. Financial Services (Amendment) Bill /13 Banking Legislation 1. Financial Services (Licensing and Regulatory Requirements for Holding Companies) /13 Directive, 2017 2. Financial Services (Consolidated Supervision for Banks) Directive, 2017 /13
12 Published on 27 April 2018 13 Submitted to the Government Printer for printing
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DETAILS OF DIRECTIVES, REGULATIONS, BILLS STATUS 3. Financial Services (Governance Requirements for Banks and Bank Holding /13 Companies) Directive, 2018 Development Finance Legislation 1. Financial Services (Licensing of Development Finance Institutions) Directive /13 2. Financial Services (Corporate Governance Requirements for Development Finance /13 Institutions) Directive 3. Financial Services (Capital Adequacy Requirements for Development Finance /13 Institutions) Directive 4. Financial Services (Credit Risk Management for Development Finance Institutions) /13 Directive Pension Legislation 1. Pension (Fit and Proper) Directive, 2015 /13 2. Financial Services (Submission of Information by Pension Entities) Directive, 2017 /13 Insurance Legislation 1. Financial Services (Submission of Information by Insurers) Directive, 2017 /13 2. Insurance (Determination of Policy Liabilities of Life Insurers) Directive, 2017 /13 3. Insurance (Operation of Life Insurance Funds) Directive, 2017 /13 Capital Markets Regulations Bill 1. Securities (Amendment) Bill Final version14 Microfinance Regulations 1. Financial Services (Prompt Corrective Action for Financial Cooperatives) Directive, /13 2017 2. Financial Services (Corporate Governance Requirements for Financial Co- /13 operatives) Directive, 2017 3. Financial Services ( Prompt Corrective action for Deposit Taking Microfinance /13 Institutions) Directive, 2017 4. Financial Services (Fit and Proper Requirements for Prudentially Regulated /13 Microfinance Institutions), 2017 5. Microfinance (Microcredit Agency) Directive, 2018 /13 LIST OF BILLS, DIRECTIVES AND REGULATIONS PLANNED TO BE PROCESSED IN 2018 Pension and Insurance Regulation Bill(s) 1. Pension (Amendment) Bill Registrar endorsed15 2. Medical Aid Schemes Bill /14 3. Insurance (Amendment) Bill Function Level Directives 1. Pension (Corporate Governance) H2:201816 2. Pension (Fees and charges) /16 3. Pension (Programmed withdrawals by pension members) /16 4. Insurance (Reinsurance Arrangements) /16 5. Insurance (Reserving requirements for general insurers) Submitted17
14 Final version vetted and sent back to Ministry of Justice for further processing 15 The Registrar endorsed the policy positions (proposed amendments to the Pension Act) agreed with Ministries of Labour and Finance. Preparing for consultations with MCTU and ECAM. 16 Planned for second half of 2018 17 Submitted to MOFEPD for onward submission to MOJ
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DETAILS OF DIRECTIVES, REGULATIONS, BILLS STATUS 6. Insurance (Inclusive Insurance) Directive /17 7. Insurance (Conduct of insurance intermediaries) /16 8. Insurance (Disclosure of information) /16 9. Pension (Investment Management of Pension Funds) Directive Undergoing internal consultations BANK REGULATION Bill(s) 1. Mortgage Finance Bill Final external stakeholder consultations on 16th July, 2018. Endorsed by the Management. To be submitted to the Board Regulation and Supervision Committee at its next sitting 2. Deposit Insurance Bill Under review by Ministry of Justice 3. Guidelines on Mergers and Acquisitions for Banks Reviewed. Circulated to banks CAPITAL MARKETS AND MICROFINANCE REGULATION Bill(s) 1. Review of the Microfinance Act, 2010 Work in progress Directives 1. Financial Services (Transactions of prudentially regulated microfinance institutions /17 with related parties) Directive 2. Financial Services (Record keeping for microfinance institutions) Directive /17 3. Financial Services (External audit and related matters) Directive /17 4. Financial Services (Capital adequacy requirements for microfinance institutions) /17 Directive (amendment) 5. Guidelines for Mergers and Acquisition for Microfinance Institutions /17 CONSUMER PROTECTION AND FINANCIAL LITERACY Bill(s) 1. Financial Consumer Protection Bill Directives 1. Financial Services (Advertising of Financial Products or Services by Financial /13 Institutions) Directive, 2018 2. Financial Services (Disclosure Requirements for Insurance Services) Directive, 2018 /13 3. Financial Services (Disclosure Requirements for Investment Services) Directive, /13 2018 4. Financial Services (Disclosure Requirements for Pension Services) Directive, 2018 /13 5. Financial Services (Fair Treatment of Financial Consumers by Financial Institutions) /13 Directive, 2018 6. Financial Services (Disclosure Requirements for Savings Products and Services) /13 Directive, 2018
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ANNEX 6. SUPPORTING DOCUMENTS (IF ANY)
1. Project Appraisal Document, Report No.: 59793-MW, dated February 28, 2011
2. Project Paper, Report No. RES19808, dated October 29, 2015
3. Project Paper, Report No. RES29394, dated August 28, 2017
4. Financing Agreement, No. 4897-MW, dated November 2, 2011
5. Memos regarding amendments to the Grant Agreements and Restructuring Papers
6. Borrower’s Implementation Completion Report, dated June 2018
7. Implementation Status and Results Reports (13) from June 2012 through November 2017
8. Malawi Baseline Financial Literacy and Consumer Protection Household Survey (June 2014)
9. Malawi Follow-up Financial Literacy and Consumer Protection Household Survey (Aug 2018)
10. Aide Memoires:
• June 11–12, 2012
• May 20–27, 2013
• October 21–25, 2013
• April 28–May 5, 2014
• December 3, 2014 (MTR)
• April 18–22, 2015
• April 27–May 21, 2015
• November 30–December 4, 2015
• June 22–26, 2015
• January 23–27, 2017
• August 2017
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ANNEX 7. SPLIT RATING CALCULATION
Before Restructuring After Restructuring Relevance of Objective High High Efficacy (PDO) Modest Substantial Efficiency Modest Substantial 1 Outcome ratings Moderately Satisfactory Satisfactory 2 Numerical value of the outcome ratingsa 4 5 3 Disbursement US$16.44 million US$9.84 million 4 Share of disbursement 65% 37% 5 Weighted value of outcome rating (Row 2 × Row 2.6 1.87 4) 6 Final outcome rating Moderately Satisfactory (2.6 + 1.87 = 4.47; rounding it to 4) Note: a. Highly Unsatisfactory (1); Unsatisfactory (2); Moderately Unsatisfactory (3); Moderately Satisfactory (4); Satisfactory (5); Highly Satisfactory (6).
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ANNEX 8. MALAWI BASELINE FINANCIAL LITERACY AND CONSUMER PROTECTION HOUSEHOLD SURVEY (JUNE 2014)
EXECUTIVE SUMMARY
Introduction
1. Although Malawi has undergone through financial sector reforms since the early 1980s, the proportion of the population with access to formal financial services remains low and a significant proportion rely on the informal financial sector. In addition to problems of access to financial services, there is a gap in knowledge of the extent to which adult Malawians are financially literate and knowledgeable about financial products and consumer protection in Malawi. Through the Financial Services Technical Assistant Program (FSTAP), the Reserve Bank of Malawi commissioned a baseline survey in the second half of 2013 to form a basis for interventions in financial literacy in Malawi. The main objective of the baseline survey was to obtain information on knowledge of financial management and services as a basis for designing appropriate interventions for improving financial literacy and consumer protection in Malawi. The baseline survey covered a randomly selected national representative sample of 4,999 households throughout Malawi across four strata including urban - cities, urban - district towns, peri-urban and rural areas. Face-to-face interviews were conducted using a structured questionnaire administered to one randomly selected adult member above the age of 17 years old (from 15 years where there were no adult members of the household above 18 years).
2. The socio-economic profile of households included in the baseline survey is consistent with the national population in terms of the population age structure, save minor difference in some selected features. The literacy rate is 71% among household heads and 67% among adult respondents. Most of the respondents have the highest completed level of education as primary school (standards 1 – 8) representing 57.9% of respondents. Most of the respondents are decision-makers in household finances as they contribute to the household budget (93%) and participate in the household decision about money (94%).
Incomes and Economic Activities
3. Most households in Malawi have fragile incomes and tend to rely more on unstable sources, and the situation is consistent with previous findings of low incomes and high incidence of poverty in Malawi. This is mainly due to the fact that self-employment is the most common economic activity and most important source of income among adult Malawians both at individual and household levels. Formal and informal employment was reported by only 9.3% of adult Malawians while only 0.3% of adult Malawians are actively looking for employment. There is high instability in incomes with 93% of adult Malawians reported that their incomes are seasonal and the seasonal variations occur regardless of times of they get most incomes or when they get the least incomes. About 67% of adult Malawians have personal incomes averaging less than MK10,000 per month while 48% of households reported receiving average monthly household incomes of less than MK10,000, although the proportions are much higher in rural areas compared to urban areas. These low levels of formal employment imply that most of the income among Malawians comes from unstable sources with consequences on people’s ability to save and invest in productive activities.
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4. There is limited recourse to advice from financial providers such as banks; microfinance organizations; insurance providers; Rotating Savings and Credit Associations (ROSCAs) or someone in a savings club. In terms of getting information or advice when making important financial decisions, 55% strongly agreed they always get information or advice, regardless of the population segments. The main source of financial advice is their spouse or partner as reported by 45% of adult Malawians, followed by a friend (40%) and a parent or grandparent (19%).
Financial Literacy
5. The levels of financial literacy vary considerably and depend on the financial concept and terms known by consumers, but financial illiteracy cuts across population segments and across formal education levels. Using the seven indicators of financial literacy relating to simple division, inflation, simple interest rate, compound interest rates, absolute and percentage discounts, risk and risk diversification, the most correct answers were on simple division (82%), followed by absolute and percentage discount (64%) and compound interest rate (54%). However, combining the scores, only 1% of respondents gave correct answers to all 7 questions, 27% got 5 – 6 questions right and 21% got only 1 – 2 questions right. The mean financial literacy is 4 correct answers representing 57% average score. Some of the adult Malawians with tertiary education and in formal employment got some of the questions on financial literacy wrong.
6. The experience of saving money as a child, mainly saving the money in the money box at home regardless of whether they are in urban – cities or rural areas, is positively associated with financial literacy. About 55% of adult Malawians saved money as a child and this tends to be associated with financial literacy and higher saving behavior. In addition, having a bank account, medium to long term planning and formal levels of education are positively associated with levels of financial literacy.
7. The knowledge of financial terms such as interest rate, insurance, shares, stock exchange, inflation and devaluation is low, and the non-existence of equivalent local language terms (except for interest rate) made matters worse. The interest rate is mostly known what it means by 43%, insurance and shares are known by 28% each, stock exchange is only known by 6%, inflation is known by 7% and devaluation is known by 14% of respondents. There are, however, urban - rural biases in knowledge of these concepts with much higher levels in the urban areas compared to rural areas.
8. There is moderate access to mobile phones although ownership of mobile phones remains low, but the opportunities for use of mobile phones for financial transactions are huge. Access to mobile phone is at 56% although only 36% own a mobile phone. There is urban - rural bias in mobile phone ownership with 71% of those living in urban - cities compared to only 29% of those living in rural areas owning a mobile phone. Most adults (more than 75%) have knowledge of use of mobile phones for financial services such as receiving/transferring money, paying bills, buying airtime and Me2U. Although most respondents have actually used mobile phones to buy air time and sending airtime (Me2U), a high proportion of respondents are very likely to use a mobile phone for receiving money (73%), transferring money (79%) and paying bills (65%).
9. There is high potential demand for alternative places for accessing financial services other than banking halls of financial institutions. Most would also welcome the use of alternative places for accessing financial services, most popular being large agro-input dealers (96%), bank branch (81%) and
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local supermarkets (80%). Some of these alternative places are much closer to customers particularly for the rural population for which a large proportion remain without access to financial services.
Knowledge of Financial Services and Products
10. Knowledge of financial products and services, usage of formal financial services and products, and knowledge about financial consumer protection remain limited in Malawi and the situation is acute in rural areas. Most adults do not have information about financial products and services and have limited information about financial consumer protection agencies and how to resolve conflicts with financial service providers. There is low usage of formal financial sector products and services in Malawi, with only 17% and 6% having products and using services in the formal and semi-formal financial services compared to 53% in the informal sector and 34% without any financial product and service. There are urban - rural differences with a higher proportion of urban city populations (47%) using formal products and services than rural populations (10%).
11. Only 15.4% of adult Malawians held bank savings/deposit account in 2013 while 25% of adult Malawians have informal savings accounts in ROSCAs and Village Savings and Loan Associations (VSLAs). The holding of formal savings and current accounts has marginally declined between 2008 and 2013, suggesting a net closure of accounts. The potential demand for bank accounts remain low, including those with accounts and those intending to open one in future, at 29% of adult Malawians. However, the availability of financial services may be key since 61% among urban - city populations compared to 22% among rural populations with bank accounts or intending to open one. Other key socio-economic factors that increase the probability of having a bank account are financial literacy, incomes, gender (male head or male respondent), age of respondent, education and formal employment. The motivating factors for opening a savings account include interest rates, bank charges and the bank’s reputation mentioned by at least 25% of respondents. The demand for bank loans is even lower as only 8% of respondents indicated that they have a bank loan or intending to take one, with bank’s reputation and credit interest rates being the main considerations.
12. In choosing financial products and services, most respondents search for information from a range of sources and are pro-active by approaching the service providers. However, most learn about financial products and services from friends and family (58%), followed by service providers from which 36% learnt about the products. This implies that targeting financial education to specific groups may have contagion effects as friends and families that attend such training are likely to pass the knowledge to others within communities.
13. Most adult Malawians have limited information about consumer protection agencies, procedures for reporting problems experienced in the course of accessing financial services, and resort to complain to traditional and community leadership when they are in conflict with financial service providers. Only 74% have heard about the Reserve Bank of Malawi, 13% have heard of the Reserve Bank of Malawi Division of Consumer Protection and 47% have heard about the Consumer Association of Malawi. It is also apparent that most consumers are not aware of procedures for seeking redress with appropriate authorities whenever they are in conflict with financial service providers. The informality of many financial services may also play a part in this gap in knowledge. Although only 8% of adults have had conflicts with financial service providers, most did nothing about it and those that acted opted to stop using the service and approached the service providers through community elders. Approaching service
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providers through community elders, stopping using service, approaching the police and by discussing informally are the most common actions that respondents would take in the future if faced with a situation of conflict with a service provider. The proportion that did not take action after experiencing conflict with service providers indicated that they are not aware of government agencies that can be approached for help.
14. In designing consumer financial education programs, the use of the radio has the potential to reach out to a greater proportion of Malawians. The survey revealed that 62% use the radio as a source of information. Newspapers, though not replacing radio, would be useful in urban areas such as cities and district towns. Modern media facilities such as internet and SMS seem to be less effective vehicle for financial education as 3.8% and 3.9% regularly use such facilities, respectively.
15. There are mixed perceptions about five service providers (banks, other lending and MFIs, community groups, (informal financial market (katapila) and insurance companies) on the quality of services. Community groups score highly with respect to getting things done easily, quick service, providing information that is easy to understand and reasonable charges. Katapila is known for lending too easily and getting borrowers into problems and taking property away property when borrowers fail to repay the loan. The main problems experience by consumers using financial services are mainly related to long time to withdraw money from the bank and ATMs not working when people want to withdraw money.
Money Management Capabilities
16. Most adult Malawians, 91%, plan use of money when they receive it and 47% of those that plan use of money do so always and 79% indicated that they keep their plans. The likelihood of planning increases with improvements in financial wellbeing, seasonality of income and education levels. Although, a large proportion of those that plan indicated that they keep the plan, it is not known to what extent these plans are documented by the household.
17. The proportion of adult Malawians that has some money left over after paying for food and basic necessities is high, 76%, but only 18% save on a regular basis. The incidence of saving is lowest in the rural areas, 75% and 16% save on a regular basis. The main reason for saving some money is to keep it for future food and other necessities needs as revealed by 75% of adult Malawians. Other reasons include keeping money for unforeseen expenditures (53%), spending money of self or buying non- essential items (51%) and to invest the money in business or farming (49%). Savings behavior is positively associated with the level of financial literacy, the level of income, improvement in financial wellbeing, seasonality of income, marital status (monogamy or polygamy), upper primary and lower secondary education, self-employment and savings experience as a child. The results underscore the importance of developing a savings culture from childhood as one way of promoting future savings behavior.
18. Most adult Malawians keep their money at home (81%), saving at a bank (20%), at an informal savings and credit group (14%) and at informal saving group (chipereganyu) (10%). Other methods mentioned by less than 8% of adult Malawians include saving through keeping livestock, using someone else for safe keeping and saving through stocks for business. The methods of savings that appeals most are simple to use, convenient to get to, safe from temptations to use the money and safe and trustworthy.
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The baseline survey has therefore established that most savings are kept outside the formal financial system.
19. While a high proportion plan and save, 90% run short of money to cover expenses for food and other basic needs and 70% have ever used debt to finance basis necessities. They run short of money because they feel that their incomes are insufficient or income fluctuates or it is unreliable and indeed many borrow from family and friends (63%) or go for ganyu18 work (61%). However, the proportion of adult Malawians that borrow to pay debts is lower, only 18% and most borrow sometimes rather than regularly. With respect to current debt obligations, a third of adult Malawians (38% among urban –city adults) have to repay borrowed money. Most adult Malawians with debts contract debts that are typically less than or equal to their monthly income, but 21% contracted debts that were more than their monthly income.
20. Most adult Malawians revealed that they are disciplined in managing their money, learning from mistakes others make and being conscious buyers of unnecessary things and consider affordability. About 79% of adults revealed that they are ‘much disciplined’ in managing their money while 67% learn from the mistakes that others make in managing their money. Malawians are also conscious buyers of unnecessary things before buying food and basic necessities and most never buy unnecessary things when they know they cannot afford them. More than half of adult Malawians (56%) revealed that they are very confident in money management, and such confidence is high among the middle age group (35–59), increases with level of formal education and increases with formality of employment.
Financial Planning Capabilities
21. There are several aspects of financial planning that were central to the study particularly focusing on planning for expected and unexpected expenses, planning for old age and planning for children. Generally, there is limited planning for old age in Malawi and this may be driven by the low income levels. Most households are desperate on how they are going to meet planned and unexpected expenses and very few have thought on a pension as a plan for old age. The following are the main findings on financial planning in Malawi:
22. There is limited planning for expected and unexpected expenses, with most adult Malawians being unable to cover such expenses equivalent to their monthly income in full. Although 74% of adults were expecting a major expense or bill equivalent to their monthly income, 59% of these would not be able to cover such expenses or to pay for such a bill in full. And 45% of adult Malawians are desperate and had done nothing to enable them cover such expected expenses in full without resorting to borrowing. Similarly, 87% of adult Malawians cannot cover unexpected expenses in full the following day without borrowing money that they would pay back and 78% are doing nothing to prepare for such an eventuality. This is consistent with problem of insufficient or irregular incomes that most people feel they have to manage their lives properly. It is not surprising that most people are very worried on how they will cover
18 The word ‘ganyu’ is widely used in Malawi to describe a range of short-term rural labor relationships, the most common of which is weeding or ridging on the fields of other smallholders, or on agricultural estates.
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expected or unexpected expenses with fragile incomes, with many respondents and their households (86%) experiencing a drop in income in the past 12 months.
23. Most adult Malawians are challenged on the concept of planning for old age among those under the age of 60 years and only 11.4% have savings plans for old age. The most popular plan for old age is to sell or rent out non-financial assets such as land, house and livestock (40%), followed by business (37%) and always working (31%). About a third of respondents have no plans at all and only less than 3% have pension plans. Similarly, for adults over 60 years old, the main ways of covering expenses are to always work, business income, selling or renting out non-financial assets and financial help or support from family. The probability of having a plan for old age significantly increases with levels of financial literacy, income levels, improvements in financial wellbeing, seasonality of income, male headship of households, age of respondents, highest levels of education (from secondary) and nature of employment.
24. People’s knowledge about pensions vary, with 42% of adult Malawians not having heard about pensions and 41% having heard about them and understanding meaning of pensions. A higher proportion of adults in urban –cities (58%) compared to 38% among adults in the rural areas. Only 11% of those that have heard about pension and know what they mean, believe that both the employer and employee contribute for the employee’s retirement. The knowledge that both the employer and employee contribute money for the employee’s retirement is even low among those with tertiary education (38%) and with upper secondary education (12%), and among those in formal sector employment (14%) but surpassed by those in informal sector employment (14%).
25. The National Pension Scheme is not very much known by adult Malawians that have ever heard of pensions and understand them, only 10% know about it and only 50% of these know that it is mandatory for employers to participate. The proportions that have heard about the National Pension Scheme is also with respect to education and nature of employment, with the highest proportion in these groups being 27% among those with tertiary education and the highest proportion of 26% among formal sector employees, respectively.
Recommendations
26. The low levels of financial literacy across the population segments and across different levels of education in Malawi justify the development of a comprehensive financial education program on various issues of money and financial management. Such programs in the context of Malawi should not only focus on the financially excluded population, but the financially included as well as their financial literacy seem to be wanting as well. This will require utilizing various delivery channels for financial education to reach out large proportions of the Malawian population.
27. Given the general low literacy levels in Malawi, it is therefore important for any financial education program to develop local language terms for some of the financial terms and concepts. Most of the financial terms and concepts do not have local language equivalent terms and are not easily translated into local languages without describing what they mean.
28. Financial education program should be developed in English and main local languages in Malawi. Although the bulk of the population has less than secondary education level, the survey has
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shown that there are pockets among the educated from secondary to tertiary levels that have poor understanding of financial concepts and financial terms.
29. The use of mass media complemented by other media channels may be recommended as channels of for delivering financial education. In Malawi, most households have access to a radio. Development of radio programs such radio drama and discussion forums and having specific times for airing the programs and providing contact numbers after broadcast may be useful interventions. The increase in the number of local radio stations and TV broadcasters offer additional opportunities for harnessing the potential of media to deliver financial education, including soap opera on TV. TV programs may prove useful for targeting the high income groups and working class in urban areas.
30. The Reserve Bank of Malawi should increase its visibility in championing financial consumer protection and in articulating the financial grievance reporting procedures. There should be public awareness of consumer protection institutions and the procedures for approaching them. This should include the establishment of walk in or phone-in centers (hotline numbers) for consumers to register their complaints about financial services and also get help on how to resolve some of the conflicts.
31. Multiple stakeholders should be used in the delivery of financial education programs in Malawi given the diversity of gaps in financial literacy and financial capability. This should include consumer protection agencies, financial service providers, non-governmental programs civil society organizations and farmer organizations. These can target specific groups such as secondary and college students, workers and micro-entrepreneurs. Some of the civil society organizations that may be targeted to deliver financial education include:
• Consumer Association of Malawi
• Economic Association of Malawi
• Malawi Economic Justice Network
• Society of Accountants in Malawi
• Malawi Microfinance Network
• Bankers Association of Malawi
• Malawi Congress of Trade Unions
• Employers Consultative Association of Malawi
32. Financial education programs should be integrated into some of the development programs in Malawi that offer cash incomes to the poor. For example, the scaling-up of the social cash transfer provides a huge opportunity for improving financial literacy if financial education can be integrated. Similarly, public works programs that are implemented by the Malawi Government through the Local Development Fund and GOM-EU provide avenues for reaching out to rural citizens on financial education.
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Where such programs are utilized financial education should not be delivered to intended beneficiaries only but also other households in communities where these projects are implemented.
33. In the medium to long-term, there is need to revisit the education curriculum in primary and secondary schools so that basic financial skills and financial literacy are introduced in the life skill courses.
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ANNEX 9. MALAWI FOLLOW-UP FINANCIAL LITERACY AND CONSUMER PROTECTION SURVEY (AUGUST 2018)
EXECUTIVE SUMMARY
1. In 2014 the Reserve Bank of Malawi (RBM) conducted a country representative baseline survey on financial literacy and financial capabilities. The RBM -in close collaboration with other government partners such as the Ministry of Education- launched a number of targeted initiatives to address the observed problems in response to these findings. The primary objective of this follow-up survey was to determine the populations’ current financial literacy and capability level. Moreover, the question were answered when consumer protection and financial literacy initiatives resulted in desired financial behavior and attitude changes of consumers towards formal financial services. The survey was designed to be nationally representative of financially capable adult Malawians. Its main findings are presented in the following sections.
Financial Inclusion
2. Over the past few years, adult Malawians have gained greater access to formal financial services. While only 17% of adult Malawians had access to formal financial services in 2013, this figure reached 29% in 2018. This improvement is remarkable and is consistent across both rural and urban areas. Rural areas have seen a 14-percentage point increase in access to 24.7%; in urban areas, a likewise 15- percentage point increase is seen between the baseline and this year. In contrast with the formal sector, access to semi-formal services has remained relatively unchanged at 5.3%; while the decline of informal services (from 53% to 45%) may suggest the substitution of the informal sector with the formal financial sector. This change implies that more people are relying on formal services, including banks and mobile money, as opposed to friends, family, unregulated microcredit agencies, and savings clubs.
3. A third (33%) of Malawians without a bank account, are considering opening a bank account. This is a significant increase from 2014 findings, where results indicated that 29% of Malawians either had an account or are considering opening one. Hence, this survey explores this “revealed demand” more in- depth by disaggregating this variable. As of today, 29% of adults in Malawi have their own bank account. This includes all accounts, such as savings and checking accounts. While 29% of Malawians have their own account, another 33% of adults said they were considering opening up an account. This 33% is acknowledged as “revealed demand”, as respondents revealed that they might have demand for a bank account in the near future. Moreover, 10.6% of Malawians not holding a bank account noted, they have previously used their relatives’ or friends’ accounts to gain access to financial products or services. A disparity between the urban and rural domains is evident. Indeed, 52.6% of urban Malawians noted that they have a bank account and about 24.1% of those without bank accounts are considering opening one. In contrast, these numbers for the rural domain are 24.8% and 35.7% respectively. Lastly, the same type of disparity was observed concerning gender, wherein 39.1% of males reported having a bank account and 33.9% of those without one are considering opening one. These numbers for females are 21.2% and 32.4% respectively.
4. Since 2014, the motivating factors to open up a new bank account have changed slightly. In this follow-up, the top five motivating factors for Malawian adults to open a bank account are: (i) having enough money to deposit in the bank (34%), (ii) bank requirements such as reference letters or ID (27%),
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(iii) bank’s minimum required balance (22%), (iv) bank charges (22%), and (v) saving & credit interest (19%). Since the 2014 baseline, this order has seen some alterations. For instance, in 2014 “saving and credit interest rate and costs” was cited as the most important factor, whereas in 2018 “having enough money” was prioritized. These shifts in motivating factors could potentially stem from various factors but are likely correlated with the large scale macroeconomic events, such as floods in 2015 and the drought in 2016.
5. Similar to the 2014 baseline study, radio was found to be the leading media for obtaining financial information. About 59% of Malawian adults regularly listened to radio in 2018, followed by Television (18%) and SMS (15%). When it comes to television, the difference between urban residents and rural residents is substantial. Furthermore, male Malawians have a higher percentage of inclusion across almost all media channels compared to their female counterparts. The rate of radio listeners has slightly decreased from 62% in 2014 to 59% in 2018 and the share of people watching TV has increased inversely. This change offers additional opportunities for harnessing the potential of media to deliver financial education. Radio, TV, and SMS can be considered useful channels when it comes to informing policymakers on financial education mass communication tools. Indeed, developing an understanding of the contemporary habits of Malawi’s adult population is imperative.
Mobile Money Services
6. Mobile phone ownership in Malawi has increased notably since the baseline. The 2014 baseline study reported that 36% of all Malawians owned a mobile phone and another 20% had access to a mobile phone. In contrast, the 2018 follow-up study, noted a 13-point growth in mobile phone ownership, from 36% to 49%. Even though urban residents generally have a larger share of mobile phone ownership, phone ownership growth was driven by rural areas in the last four years. While the 2014 baseline stated that only 29% of rural respondents owned a mobile phone, this share of the population saw the largest increase in phone ownership, increasing by 17-percentage points to 46% in 2018. Lastly, male respondents showed greater access to mobile phones than their female counterparts (59% male vs. 42% female).
7. The vast majority of Malawians are aware of the different types of mobile phone services available to them. Notably, 92% of respondents knew that they could buy airtime for their mobile phones. Moreover, this survey found that: 90% of respondents know of sending or receiving mobile money services; 88% heard of sending airtime and 77% have heard of using a mobile phone to pay bills. Mobile financial services are widely known in the urban sector. 95% of urban Malawians know that money can be transferred through a mobile phone. Similarly, 93% of the urban population knows that payment can be received through a mobile phone. Awareness of mobile phone services seem to penetrate even the rural areas, with 89% and 88% of rural respondents understanding that they can send and receive money via their mobile phones. No significant difference was observed between men and women with respect to awareness about financial services and products; yet men obtained larger proportions in all the categories.
8. A notable gap exists between the knowledge of mobile phone services and the actual use of mobile phone services. 92% of respondents with access to mobile phones were aware of the possibility to buy airtime, but only 53% of them use their mobile phone to purchase airtime. Similarly, about 89% of Malawians knew about the option to receive money, and 90% were aware of transferring money using their mobile phones. However, only 48% and 44% (respectively) of the respondents used such services in
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practice. Another key point is that the usage of all mobile financial services is more common in the urban as compared to the rural area. 64% of the former respondents noted they used their mobile device to transfer money, compared to 39% of the latter. This pattern is repeated with respect to receiving money using mobile phones (62% urban vs 45% rural). Gender differences are small, with the greatest disparity between transferring money or sending airtime (50% vs 38%; and 48% vs 38%).
Financial Literacy
9. Significant improvements have been made in the sphere of financial literacy since the 2014 baseline survey. However, the overall picture is mixed and varies depending on the financial concept. Seven financial concepts and numeracy skills were measured in this survey. These are: simple division, simple interest rates, compound interest rates, discounted amount, familiarity with insurance, and diversification in the capital market by creating a portfolio. In both the 2014 baseline and 2018 follow-up, a majority of respondents across all segments of the population show very high levels of simple division skills (89% in follow-up vs. 83% in baseline). Moreover, the calculation of simple interest rates increased substantially from 19% in 2014 to 34% in 2018, yet it is still the lowest among the seven indicators. Insurance and risk diversification also showed slight improvement since the baseline (from 45% to 50% and from 38% to 42% respectively). However, compound interest rates, as well as discount calculation, record a slight decrease since the baseline.
10. The mean of the Financial Literacy Index increased by 0.4 points from 3.5 in 2014 to 3.9 in 2018. While this improvement may seem small, it is a part of a more considerable improvement seen among all Malawians. Indeed, 2018 data reveals that the proportion of financially illiterate Malawians has been almost cut in half. In 2014, 2.12% of Malawians answered all questions incorrectly, while the number decreased to 1.36% in 2018 - after only four years of directed interventions. This national improvement, which can be seen in the statistics, is highly driven by the rural residents of Malawi. While 2.48% of rural Malawians were financially illiterate in the 2014 baseline survey, only 1.55% were identified as such in 2018. This decrease is impressive given the barriers that financial literacy campaigns face in penetrating these small subsets of the populations.
11. Respondents’ self-perception of financial terms expertise increased since the baseline study. Even though this perception is subjective in nature, in the sense that respondents indicate their awareness, it provides insight into the penetration of national financial literacy campaigns. With this in mind, comparing true knowledge (% of correct answers) and self-perception can inform policymakers about the accuracy level of financial concepts. A remarkable increase was found with regard to the term “devaluation”. In 2014 only 14% of the population knew about the term devaluation. In 2018 the understanding of this term spiked to a remarkable 51%. Notably, the highest improvement was found among the rural population. In 2014, rural awareness of “devaluation” was marked at 9% whereas today almost half (49.42%) of all rural adults understand the meaning of “devaluation”. Another relevant topic for many Malawians in recent years is the concept of inflation. Data suggests that many Malawians have experienced inflation first hand, with indicators in this report showing that Malawians are noticing increases in prices of food and other goods. In 2014, only 7% of Malawians understood the concept of inflation and an overwhelming majority (78%) had never heard of it. In 2018, only 11% of Malawians report that they have never heard of this concept.
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12. Money Management and Financial Planning Money management indicators show declining trends. Even though the majority of Malawian adults plan how they will spend their money before they receive it, the trend has been on the decline by about 12-percentage points since the baseline (from 91% in 2014 to 79% in 2018). Moreover, the share of respondents who adhered to their plan (if they plan) has decreased from 43% in 2014 to 35% in 2018. In contrast, the percentage of respondents occasionally adhering to their devised plans increased from 57% to 65%. Collectively, these indicators signal the decreasing trend in financial planning. Data shows that once a budget plan is created, the process of following this budget can be challenging. Overall only 35% of respondents indicate that they are always able to adhere to their plan. Concerning information sources for budgeting, advice from colleagues is the first source of budgeting information in Malawi. Furthermore, 2018 data indicates that for rural and female Malawians, word of mouth (advice from colleagues) is a preferable way to spread budgeting and other financial information.
13. Private savings, after purchasing all desired goods, has dropped since the baseline study. In 2014, about 76% of adult Malawians noted that they had money left after paying for their necessary items and expenses. In 2018, this number has decreased by 16 percentage-points to 60%. On a more encouraging note, the percentage of Malawians who mentioned that they run short of money for necessary items has declined by 9-percentage points. All things considered, results show that overall financial planning and saving has been on decline. This observation combined with the findings regarding the overall income of Malawians may suggest that a drop in financial planning is not solely based on the lack of knowledge about financial planning, but also the economic conditions of the general public.
14. Financial planning for expected and unexpected events saw improvements. In 2014, limited planning for both expected and unexpected expenses were reported (23% and 21% respectively). These indicators improved in 2018, where the percentage of adult Malawians who plan for their expected expenses increased by about 14 points, and the rate of adult Malawians who plan for their unexpected expenses has improved by a small margin of about six percentage points. Similar to the baseline, accumulate savings and using returns from businesses are the top measures taken to prepare for unforeseen expenses. A smaller share of respondents also expressed being worried about unexpected events in comparison with the baseline; yet the cumulative rate of the ones who reported that they are either a bit worried or very worried in both surveys was very high and above 80%. Lastly, disparities were observed across both domains (rural & urban). While these differences were minor (about a 2-percentage point difference), gender variables were more pronounced (about 10-percentage point difference).
15. Even though the percentage of Malawians experiencing a sudden drop in their income has slightly decreased since 2014, it is still very high. In sum, 77.4% of respondents reported a reduction which is an 8% improvement compared to the 2014. In particular, the decline was more prevalent in the rural areas (79.04%), compared to the urban areas (68.12%). This is not surprising, considering rural populations vulnerability to external shocks such as natural episodes, drought, and flood. Notably, the majority (47.2%) of respondents experiencing a reduction in income worked on ganyu19/ contracts to deal with such events. Consequently, expenses were cut down by 14 43% and followed by increased money
19 The word ‘ganyu’ is widely used in Malawi to describe a range of short-term rural labor relationships, the most common of which is weeding or ridging on the fields of other smallholders, or on agricultural estates.
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borrowing from relatives, and friends. The proportion of the population who did ganyu was predominantly from the rural areas (50.2%), compared to the urban areas (27.9%).
16. The number of people under 60 lacking plans to meet household expenses in old age, decreased slightly from 33% in 2014 to 32% in 2018. Being that, “having no plan” was the second leading option after “business income” selected by the respondents younger than 60. This is a concerning trend as people under 60 made up about 90% of the entire sample in the follow-up survey. Moreover, “having no plan” was the fourth commonly selected option for respondents above 60 (20%) after selling/renting non- financial assets, support from family and friends, and reliance on work. Lastly, differences were seen across domain favoring urban residents. For instance, about 22% of the urban population (under 60) noted that they have no plan for meeting needs in older age, whereas this number for rural respondents was 13% higher. This respective difference for respondents above 60 was 8%.
17. The proportion of respondents without any knowledge on pension remained stable since 2014. In both baseline and follow-up surveys, 24% of the respondents at the national level indicated that they never heard about pensions. The largest proportion was retrieved from rural areas (14% urban vs. 26% rural in and baseline). About 25% of respondents familiar with the concept of pension had a precise understanding of it. This number more than doubled since baseline (from 11% to 25%). With respect to national knowledge of pension schemes in Malawi, about 77% of the respondents who had understood pensions had not heard about the plan to introduce a national pension scheme. In sum, the results show that the majority of Malawians, especially in rural areas, have a misperception about the concept of a national pension scheme. However, it is important to note that the results have improved considerably since 2014 baseline by 25-percentage points.
Financial Consumer Protection
18. This survey measures the knowledge of adult Malawians on three Consumer Protection Institutions (CPI) namely: the Reserve Bank of Malawi (RBM), the Consumer Association of Malawi, and the RBM Division of Consumer Protection. This study found that respondent’s knowledge about these institutions or about divisions within these institutions vary. Hence, a need for financial consumer protection arises due to asymmetric information between financial service providers and consumers. This asymmetry is the result of many factors, including a lack of financial literacy among consumers or time and cost involved with understanding these financial products.
19. Malawians awareness of RBM has increased by ten percentage points in 2018. In the 2014 baseline, the most commonly known CPI was that of the Reserve Bank of Malawi, with 74% of Malawians acknowledging that they had heard of this institution. In 2018 this number increased to 84%. However, this positive trend does not continue for other institutions. For example, knowledge of the Consumer Association of Malawi reduced by 12 points, as only 37% of all Malawians had heard of it. Moreover, the Reserve Bank of Malawi’s Division of Consumer protection saw a minor increase from 13% to 16% from 2014 to 2018. This lack of awareness results in fewer consumers taking action against a financial service provider. Explicitly, 44% of adults that experienced a conflict with a financial service provider did not take action because they were not aware of government agencies that can be approached for help. This lack of action could prove problematic as the financial service sector grows in Malawi. Indeed, in 2014 8% of Malawians reported that they experienced conflicts with a financial service provider, 9% in 2018
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respectively. Given the growth of financial services, this number will increase if consumers are not protected adequately.
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ANNEX 10. STATUS OF DIRECTIVES, REGULATIONS, AND BILLS PREPARED TO DATE
STATUS Financial Services Regulations and Directives Published 1. Agent Banking Regulations, 2018 Published20 2. Capital Adequacy for Banks Directive, 2018 Published 3. Annual Audit of Banks Directive, 2018 Published 4. Disclosure of Information by Banks Directive, 2018 Published 5. Fit and Proper Requirements for Shareholders, Directors and Senior ManagementPublished Officials of Banks Directive, 2018 6. Licensing of Banks Directive, 2018 Published 7. Transactions of Banks with Related Parties Directive, 2018 Published 8. Supervisory Levy for Banks Regulations, 2018 Published 9. Submission of Information by Banks Directive, 2018 Published 10. Prudential Liquidity Requirements for Banks Directive, 2018 Published 11. Prompt Corrective Action for Banks Directive, 2017 Published 12. Information Management Requirements for Banks Directive, 2017 Published 13. Foreign Currency Lending Ratio Directive, 2017 Published 14. Premises Inspection Directive, 2017 Published 15. Financial Asset Classification for Banks Directive, 2018 Published 16. Regulation of Commodities Exchanges Directive, 2018 Published 17. Disclosure Requirements for Credit Products Directive, 2018 Published Bills Published Regulations and Directives under Printing 1. Banking (Amendment) Bill Under way21 2. Financial Services (Amendment) Bill Under way Banking Legislation 1. Licensing and Regulatory Requirements for Holding Companies Directive, 2017 Published 2. Consolidated Supervision for Banks Directive, 2017 Published 3. Governance Requirements for Banks and Bank Holding Companies Directive, 2018Published Development Finance Legislation 1. Licensing of Development Finance Institutions Directive Published 2. Corporate Governance Requirements to develop Financial Institutions Directive Published 3. Capital Adequacy Requirements to develop Financial Institutions Directive Published 4. Credit Risk Management to develop Financial Institutions Directive Published Pension Legislation 1. Pension (Fit and Proper) Directive, 2019 Under way 2. Financial Services (Submission of Information by Pension Entities) Directive, 2017 Published Insurance Legislation 1. Financial Services (Submission of Information by Insurers) Directive, 2017 Published
20 Published on April 27, 2018. 21 Submitted to the Government Printer for printing.
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
STATUS 2. Insurance (Determination of Policy Liabilities of Life Insurers) Directive, 2017 Published 3. Insurance (Operation of Life Insurance Funds) Directive, 2017 Published Microfinance Regulations 1. Prompt Corrective Action for Financial Cooperatives Directive, 2017 Under way 2. Corporate Governance Requirements for Financial Co-operatives Directive, 2017 Published 3. Prompt Corrective action for Deposit Taking Microfinance Institutions Directive,Published 2017 4. Fit and Proper Requirements for Prudentially Regulated Microfinance Institutions,Published 2017 5. Microfinance (Microcredit Agency) Directive, 2018 Published
List of Bills, Directives, and Regulations Planned to be Processed in 2018 1. Pension (Amendment) Bill Under way 2. Medical Aid Schemes Bill Under way 3. Insurance (Amendment) Bill Under way Directives 1. Pension (Corporate Governance) Under way 2. Pension (Fees and charges) Pended in view of the proposed amendments to the Pension Act 3. Pension (Programmed withdrawals by pension members) Pended in view of the amendments to the Pension Act 4. Insurance (Reinsurance Arrangements) Under way 5. Insurance (Reserving requirements for general insurers) Under way 6. Insurance (Inclusive Insurance) Directive Under way 7. Insurance (Conduct of insurance intermediaries) Under way 8. Insurance (Disclosure of information) Discontinued due to publication of Directive on submission of information 9. Pension (Investment of Pension Funds) Directive Under way Bank Regulation 1. Mortgage Finance Bill /22
22 Final external stakeholder consultations done on July 16, 2018; endorsed by the Executive Management. To be submitted to the Board Regulation and Supervision Committee at its sitting on May 29, 2019.
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The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)
STATUS 2. Deposit Insurance Bill Under review 3. Guidelines on Mergers and Acquisitions for Banks Reviewed & Issued Capital Markets and Microfinance Regulation 1. Bill for Review of the Microfinance Act, 2010 Under way Directives 1. Transactions of prudentially regulated microfinance institutions with relatedUnder way Directive 2. Record keeping requirements for microfinance institutions Directive Under way 3. External audit and related matters Directive Under way 4. Capital adequacy requirements for microfinance institutions DirectiveUnder way (amendment) 5. Guidelines for Mergers and Acquisition for Microfinance Institutions Under way Consumer Protection and Financial Literacy 1. Financial Consumer Protection Bill Awaiting Government’ s policy direction on the Financial Consumer Protection Regulatory Authority Directives 1. Advertising of Financial Products/Services by Financial Institutions Directive, 2018Published 2. Disclosure Requirements for Insurance Services Directive, 2018 Published 3. Disclosure Requirements for Investment Services Directive, 2018 Published 4. Disclosure Requirements for Pension Services Directive, 2018 Published 5. Fair Treatment of Financial Consumers by Financial Institutions Directive, 2018 Published 6. Disclosure Requirements for Savings Products and Services Directive, 2018 Published
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