The World Bank for OFFICIAL USE ONLY

Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: 59793-MW

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 18.1 MILLION

Public Disclosure Authorized (US$28.2 MILLION EQUIVALENT)

TO THE

THE REPUBLIC OF MALAWI

FOR THE

FINANCIAL SECTOR TECHNICAL ASSISTANCE PROJECT (FSTAP)

Public Disclosure Authorized

February 28, 2011

Finance and Private Sector Development East and Southern Africa 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 January 31, 2011)

Currency Unit = Malawi Kawacha (MK) US$1 = MK 150.77 US$1 = SDR 0.640229

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ACH Automated Clearing House AfDB African Development Bank AFRITAC African Technical Assistance Center ATS Automated Transfer System BAM Bankers’ Association of Malawi BESTAP Business Environment Strengthening Technical Assistance Project BSD Banking Supervision Department CAS Country Assistance Strategy CEM Country Economic Memorandum CSC Credit and Savings Co-operatives CSD Central Securities Depository DEMAT Development of Malawi Trader’s Trust DFID UK Department of International Development EFT Electronic Funds Transfer FIMA The Financial Inclusion in Malawi FIRST Financial Sector Reform and Strengthening Initiative FMP Financial Management Plan FSAP Financial Sector Assistance Program FSDS Financial Sector Development Strategy FSPU Financial Sector Policy Unit FSTAP Financial Sector Technical Assistance Project FSVC Financial Sector Volunteer Corps GCI Global Competitive Index GDP Gross Domestic Product GL General Ledger GNI Gross National Income HiVOS Humanistisch Instituut voor Ontwikkelingssamenwerking (International Humanist Institute for Cooperation with Development) IoD Institute of Directors IMF International Monetary Fund IDA International Development Association ii

KYC Know Your Customer MARDF Malawi Rural Development Fund MALSWITCH Malawi Switch Center Limited MFCMSD Microfinance and Capital Markets Supervision Department MoF Ministry of Finance MFSDT Malawi Financial Sector Deepening Trust MFI Microfinance Institutions MGDS Malawi Growth and Development Strategy MMFN Malawi Microfinance Network MRFC Malawi Rural Finance Corporation MSB Malawi Savings Bank MSE Malawi Stock Exchange MoU Memorandum of Understanding MTR Mid-Term Review NBFI Non-Bank Financial Institution NTCFE National Taskforce on Consumer Financial Education OTA US Treasury Office of Technical Assistance PDO Project Development Objective PERMU Public Enterprises Reform and Monitoring Unit PIC Project Investment Committee PIM Project Implementation Manual PIP Project Implementation Plan PIU Project Implementation Unit PSC Project Steering Committee RBM Reserve Bank of Malawi RTGS Real Time Gross Settlement SACCO Savings and Credit Cooperatives SFI State Financial Institutions SIL Specific Investment Loan SOE State Owned Enterprises SEDOM Small Enterprise Development Organization of Malawi SWIFT Society for Worldwide Interbank Financial Telecomminication TWG Technical Working Group USAID United States Agency for International Aid VSLA Village Savings and Loan Associations WB World Bank

Regional Vice President: Obiageli Katryn Ezekwesili Country Director: Olivier Godron, Acting Sector Director: Marilou Uy Sector Manager: Michael Fuchs, Acting Task Team Leader: Samuel Munzele Maimbo

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Table of Contents

I. STRATEGIC CONTEXT ...... 1 A. Country Context ...... 1 B. Sectoral and Institutional Context ...... 1 C. Higher Level Objectives to which the Project Contributes ...... 8 II. PROJECT DEVELOPMENT OBJECTIVES...... 9 A. Project Development Objective ...... 9 B. Project Beneficiaries ...... 9 C. PDO Level Results Indicators ...... 10 III. PROJECT DESCRIPTION ...... 10 A. Project components...... 10 B. Project Financing ...... 13 1. Lending Instrument...... 13 2. Project Financing Table ...... 13 C. Lessons Learned and Reflected in the Project Design ...... 13 IV. IMPLEMENTATION ...... 14 A. Institutional and Implementation Arrangements ...... 14 B. Results Monitoring and Evaluation ...... 16 C. Sustainability ...... 17 D. Loan/credit conditions and covenants ...... 17 V. KEY RISKS ...... 18 VI. APPRAISAL SUMMARY ...... 19 A. Economic and Financial Analysis ...... 19 B. Technical ...... 20 C. Financial Management ...... 20 D. Procurement ...... 21 E. Social ...... 21 F. Environment ...... 21 G. Other Safeguards Policies triggered (if required) ...... 22 Annex 1: Results Framework and Monitoring...... 23 Annex 2: Detailed Project Description ...... 32 Annex 3: Implementation Arrangements ...... 43 Annex 4: Operational Risk Assessment Framework (ORAF) ...... 56 Annex 5: Implementation Support Plan ...... 59 v

Annex 6: Team Composition ...... 62 Annex 7 Procurement Packages with Methods and Time Schedule...... 63 Annex 8: Malawi Financial Sector Deepening Trust (MFSDT) ...... 70 Annex 9: Project Costing Table ...... 75 Annex 10: Developing Partners’ Activities in the Financial Sector and Identified Gaps ...... 76 Annex 11: Malawi at a Glance...... 86

PAD DATA SHEET

The Republic of Malawi

Financial Sector Technical Assistance Project (FSTAP)

PROJECT APPRAISAL DOCUMENT

AFRICA

AFTFE

Date: February 28, 2011 Sector(s): Financial Sector Country Director: Olivier Godron, Acting Theme(s): Sector Director: Marilou Uy - Financial stability Sector Manager: Michael Fuchs, Acting - Long term finance Team Leader(s): Samuel Munzele Maimbo - Financial Infrastructure Project ID: P122616 - Access to finance Lending Instrument: SIL EA Category: C-Not Required

Project Financing Data: Proposed terms:

[ ] Loan [ X] Credit [ ] Grant [ ] Guarantee [ ] Other: Source Total Amount (US$M) Total Project Cost: Co-financing: Borrower: Total Bank Financing:

IBRD IDA $28.2 New Recommitted

Borrower: The Republic of Malawi Responsible Agency: Ministry of Finance Contact Person: Joseph Mwanamvekha (Secretary to the Treasury) Telephone No.: (265) 01789355 Fax No.: (265) 01789173 Email: finance@ finance.gov.mw

vii

Estimated disbursements (Bank FY/US$m) FY 2012 2013 2014 2015 2016 Annual 2.00 5.00 9.5 9.5 2.2 Cumulative 2.00 7.00 16.5 26.0 28.2 Project Implementation start date: March 24, 2011 Project Implementation end date: August 31, 2016 Expected effectiveness date: September 12, 2011 Expected closing date: August 31, 2016 Does the project depart from the CAS in content or other ○ Yes X No significant respects?

If yes, please explain:

Does the project require any exceptions from Bank policies? ○ Yes X No Have these been approved/endorsed (as appropriate by Bank ○ Yes ○No management? Is approval for any policy exception sought from the Board? ○ Yes X No

If yes, please explain:

Does the project meet the Regional criteria for readiness for X Yes ○ No implementation?

If no, please explain:

Project Development Objective: The project aims to increase access to finance for the currently unbanked, but bankable, population of Malawi.

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Project description

Component 1: Financial Sector Regulation and Supervision. This component will assist 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.

Component 2: Financial Infrastructure. The component aims to assist the RBM to update the basic infrastructure for payment services by supporting the modernization of its Real Time Gross Settlement (RTGS) system; the design and development of an interoperable central switch for processing payments; 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.

Component 3: Financial Consumer Protection and Financial Literacy. This component will support the Government’s efforts to increase public trust in the financial sector by supporting the following activities: (i) strengthening the legal and regulatory framework for financial sector consumer protection; (ii) enhancing institutional arrangements for consumer protection for all financial services; and, (iii) developing and piloting a consumer awareness / financial literacy program to improve participation in the financial sector.

Component 4: Ministry of Finance’s Financial Sector Policy and Governance Capacity and Long-term Finance. The objective of this component is to strengthen the capacity of the Ministry of Finance (MoF) to: (i) coordinate the analysis, formulation, implementation, and monitoring of financial sector policies and regulations; and, (ii) oversee Government interventions in the financial sector. This component will also support 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 an infrastructure financing framework; and, to carry out diagnostic studies to identify short and medium term solutions to the long term financing challenge in Malawi.

Component 5: Implementation Support. This component will facilitate the implementation arrangements for the project by supporting the operation of a Project Implementation Unit (PIU) at the RBM which is the responsible implementing agency of the project with support from an oversight committee chaired by the MoF. The component will finance PIU consultant salaries, office facilities and operating expenses. This component will also finance the consultancy costs for administering the five-year Multi-Donor Financial Sector Deepening Trust (MFSDT) which will finance innovative solutions to access to finance constraints.

Safeguard policies triggered?

Environmental Assessment (OP/BP 4.01) ○ Yes X No Natural Habitats (OP/BP 4.04) ○ Yes X No Forests (OP/BP 4.36) ○ Yes X No Pest Management (OP 4.09) ○ Yes X No Physical Cultural Resources (OP/BP 4.11) ○ Yes X No Indigenous Peoples (OP/BP 4.10) ○ Yes X No Involuntary Resettlement (OP/BP 4.12) ○ Yes X No Safety of Dams (OP/BP 4.37) ○ Yes X No Projects on International Waters (OP/BP 7.50) ○ Yes X No Projects in Disputed Areas (OP/BP 7.60) ○ Yes X No

Loan Credit Effectiveness

The Additional Conditions of Effectiveness consist of the following:

(i) The Subsidiary Agreement has been executed on behalf of the Recipient and the Project Implementing Entity. (ii) The Project Implementing Entity has adopted the Project Implementation Manual in accordance with Section I.B of the Schedule to the Project Agreement.

Covenants applicable to project implementation

Disbursement condition under the project is:

(i) The project implementation funds that have been budgeted for the consultancy costs for the proposed Malawi Financial Sector Deepening Trust will only be disbursed after the Trust has been established.

The Covenants under the project are:

(i) By not later than December 31, 2011, establish and operationalize the FSTAP PIU, and thereafter ensure that the responsibilities carried out by the BESTAP PIU are efficiently transferred to the PIU. (ii) No withdrawal shall be made for payments prior to the date of the Financing Agreement; and for consultant services for the Malawi Financial Deepening Trust unless and until it has been established referred to in Section I.E of Schedule 2 to the Financing Agreement. (iii)Maintain adequate financial management system and records; prepare financial statements of operations, resources and expenditures of the project. (iv) Submit to the Bank audited financial statements not later than 6 months after the end of the project. (v) Furnish unaudited interim financial reports (IFRs) no later than 45 days after the end of each accounting quarter.

I. STRATEGIC CONTEXT

A. Country Context

1. Malawi has achieved relatively high economic growth in recent years. Over the past 6 years, Malawi implemented sound macroeconomic policies: interest rates have been stable and inflation has been generally in the single digits, and Malawi’s agriculture-based economy has weathered the global economic crisis relatively well. The small financial sector was only modestly affected by the global turmoil and remains well-capitalized and highly profitable. Record harvests on the main agricultural commodities in recent years led to Gross Domestic Product (GDP) growth of 9.7 percent in 2008 up from a low of 2 percent between 1999 and 2004. GDP growth was 8 percent in 2009 and projected to be 6 percent in 2010 (World Economic Outlook April 2010, IMF

2. Poverty, however, remains pervasive. General National Income (GNI) per capita is one of the lowest in the world ($280). Almost 90 percent of Malawi’s 15 million population lives in rural areas with most people still engaged in smallholder, rain-fed agriculture. While agriculture is the main source of Malawi’s economic growth, contributing about 40 percent of GDP and over 90 percent of the country’s total export earnings, the high-level of subsistence farming is a major contributor to the high level of poverty, estimated at 52.4 percent of the population in 2005. About 56 percent of the rural population is living in poverty, compared with approximately 25 percent of the population in urban areas (Malawi Poverty & Vulnerability Assessment 2007).

3. The business environment in Malawi is challenging. The country ranks 119 out of 134 countries in the Global Competitiveness Index (GCI); 126 for Macroeconomic Stability under the GCI and also ranked low for Technological Readiness (126). With respect to Doing Business, the 2010 survey has ranked Malawi 132 out of 183 economies. While the country has recently achieved notable reforms in Doing Business, mainly in the “closing a business” indicator (by introducing a cap on liquidators’ fees) and trading across borders (introduction of risk-based inspections), much business environment work remains to be done, particularly in financial reforms. E. Enterprise survey data for 2009 shows access to finance as the greatest problem amongst the top ten business environment constraints (reported by 46percent of the interviewed firms compared to the second obstacle, transport, reported by 11percent of the sample).

B. Sectoral and Institutional Context

4. While significant progress in the regulatory framework has been made, the formal financial sector in Malawi remains small, concentrated, and services a narrow clientele basis. The World Bank-IMF Financial Sector Assessment Program (FSAP) (2008) concludes that much more needs to be done to expand and improve access. Financial services do not yet make their full potential contribution to growth and poverty reduction. The underdeveloped Non- Bank Financial Institutions (NBFIs) sector is composed of a few small private pension funds and life insurance companies, and a very small group of microfinance institutions and savings and credit cooperatives. Collectively, the banks and NBFIs reach a very limited segment of the population. The 2008 FinScope Demand Survey for Malawi showed that only 26 percent of the

adult population is served by formal financial institutions, 19 percent are served by informal financial services providers, and 55 percent are financially excluded. For a brief overview of Malawi’s financial sector, please refer to Box 1.

Box 1 Malawi Financial Sector Banking: Regulated by the Reserve Bank of Malawi (RBM), the banking system is comprised of eleven licensed commercial banks, two discount houses, one leasing company, eight non-life and three life insurance companies, four DFIs, a young and small microfinance industry, and a nascent capital market. The banking system is predominantly privately owned, with a significant share of foreign ownership.Total assets held by the banking system as of March 2009 was estimated at about US$1.28 billion (RBM), equal to 35 percent of GDP. More than 65percent of the banking assets are concentrated in the country’s three largest banks. Private sector Credit to GDP remains low at 8 percent. Only 19percent of the adult population is banked (FinScope Malawi 2009). There is only a limited interbank market. Most excess liquidity in the Malawian financial system is currently placed with the RBM. The average return on equity of the Malawian banking sector was estimated at 43.6percent at the end of 2008. This level of bank profitability indicates that there is little competitive pressure on commercial banks to diversify their client base and develop new markets for their financial services. Of their total income, banks have historically derived nearly 25percent from the foreign exchanges markets, with the authorities effectively subsidizing the banks by restricting price competition in the foreign exchange market. Choices of savings and credit products are also limited. Banking services are fragmented as reflected in dispersed card systems and the lack of interoperability between ATMs, POS devices, etc. The existing RTGS system for wholesale payments transactions is in urgent need of for replacing with an ATS to provide timely, safe and reliable clearing and settlement services for RTGS, ACH and CSD processing.

Encouragingly the level of indirect access to banking is high in Malawi – 22percent of banked adults make use of bank accounts that are not registered in their names. Indirect banking access mainly occurs through the use of the account of a spouse, parent or child although the bank accounts of neighbors and friends are often used in rural areas. The overwhelming reasons why people do not have bank accounts are income-related – 54percent of individuals responded that they did not need an account since they did not have enough funds; a further 44percent said that they had insufficient funds after their expenses for a bank account. Then a further 21percent cited perceived affordability as the key reason for not having a bank account i.e. they could not afford the minimum balance required to open or keep a bank account. The above affordability issues seem to be more important than bank charges as a barrier to people having a bank account since less than 5percent cited high bank charges as a key reason. Physical accessibility is cited as only a minor reason why respondents had not opened bank accounts (less than 10percent), however since the majority of individuals tend to take public transport to reach a bank (45percent of those banked), cost of access is also likely to be an issue.

Insurance: The insurance sector in Malawi consists of eight non-life insurers, three life insurance providers, and a number of brokers and other agents. The total premiums collected (including those from savings businesses) were estimated at approximately 2.6percent of GDP as at the end of 2008. This figure compares favourably versus economies of a similar level of development. However, less than 3percent of the adult population is covered by an insurance product (FinScope 2009). There remains a clear need to further deepen the penetration of insurance products and increase awareness of their benefits. Whilst some innovative products that cater for the needs of the rural sector have been developed in the non-life sector (for example: crop, weather and funeral insurance) more needs to be done. Further, the life sector is dominated by a small group of firms who are able to charge uncompetitive premiums. The lack of suitable domestic investment opportunities is another key area of concern. Finally, in addition to these issues there is a major need to improve the ability of the RBM to regulate the sector, enforce rules and discourage market distorting behaviour.

Microfinance: Microfinance Institutions (MFIs) cover the range of for-profit and non-profit institutions that include companies with private shareholders such as payroll lenders, those organized as trusts, companies limited by guarantee, and public entities. MFIs are currently not regulated by the RBM and are prohibited from collecting voluntary deposits. The Financial Cooperatives Bill (recently enacted) will give the RBM authority to license deposit only institutions. Currently some Sues are distorting markets by subsidizing interest rates and continuing operations with very poor recovery rates. Loan recovery rates are very low across the sector which remains heavily focused on the urban population. There remains a clear need for operational and human capacity building

and promotion of new rural focused models.

Pensions and capital markets: The pensions/long term savings industry has accumulated total assets of approximately MK60Bn to date. Currently this is all in the form of private pension schemes (i.e. through voluntary contributions) as mandatory public pensions do not exist. Pending legislation may however make pensions compulsory for all (formally) employed individuals. Assuming this eventuality, the gradual increase in demand for suitable long-term instruments will not be matched by supply unless a sovereign bond market is developed. In addition, in order to adequately regulate the expanding industry, capacity will have to be built.

State sector: The government has pursued an intense hands-on involvement in mobilizing and allocating financial resources through a number and variety of government-led development finance institutions notably: one fully government-owned commercial bank, Malawi Savings Bank (MSB, formally the Postal Bank), one non- bank government-owned financial intermediary, Malawi Rural Finance Corporation (MRFC), one government program MARDF which receives some funding from Government through MSB, and two government trusts, SEDOM and DEMAT, serving SMEs. In addition, the government has a majority shareholding of the largest commercial bank in Malawi, the National Bank of Malawi through the government run trust, Press Trust. While some programs have achieved some modest measures of success, overall performance has not been stellar, nor achieved government’s objectives of broad based access to finance. Source: Malawi Financial Sector Development Plan, 2010; World Bank/IMF FSAP, 2008.

5. Many of the inhibiting factors to financial sector development are closely related to each other, and therefore require a more integrated approach. These factors include the following environmental, institutional, products and services, and client factors :

Environmental factors

• Underdeveloped regulation….: Banking supervision is largely in compliance with a majority of Basel Core Principles (BCPs). However the legal, regulatory and institutional framework for NBFIs is still immature. Malawi is in the process of enacting a package of financial sector laws designed to completely overhaul and modernize the sector 1, especially in the areas of banking, microfinance, insurance, pensions, and capital markets. • …and too little risk-based supervision: The capacity of supervisors to implement regulations and to assess and manage the real risks in the sector is low. Supervisory resources, including qualified staff and appropriate analytical tools, are limited. Supervisory processes focus on compliance with regulatory requirements, but are not designed to identify and manage the changing risks in the financial system, nor are they adequately focused on supporting financial sector development.

Institutional

• Lack of diversity / Limited competition: To achieve outreach, a significant increase in the diversity of financial products and services and an increase in the number and types of financial services providers are required to generate healthy competition and innovation. • …and also a lack of shared market infrastructure. The lack of effective interbank transaction switching whereby a customer of one financial institution is able to use access devices of another bank has resulted in duplication of investment in access devices (such

1 Legislation that have been recently passed into law are the: Banking Act, Insurance Act, Microfinance Act, Securities Act, Financial Services Act, Credit Reference Bureau Act, and the National ID Act. The pending bills are for: financial cooperatives, Pensions, and Payment Systems. 3

as ATMs and points of sale) and thus limits outreach and gains from economies of scale arising from fixed costs being shared across more transactions and more efficient usage of technology. Coordination failures often hamper industry growth and are especially damaging where scale is limited.

Products and services

• Lack of adequate products and capacity to serve client needs: Financial institutions do not have the technological and human capacity to offer the appropriate financial services needed. For example, almost 90 percent of the Malawian population consists of agricultural small holders and their dependents. Farming generates 35-40percent of GDP and over 90percent of export earnings. It is currently the largest contributor to GDP growth (11.3 percent in 2008) and export revenues. Yet, only 8.5percent of the outstanding loan portfolio of Malawian financial institutions was related to the agricultural sector. This reflects the underdeveloped small-scale nature of farming in Malawi. A more diversified financial sector could support upgrading of farming techniques, establishment of farmers’ production and marketing cooperatives, and the creation of more value added in agricultural products; with these factors all helping to enable financial institutions to better manage risks in agricultural credits. • Limited innovation: Lack of competition and diversity, in turn, has reduced pressure to innovate and to expand into new market segments, and keeps the cost of financial services high. These factors are reinforced by excessively rigid regulatory requirements which often halt innovation where it would be desirable.

Clients – Firms & households

• Lack of scale: The small size of the economy, and even more so the small size of local businesses makes the provision of financial services inefficient and costly, particularly for commercial banks. • Quality of firm and household demand for financial services has become a growth constraint, which could be addressed through targeted business development services and consumer literacy and protection programs. • Lack of information: Financial institutions face significant information asymmetries about their clients and often don’t know well enough the markets they operate in. They have difficulties finding, assessing and monitoring their clients, and in developing suitable products to serve them. • Informality, not just of client enterprises, but also of the markets within which they work is a particular challenge. Informality reduces the degree to which reliance can be placed on systematic documentation, adherence to a predictable schedule, or even a fixed place of business.

6. Since the 2007-2008 FSAP, Malawi has followed a consistent and comprehensive path towards a comprehensive financial sector development. Immediately after the FSAP, the government used the FIRST Initiative’s Non Banking Financial Institutions Capacity Building Project to support the immediate post-FSAP follow up activities in the areas of insurance, pensions, capital markets, and microfinance activities, including the development of legislative

and regulatory framework for a number of related financial sector related Bills. Thereafter, and alongside the FIRST NBFIs technical assistance project, the government using the FIRST funding prepared and adopted a Financial Sector Development Strategy (FSDS) for 2010 – 2015, after an exhaustive consultation process with all relevant stakeholders.

7. The Government has continued to strengthen financial sector regulation and supervision utilizing a number of donor sources, but more detailed technical assistance is needed. The ongoing programs include the FIRST support mentioned above; an IMF/Norges Bank program which has helped to define the RBM’s strategies in key areas 2. An expected USAID initiative will finance back-office automation (including regulatory reporting) for MFIs. Efforts are being made by the 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, foreign exchange reserve management, payments system strategy, credit bureau policy, and Government debt management. Further technical assistance is needed to develop supporting regulations and implementation manuals in the context of the new Financial Sector Act, enhance regulations for capital market and the insurance and pension industries, and upgrade RBM’s capacity for off-site supervision and financial stability reporting. In parallel, the RBM’s governance and management are being streamlined and improved.

8. Notable efforts to transform the national payment system in Malawi are underway . A national payment system bill originally prepared in 2002 has been updated to take into account recent developments; in particular the introduction of mobile telephone based payments, and will shortly be re-submitted to relevant Government agencies for finalization and submission to Parliament. Further, the RBM has: (a) stipulated regulatory guidance for both bank and non-bank based models for mobile payments; (b) authorized the piloting of mobile payment technology; and, (c) initiated the process of setting up an interoperable central switch by the Bankers’ Association of Malawi (BAM). In the course of these actions, the RBM has recognized remaining weaknesses in the country’s payment system and has revised the Malawi National Payment System Vision and Strategy framework to cover the period 2010-13 and refocus it towards attaining interoperability of systems, increased acceptability and access to non-cash payment methods, and promoting fair and equitable competition among payment service providers. At the same time, it plans to replace the existing RTGS system with in Automated Transfer System (ATS).

9. However the non-interoperability of the existing payment systems inhibits participation by the greater share of financial institutions and the delivery of basic payment services to the majority of Malawians. In 1999, the Government established Malswitch in the hope that it would operate as a shared switching platform with broad participation by financial institutions. Today Malswitch is not interoperable and is inconsistent with best practice and user needs for a shared platform, and a number of banks have established their own competing retail network Since the establishment of Malswitch, there have been dramatic technological advances in telecommunications and a strengthening of the role of non-bank entities, particularly micro-

2 In 2006, a technical cooperation program was agreed between the RBM, the IMF and Norges Bank, encompassing a broad-based central bank modernization program for the RBM. The execution of the technical cooperation program was under the supervision and quality control of the IMF and financed by resources provided by the Norwegian authorities (Central Bank Modernization, Norges Bank 2010). 5

finance institutions, in fostering financial inclusion in Malawi. Aiming at promoting markets that are open to competition and non-discriminatory, the authorities want to support the establishment of a national switch with broad ownership by financial institutions, and having appropriate governance arrangements. Eliminating the current fragmentation of the payment system landscape and increasing competition in the market for payment services is seen as an essential element of this transformation. The Government plans to undertake a fundamental re-evaluation of the need to provide continuing support for Malswitch. The development and usage of retail payments media, such as cards, mobile and internet payments and particularly building an extensive branch network or non-bank agency network (i.e. branchless banking) on a national basis depends on transformation of the payments system.

10. Malawi ranks third among peer African countries in terms of the level of its financially excluded population, with weak consumer protection and financial illiteracy recently identified as key obstacles for financial inclusion. As previously noted, the recent FinScope Demand Survey 2008 for Malawi showed that 55percent of the population is financially excluded. Although affordability is a key barrier to access to the financial system, other obstacles are related to a lack of trust in financial institutions. Some Malawians have opened savings accounts only to be charged high maintenance fees; others have had bad experiences with inoperative ATMs in times of emergency. Consumers do not have adequate mechanisms to resolve their complaints or disputes against financial institutions. There are neither established procedures for handling consumer complaints within financial institutions, nor out-of-court dispute resolution mechanisms. The FinScope survey further identified financial illiteracy as an obstacle for financial inclusion. Some respondents did not open bank accounts simply because they do not know how to apply; or do not understand how banks work; or are not aware of the benefits of opening a bank account; or simply do not understand the language used by retail officers.

11. The Government highlights the importance of financial literacy and consumer protection in the Malawi National Strategy for Financial Inclusion (2010-2014). The strategy developed by the FIMA Project under the MoF includes an Action Plan at the client level that focuses on financial literacy and consumer protection. The financial literacy dimension includes activities such as: conducting a baseline study on financial literacy, developing a strategy for financial literacy, establishing a national financial literacy network, providing training, and delivering financial education. The action plan for consumer protection includes activities such as: conducting a baseline study on consumer protection, enacting a consumer bill of rights, establishing a national consumer protection network, and conducting a public awareness campaign.

12. Consequently the Government has undertaken initial measures to develop a legal and institutional framework for financial consumer protection and financial literacy, in addition to the important step of setting up a multi-stakeholder National Taskforce on Consumer Financial Education (NTCFE), under the leadership of the RBM. The new Financial Services Act gives the RBM authority to deal with some consumer protection issues, such as: directive on improvement of consumer disclosure, regulation on unfair business practices, and guidelines on complaint resolution mechanisms. RBM is currently drafting relevant regulations to implement the Financial Services Act (e.g. requiring banks to disclose all costs clearly and to explain the consequences of specific consumer behaviors such as penalty fees and loss of collateral).

Furthermore, in June 2010 the Government set up the NTCFE under the chairmanship of the RBM. The taskforce includes representatives of the financial industry (banks, insurance, microfinance associations and representatives of stockbrokers), Government (Ministries of Education, Industry and Trade, Gender), civil society (associations of consumers, of small farmers, of small business people, of disabled persons), academia (University of Malawi, Mzuzu University, Bunda College, and College of Accountancy) and the media council. So far the taskforce has developed a draft outline of a financial literacy action plan. These Government initiatives have also been complemented by efforts from the private sector. In February 2010 the chief executive officers of commercial banks agreed to set up a Financial Inclusion Task Force to develop a strategic framework which will govern the banks’ approach to developing solutions to increase access for the unbanked but bankable population.

13. Given its prominent policy formulation and ownership responsibilities, the MoF has decided to enhance its capacity to develop and coordinate financial sector policies and regulations. Although the Ministry of Finance (MoF) has the overall mandate of coordinating the formulation of financial sector policies and regulations, it lacks the required capacity to do so effectively. As part of its National Strategy for Financial Inclusion (2010-2014), the Government has established the Financial Sector Policy Unit (FSPU) within the Economic Affairs Division of the MoF. The FSPU is entrusted with the promotion of a vibrant and inclusive financial sector. Yet, five months after the establishment of the FSPU, the unit has not become fully operational and faces serious capacity constraints – only two economists with limited work experience have been appointed; the unit has not outlined its strategic objectives through a business plan, and it lacks basic IT and office equipment. The Government intends to increase the capacity of the FSPU using resources drawn from the proposed project. The capacity building activities will not include the payment of civil service wages.

14. Further, the Government intends to strengthen the ownership, oversight, and governance structures of state owned financial institutions and programs. State ownership in the financial sector includes two banks (the Malawi Savings Bank and INDEBANK) and special development finance institutions, most notably the Malawi Rural Finance Corporation (MRFC), the Malawi Rural Development Fund (MARDF), Small Enterprise Development Organization of Malawi (SEDOM), and the Development of Malawi Trader’s Trust (DEMAT). INDEBANK recently became a state owned bank following the state’s acquisition of all the shares previously in private hands (41.38 percent) 3. The Malawi Savings Bank (MSB) and MRFC are the predominant suppliers of microfinance services and play a key role in collecting deposits in rural areas. Despite playing an important role in broadening access to finance, some of these programs may have contributed to the distortion of the lending environment. This is partly due to unclear policy mandates, mission drift in attempt to diversify risk, and limited oversight. Therefore, in addition to on-going restructuring initiatives 4 the Government wants to strengthen the oversight

3 These shares were held by TransAfrica Holding Limited of Mauritius and the Government bought them following TranAfrica’s decision to divest from INDEBANK. The acquisition was allegedly aimed at preventing the bank from falling into foreign hands and there are speculations that the Government intends to sell its shares through the Malawi Stock Exchange in order to ensure a broad ownership of the bank by Malawians. The other shareholders include Press Trust (30 percent), ADMARC (25.67 percent), and INDEBANK Employees (2.95 percent). ADMARC is a parastatal. 4 Current restructuring activities include: (i) the merger of SEDOM, DEMAT and the Malawi Entrepreneurs Development Institute (MEDI) into a new institution to be known as the Small and Medium Enterprise Board; (ii) 7

and governance structures of state-owned financial institutions and Government programs. These will include addressing the fragmentation of ownership responsibilities among various bodies (ministries, MoF, and the Department of Statutory Corporations), increasing the independence and technical capacity of boards of directors, and defining clear policy mandates. A key action will be the development of an ownership policy for state investment in the financial sector. The policy will communicate the rationale and objectives of the state ownership, the state’s role in corporate governance, and how it intends to implement its ownership policy. As such the policy will clarify the goal of state ownership in key SFIs including INDEBANK, MSB, and MRFC. It will also clarify the role of ex-officio public officials in the boards of SFIs.

15. The Government also plans to address the problem of limited access to long-term finance. According to the FSAP, financing in Malawi is predominantly short-term, with over 80 percent of the loans having a maturity of less than three months. Products with longer maturities, which include investment loans (usually up to seven years) and mortgages (10-15 years) are limited and are available at adjustable rate. Reversing this situation requires the development of alternative sources of finance including capital markets, venture capital, leasing, etc. The FSDS 2010-2015 calls for the development of a sovereign bond market in order to finance the infrastructure development agenda of the Government while offering long-term investment opportunities for pension funds, insurance companies, and even banks. The development of the bond market is also viewed as a way to deepen the Malawi Stock Exchange. Moreover, the Government is highly committed to the establishment of a development bank that would offer long-term loans and venture capital to business. The bank is envisaged as a joint venture with the private sector, operating on sound banking principles. Indeed, the 2010 - 11 state budget set aside MK1.5 billion (approx. US$9.9 million) for this purpose. Private sector participation will be a key ‘market test’ of the perceived viability of the bank including the adequacy of its business model and governance. The Government will require advice on how to set up the bank in line with international best practices.

16. Collectively, the recent activities described above are part of the Government’s overall objective to build a financial sector which supports inclusive and sustainable growth. The World Bank has been a leading development partner in this process. In the context of the Government’s FSDS, the Bank has worked with the other key development partners and agreed to harmonize and coordinate the support for Malawi’s financial sector development. Annex 9 presents an inventory of on-going donors’ activities and key gaps in technical assistance. These efforts form the context for the activities that have been selected for this project, namely; legal and regulatory reforms, financial sector infrastructure, financial sector literacy and consumer protection, and the role of the Government in the financial sector.

C. Higher Level Objectives to which the Project Contributes

17. The activities listed above, and those proposed in this project support the priorities outlined in the Malawi Growth and Development Strategy (MGDS), the Country Assistance Strategy - CAS (2007-2010) and Country Economic Memorandum (CEM). The the merger of MARDF with the Youth Enterprise Development Fund to form the Malawi Rural and Youth Enterprise Development Fund, and (iii) the proposed partial divestment from the MSB through an IPO on the Malawi Stock Exchange. 8

Government is committed to pursuing market-oriented reforms in its efforts to achieve sustained economic development and meaningful poverty reduction. Malawi’s poverty reduction strategy, the Malawi Growth and Development Strategy (MGDS), was launched in 2006. The MGDS explicitly states that the private sector is the engine that will drive economic growth in Malawi.

18. Both the CAS and the CEM recognize the importance of the financial sector . The CAS supports Malawi’s economic development strategy that aims to put in place a foundation for longer term economic growth through improved infrastructure and investment climate. A new CAS is due to be completed in early 2011 and it is expected that it will continue to support the Malawi Government’s priorities as outlined in the MGDS. In addition, the CEM (2009) recognizes the importance of the financial sector in agriculture development and recommends that policies to improve access to banking services and finance be urgently considered.

19. The successful implementation of the MGDS, the CEM and the new CAS will depend on the level of financial deepening and a stable financial sector that provides efficient and broadly-based financial intermediation . Financial development can be a driver of economic growth. By allocating capital to its most productive uses, shifting risks to those who can best bear them, and exercising good corporate governance, financial systems can support the growth of economic activity in the real sector. A well-functioning financial system provides reliable and inexpensive payments services, makes available remunerative and safe deposit facilities, and offers business access to a suitable range of sources for short- and long-term funds. Finance matters for development not only when it functions well, but also when it malfunctions. Where the governance structures of financial institutions are weak, they can undermine effective oversight and accommodate corruption in lending and other financial transactions. Unsound financial markets and imprudent behavior by financial institutions can also lay the foundations for financial crises. Financial crises are typically associated with a drastic erosion of real economic activity and – as the official sector intervenes to stave off an impending collapse of the financial system – a significant increase in public indebtedness.

II. PROJECT DEVELOPMENT OBJECTIVES

A. Project Development Objective

20. The project aims to increase access to finance for the currently unbanked, but bankable, population of Malawi.

B. Project Beneficiaries

21. The project’s primary end-beneficiaries will be the financially excluded population, i.e., adults who have managed their lives without using any kind of financial product (formal or informal). The project does not target any specific group of financial institutions but smaller banks and the NBFIs including micro-finance institutions are expected to benefit more. With regulatory framework strengthened, the Government’s capacity for financial sector policy formulation enhanced, infrastructure for payments services upgraded, and a basic

legal/regulatory/institutional framework for consumer protection in place, the direct project beneficiaries will be all persons gaining access to use of formal financial institutions.

C. PDO Level Results Indicators

22. The Project Development Objective (PDO) Level Results Indicators – to be measured bi- annually – will be (i) Increase in the percentage of the adult population that use formal financial institutions; (ii) Increase in the proportion of women within the adult population that is formally banked. The primary methodology for measuring PDO level results will be the FinScope Demand Side Survey tool developed by the FinMark Trust and first used in Malawi 2008, and followed up with a FinScope Supply Side Study (2009); The methodology not only enables the assessment of the current landscape of financial access in Malawi, but also provides benchmarks for repeat surveys that will enable the impact of access related policy interventions to be assessed 5.

III. PROJECT DESCRIPTION

A. Project components

23. The Project design takes into account the ongoing and planned activities of other development partners active in the financial sector, that is: United States Agency for International Development (USAID), the International Monetary Fund (IMF), the US Treasury Office of Technical Assistance (OTA), Norges Bank, Financial Sector Reform and Strengthen (FIRST), and UK Department of International Development (DFID). Activities included in this project have been designed to build on and complement the activities of other development partners and as a consequence. Some activities are not comprehensive on a stand-alone basis but form part of a comprehensive whole once other donors’ activities are taken into account. Refer to Annex 9 for a complete overview of partner activities which this project compliments.

24. The proposed International Development Association (IDA) credit for project implementation will support five components and will fund the following main activities; (i) training and workshops, (ii) short term consultancy services and (iii) goods, predominantly IT hardware and software systems. Activities supported by the project are aggregated in the five following components:

5 FinMark Trust developed the FinScope survey as a tool to assess financial access in a country and to identify the constraints that prevent financial service providers reaching the financially excluded. The FinScope survey is an individual based survey representative of the adult population (urban and rural) which provides insights into how people source their income and manage their financial lives. It looks at the use of, and demands for, financial products and services (formal and informal) and how factors such as geographical access, the attitudes, behavior, and quality-of-life of people impact on consumption patterns in various financial market segments. 10

Component 1: Financial Sector Regulation and Supervision (US$ 5.32 million)

25. This component will assist 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 builds on preparatory work (primarily diagnostics, preparation of new regulations, and in some areas also supervision manuals) undertaken with the FIRST support mentioned above; an IMF/Norges Bank program which has helped to define the RBM’s strategies in key areas; and, also, to complement an expected USAID initiative to finance back-office automation (including regulatory reporting) for MFIs. Specific activities include: (i) Strengthening the legal and regulatory framework with regards to: bank supervision; capital markets supervision; microfinance institutions (MFI) and savings and credit cooperatives (SACCO) supervision; insurance supervision; pensions supervision; and administrative law; and (ii) Strengthening the supervisory capacity of the RBM. Specific activities include the: design of new or amended call reports for banks, MFIs and SACCOs, pension administrators, insurance companies, and stock brokers; development of off-site analysis tools for banking, insurance, MFIs and SACCOs, pensions, and capital markets; development of macro-prudential analytical tools to automate the analysis of macroeconomic and financial sector data required to prepare a periodic financial sector stability report; and, building capacity of RBM supervisory and research staff.

Component 2: Financial Infrastructure (US$ 13.22 million).

26. This component aims to assist 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 will include: (i) Strengthening the RBM in the area of RTGS systems, with a Central Depository System (CDS) to be among the components of the new RTGS; (ii) Design, development and implementation of a National Switch; (iii) Support for an MFI transaction processing hub; (iv) support for the development of securities settlement and non-bank agency networks; and, (v) support for consumer education and promotional campaigns to increase public understanding of payment products and services. Some of the aspects covered will include supporting public awareness of the functioning of new Credit Reference Bureau, implications the new National Switch in terms of convenience and cost of service and what to do when things go wrong. This will also cover relevant training workshops for credit and payment service providers and RBM staff on credit bureau and shared infrastructure supervision.

Component 3: Financial Consumer Protection and Financial Literacy (US$ 3.02 million).

27. This component will support the 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 will take into account the results of the

work undertaken by the World Bank’s Global program on consumer protection and financial literacy in several countries worldwide.

Component 4: Ministry of Finance Financial Sector Policy and Governance Capacity and Long-term Finance (US$ 3.39 million).

28. The objective of this component is to strengthen the capacity of the MoF to: (i) coordinate the formulation, implementation, and monitoring of financial sector policies and regulations, and (ii) oversee Government interventions in the financial sector. Working closely with the Financial Sector Policy Unit (FSPU) and the Public Enterprises Reform and Monitoring Unit (PERMU) at the MoF, the project will finance the following activities: (i) 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; (ii) staff capacity building through specialized on-the-job training, study tours, secondments, and specialized training; (iii) procurement of goods and equipment; (iv) and publication/dissemination of relevant policy work.

29. This component will also support the establishment of a policy framework and a legal and institutional infrastructure which facilitate the provision of long-term finance. The policy framework will 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 will 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; (v) establishment of a framework for leasing; (vi) feasibility study for establishing a development bank that is efficient, sustainable, and complements the private sector lending, and (vii) diagnostic studies examining the pros and cons and the applicability of a long term finance guarantee scheme.

Component 5: Implementation Support (US$3.26 million).

30. This component will support the implementation of the project by supporting the establishment of a Project Implementation Unit (PIU) at the RBM which is the responsible implementing agency of the project with support from an oversight committee chaired by the Ministry of Finance (MoF). More specifically this component will fund 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) auditing actions, which will be carried out annually by independent external auditors.

31. This component will also 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) in which funds will finance innovative solutions to addressing access to finance constraints. The MFSDT will be financed through grants by development partners (initially

DFID and USAID). The Government’s contribution to that Trust Fund through this IDA project will be to meet the consultancy costs associated with administering the Trust Fund including the costs of procurement specialist, financial management specialist, M&E specialist, a project manager and support staff.

B. Project Financing

1. Lending Instrument

32. The lending instrument for this project is a Specific Investment Loan (SIL) in the form of an IDA credit of US$28.22 million equivalent. Standard IDA terms for Malawi would apply. The SIL instrument is the most appropriate in light of its scope to support the creation, rehabilitation, and maintenance of financial infrastructure in addition to financing consultant services and management and training programs.

33. The IDA operation is part of a comprehensive financial sector technical assistance program (estimated total costs is US$32.5 million equivalent) that has been developed with multi-donor efforts. The rest of the funding needs are to be satisfied by DFID and USAID, mainly for the proposed MFSDT. The team has explored options for basket funding for the whole program. However at this time this is not feasible due to timing mismatch of the different funding sources and other institutional implications.

2. Project Financing Table

Project Components Project cost IDA Financing (in US$m) Financing percent

(1) Strengthening financial sector regulation and supervision 5.32 5.32 100 (2) Financial infrastructure 13.22 13.22 100 (3) Financial consumer protection and financial literacy 3.02 3.02 100 (4) Ministry of Finance financial sector policy and governance capacity and long term finance 3.39 3.39 100 (5) Project implementation support 3.26 3.26 100

Total Baseline Costs 28.21 28.21 100

C. Lessons Learned and Reflected in the Project Design

34. Special attention has been given to ensuring that the project design reflects both the Bank’s experience in financial sector reform projects world-wide, in addition to donors’ specific experiences. More specifically, the project design reflects the following key lessons learned:

• Time needed for reforms: The project takes into account that the implementation of reforms has multiple steps and takes a significant amount of time. Project implementation is 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. • Focused technical design : The project deliberately adopts a focused technical design. It has not tried to undertake all the financial sector reforms that are required in Malawi. Rather it has focused only on those that are unlikely to attract support from other development partners. If viewed in isolation, individual components may not seem comprehensive in their design but form parts of a comprehensive whole. Each intervention has basic objectives, clear actions, and expected results. • Ownership: The objectives of the project will include the implementation of a series of policy, legal and administrative reforms. 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. It is noteworthy that the FSTAP supports the implementation of the Malawi FSDS and thus has strong champions at the political and technical levels in both the MoF and the RBM, the key Government institutions in the sector. Furthermore the project has benefited from numerous consultations with the various stakeholders in the sector. • Donor Coordination: The project does not assume that a single intervention can 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 is based on the Government-endorsed FSDS and which takes a holistic approach to addressing constraints in financial sector development.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

35. The project will receive oversight from a Project Steering Committee chaired by the designated Principal Secretary at the Ministry of Finance. An interagency oversight steering committee will be established to provide policy guidance and inter-agency coordination for the project and will be responsible for overall project implementation and achievement of the project’s development objectives. This committee will be comprised of high level public sector professionals from the project beneficiaries who will primarily be the relevant departmental heads at the Ministry of Finance and the Reserve Bank of Malawi. The committee will meet every six months or ad hoc if a situation so requires.

36. Project implementation will be managed by a Project Implementation Unit (PIU). The institutional responsibility for coordinating and managing the project on a daily basis and providing procurement and accounting services to components will be delegated to a professional PIU. The PIU will be headed by the Project Coordinator who will be supported by a procurement specialist, a financial management specialist, a monitoring and evaluation specialist, other technical specialists (such as a financial sector advisor), and an executive assistant. The PIU will be responsible for providing the necessary guidance to beneficiaries for

14 procurement of consultants, goods and services, as well as M&E. Wherever necessary, timely short-term technical assistance will be sought to strengthen the team. This technical assistance could include, but may not be limited to, expertise in financial sector issues, as well as financial management and procurement, and can take the form of specialized training or recruiting short- term consultants. The PIU is responsible for the implementation of Component 5.

37. It has been agreed that the staff of the World Bank financed Business Environment Strengthening Technical Assistance Project (BESTAP) Project Implementation Unit (PIU) will undertake the fiduciary responsibilities of the FSTAP project until such a time that the FSTAP PIU staff have been hired and deemed ready. It is planned that no later than December 31, 2011, the FSTAP PIU will be established and operational, and the responsibilities carried out by the BESTAP PIU efficiently transferred to the FSTAP PIU. A procurement and financial assessment of the PIU will be carried out by the World Bank before the PIU can be operationalized and fiduciary responsibilities can be transferred from the BESTAP PIU to the PIU. The activities to be undertaken by the BESTAP PIU include the activities listed in the approved PPA, and those included in the FSTAP procurement plan for which the FSTAP PIU does not have the capacity to undertake. As PIU staff for the FSTAP project is hired, they will be assigned to the BESTAP PIU for orientation and hands on training until the FSTAP PIU is deemed ready to assume its offices and responsibilities.

38. While the PIU will also be responsible for the core project management functions, the actual implementation responsibility for the various components will be with designated persons within the beneficiary institutions and responsible departments. The counterparts for each component are:

• Component 1: The Beneficiary Departments (RBM’s departments responsible for research and statistics; financial markets; banking supervision, microfinance and capital markets supervision; national payments system; and pensions and insurance supervision) in consultation with the Malawi Microfinance Network and the Malawi Union of Savings and Credit Co-operatives. • Component 2: The RBM’s department responsible for national payment system in consultation with the Malawi Microfinance Network • Component 3: The RBM’s departments responsible for microfinance and capital markets supervision, the pensions and insurance supervision, and the banking supervision in consultation with the Financial Sector Policy Unit within MoF. • Component 4: the RBM in consultation with the Financial Sector Policy Unit and the Public Enterprises Reform and Monitoring Unit within the MoF.

39. Each beneficiary will be responsible for preparing (with the assistance of the PIU) the terms of reference (TOR) for consultants, including the scope of work, the expected main deliverables, and the required qualifications and experience. The beneficiaries will also provide technical specifications for procurement of goods. To ensure that beneficiaries have the capacity to implement their components, the technical assistance project has designed based on in-depth consultation with counterparts and taking into account the Government’s absorptive capacity.

Consequently, substantial training and capacity building exercises have been also been built into the project.

40. Collectively, designated representatives from each of the departments will constitute a Technical Working Group (TWG) that will be chaired by the Project Coordinator. For the committee to be effective, the representatives of the beneficiary departments have to be staff that are empowered to make technical decisions and commitments on behalf of their department to ensure that the project continues to advance. The TWG will: (i) discuss the technical and operational activities for the project; (ii) review and discuss quarterly progress reports prepared by the Project Manager; and, (iii) proactively address any technical or implementation problems affecting project progress. The TWG will at a minimum be meeting on a quarterly basis to review the progress of the project and agree on next steps but may meet as and when required to deal with technical issues. Furthermore, prior to the TWG meeting, members will be required to prepare quarterly reports on the progress of their respective departments towards meeting project objectives that will be consolidated by the project office into a report and be discussed at a quarterly. Once agreed at the TWG, the report will be discussed with the Governor and a copy will be sent to IDA and other development partners.

41. Regarding the MFSDT, an independent trust will be established to implement its activities. The MFSDT will be financed through pooled funds, from Government and from the development partners through a combination of basket and earmarked funds. The funds will support commonly agreed development objectives and activities aimed at addressing access to finance constraints. The MFSDT will operate as a legally independent trust under the supervision of professional trustees, with policy guidance from a Program Investment Committee (comprising of representatives of donors and the Government) (see Annex 7 for MFSDT organization structure and proposed scope of activities).

B. Results Monitoring and Evaluation

42. The M&E system will be based on the agreed Results Framework and monitoring arrangements . The PIU will be responsible for conducting M&E activities. As indicated in Annex 1, and given the nature of this project’s intervention, most intermediate results indicators are descriptive in nature. At mid-term review target values will be reviewed and if justified updated based on information that could become available later. The project PIU will be responsible for data collection and reporting for the overall M&E system with inputs from the designated focal points in implementing units. These units will be responsible for data collection and reporting for their respective component.

43. A quarterly monitoring table and progress reports will be prepared by the PIU, approved by the RBM and then submitted to IDA and other funding donors for review. These reports will assess achievements against the Project Implementation Plan (PIP), a Financial Management Plan (FMP) and overall Procurement Plan that will be prepared and incorporated into the Project Implementation Manual (PIM) prior to negotiation. The PIU will be responsible for updating the PIP on an annual basis, taking into account experiences and the strategic focus of the project. The PIM includes, among others, guidelines on all period reporting, and monitoring arrangements. The Mid-Term Review (MTR) of the IDA-operation will be 30 months into the project and will include an update of the FSAP (subject to agreement with Government) that will 16

assess progress in the reform program and provide the basis to make changes in the project. An Implementation and Completion Results Report (ICR) will be undertaken within six months upon the closing of the project.

44. 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 will be tested through a rigorous impact evaluation. This study will use an experimental design to compare the change disaggregated by gender in outcomes of interest for the participants in the programs against what would have happened in the absence of the programs (“counterfactual”).

C. Sustainability

45. By resting on the foundation of the Government’s FSDS (2010-2014), this IDA project has a good basis for sustainability, and is clearly owned by the Government. The Government’s on-going legislative reforms for the financial sector, its request for a FSAP, and then development of a comprehensive program based on the FSAP’s recommendations, highlight its continued interest in advancing the financial sector agenda. The undisputed commitment of the current Government to financial sector reform enhances the likelihood that, once implemented, they will be sustained. Moreover, having the financial inclusion agenda under a single umbrella which, albeit to be financed separately, harmonizes and coordinates different donor-supported reforms in the financial sector is an important asset to sustain ongoing reforms.

46. The regulations to be developed to support the implementation of the new laws and the infrastructure to be developed under the project will provide the basic building blocks to support continuous improvements in access to finance after the completion of the project . The capacity to analyze issues and to develop and implement strategies is crucial to the sustainability of the project’s outcomes. Recognizing the weaknesses in base capacity across the beneficiaries, the project includes explicit institutional capacity building support in all of its components. Follow-up Bank support will be developed before the project is completed and one priority area will be institutions building and capacity development.

D. Loan Credit Effectiveness

47. The Additional Conditions of Effectiveness consist of the following:

48. There is one disbursement conditions under the project.

49. The Covenants under the project are:

(i) By not later than December 31, 2011, establish and operationalize the FSTAP PIU, and thereafter ensure that the responsibilities carried out by the BESTAP PIU are efficiently transferred to the PIU (ii) No withdrawal shall be made for payments prior to the date of the Financing Agreement; and for consultant services for the Malawi Financial Deepening Trust unless and until it has been established referred to in Section I.E of Schedule 2 to the Financing Agreement. (iii) Maintain adequate financial management system and records; prepare financial statements of operations, resources and expenditures of the project. (iv) Submit to the Bank audited financial statements not later than 6 months after the end of the project (v) Furnish unaudited interim financial reports (IFRs) no later than 45 days after the end of each accounting quarter.

V. KEY RISKS

50. Project preparation risk is deemed High Impact/Low Likelihood (MI) . Two main preparation risks were outlined at the PCN stage. The first relates to donor risk in supporting the project. All donors active in Malawi’s financial sector have realigned (or are in the process of realignment) their assistance strategies and programs with the Government’s strategy and in this respect are supportive of this project given its design being based on the identified priorities of the Malawi FSDS. During the project preparation phase the task team received positive responses from the main donors with regard to the scope of the project. The second outlined risk relates to concerns about collaboration and coordination between the RBM and the MoF. This issue has been highlighted by the fact that the project will support the further development of the FSPU in the MOF mandated to undertake financial sector policy formations, a role previously championed by the RBM. Discussions during the preparation of the project have confirmed the support and eagerness of the RBM for the MoF to take on its natural policy leadership role in the sector. The RBM has highlighted that the process of developing and approving new financial sector legislation would have been faster and more efficient had it been supported the MoF. In this respect RBM has confirmed its role as a financial policy implementer with the MoF being the policy driver.

51. The project implementation risk has been assessed to be High Impact/Low Likelihood (MI). In the table below we highlight the primary risks during the project implementation (see Annex 4 for more detail). 18

Risks during Implementation Risk Mitigation measure Risk Rating

Stakeholder risk : Local financial institutions and During project implementation, training, High private sector investors might be reluctant to workshops and public awareness campaigns Impact/Low accept and/or lack of capacity to use the new will be used to disseminate knowledge and Likelihood delivery channels of banking products and advocate the benefits of the new delivery (MI) financial services to be developed/supported channels for financial deepening. under the Project. Implementation agency risk : Staff skills and During project implementation, the RBM High organizational knowledge of the RBM for project PIU will be supported by 4 consultants, Impact/Low implementation are limited. Limited resources each acting as Project Coordinator, Likelihood and lack of the systems and processes that are in Procurement Specialist, FM Specialist and (MI) line with Bank guidelines for procurement and M&E Specialist. financial management could cause delays in project implementation. Training will be provided to RBM and MOF technical staff who will participate in the planned activities under the Project.

VI. APPRAISAL SUMMARY

A. Economic and Financial Analysis

52. Given the character of this operation, a quantitative economic and financial analysis is not an appropriate tool to assess the returns of the project. However, there is ample evidence for the financial sector’s potential in accelerating economic growth and poverty reduction. A rapidly increasing body of academic studies mostly concludes that financial development drives economic growth. By allocating capital to its most productive use, shifting risks to those who can best bear them, exerting corporate governance and easing exchange, financial systems support real economic activity. In practical terms, a well-functioning financial system provides reliable and inexpensive payments services, makes available remunerative and safe deposit facilities and offers entrepreneurs access to a suitable range of sources for short- and long-term funds. Recent empirical studies also note that financial sector development is associated with beneficial distributional effects 6, while small-firm industries benefit disproportionally from financial development. 7

53. Equally important, financial sector development matters for development not only when it functions well, but also when it malfunctions. Where the governance structures of financial institutions are weak, they can undermine effective oversight and accommodate corruption in lending and other financial transactions. Unsound financial markets and imprudent behavior by

6 Beck, Demirgüç – Kunt and Levine (2007) observe a negative relationship between financial development and the growth rate of the Gini coefficient. 7 See Beck, Demirgüç – Kunt and Levine (2008). Often lacking credit histories and audited financial statements, small firms are more informationally opaque than large firms, so that financial improvements that lower the marginal costs of acquiring information disproportionately facilitate the flow of capital to small firms. 19

financial institutions can also lay the foundations for financial crises, such as the recent global financial crisis. Financial crises are typically associated with a drastic erosion of real economic activity and – as the official sector intervenes to stave off an impending collapse of the financial system – a significant increase in public indebtedness. 8

54. The project aims to support the Government efforts to achieve its two-sided developmental responsibility in the financial sector. To ensure that financial systems work well, and allocate resources to the most productive uses – enhancing productivity, boosting poverty- reduction effects of growth and spreading equality of opportunity. And to minimize the risk of the system malfunctioning, which can be a breeding ground for costly financial crises. From the economic perspective, the project is justified and can be cost effective if the expected results are achieved.

55. The project will be financed 100 percent by the proposed IDA credit. The costing is based on international market prices and cost of similar projects. Because of the favorable IDA credit terms, the impact on the Government’s debt servicing is considered minimal, and that on the implementing entities budget is manageable since their contributions to the financing of the project activities are in-kind, in the form of staff time and office facilities.

B. Technical

56. The technical merits of the project design have been examined by Bank staff over the course of project preparation and are considered sound and in line with international practices. The design is based on analytical work undertaken over the past two years, including the analysis and recommendations from the joint Bank/Fund FSAP (2007), FinScope Demand Side Study (2008), FinScope Supply Side Study (2009); Malawi FSDS (2010-2015), Malawi National Strategy for Financial Inclusion (2010-2014), Micro Finance Assessment Report (2010), and Central Bank Modernization (Norges Bank Occasional Paper 2010). In addition technical assessments will continue throughout the implementation period. Substantial preliminary work and foundations have been identified in the course of project preparation and to be supported by the PPF.

C. Financial Management

57. Based on the Bank’s FM assessment, the Malawi FSTAP has been assessed as moderate risk after performance of a review of RBM’s financial management systems. The major strength of RBM, as the implementing institution, is that it is a central bank with all the stringent rules and tight internal controls expected of such an institution. However, the assessed weakness is that it does not have experience implementing a World Bank funded project. As such, it is recommended that accounting staff of the RBM attend a Financial Management and Disbursement Course on World Bank funded projects. The other weakness is that RBM is in the process of changing its accounting platform. The General Ledger project requires the time of most of the key FM staff.

8 As an illustration, Laeven and Valencia (2008) find that the output losses – measured as deviations from trend GDP – of systemic banking crises average some 20 percent of GDP. Fiscal costs, net of recoveries, average more than 13 percent of GDP. 20

D. Governance and Anti Corruption

58. The RBM will ensure within reason that all measures to mitigate corruption are taken on board. The RBM has a robust anti Fraud policy and an anti corruption whistle blowing policy which is working as noted from recent examples. Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA. Credits and Grants, “dated October 15, 2006 and updated January 2011, shall apply to the project.”

E. Procurement

59. A procurement assessment has been carried out and has concluded that Reserve Bank of Malawi has limited capacity to carry out procurement activities related to the proposed project. RBM is unfamiliar with Bank procurement procedures. However, risk mitigation measures have been discussed with the RBM and agreed, including assistance with a Procurement Specialist financed by the Project and capacity building to current staff of the procurement unit in World Bank procedures. Risk assessment for the project is moderate. The Procurement Plan for the project has been prepared at appraisal stage. It will be updated at least annually to reflect project implementation needs. A brief summary of the procurement capacity assessment and project procurement arrangements are provided in Annex 3.

F. Social

60. Access to appropriate financial services is a critical tool for poor households to reduce their vulnerability. While the IDA operation will not directly address this issue, the project will assist the Government to establish a framework for a more efficient and inclusive access to financial services. Where possible, the project will coordinate its interventions with the active donors in the sector to leverage information and dialog with the Government on access of financial services to the rural areas that are currently underserved.

G. Environment

61. The civil works described in Component 2 include the establishment of a Micro Finance processing hub and an interoperable switch. As these works are very minor and localized, national and local laws and regulations will be sufficient to manage any environmental impacts and the project is thus rated a Category C.

H. Other Safeguards Policies triggered (if required)

Safeguard Policies Triggered Yes No TBD Environmental Assessment (OP/BP 4.01) X Natural Habitats (OP/BP 4.04) X Forests (OP/BP 4.36) X Pest Management (OP 4.09) X Physical Cultural Resources (OP/BP 4.11) X Indigenous Peoples (OP/BP 4.10) X Involuntary Resettlement (OP/BP 4.12) X Safety of Dams (OP/BP 4.37) X Projects on International Waterways (OP/BP 7.50) X Projects in Disputed Areas (OP/BP 7.60) X

Annex 1: Results Framework and Monitoring MALAWI: FINANCIAL SECTOR TECHNICAL ASSISSTANCE PROGRAM (FSTAP) Results Framework

Project Development Objective (PDO): The Project Development Objective is to increase access to finance for the currently unbanked, but bankable, population of Malawi

Cumulative Target Values** Description Note)

PDO Level Results ( Unit of Data Source/ Responsibility (indicator Baseline Frequency Indicators* Measure YR 1 YR 2 YR3 YR 4 YR5 Methodology for Data Collection definition etc.) Core PDO Indicator one:

Increase in the Percentage 19 % of 19% 25% 25% 40% 40% Bi-annually FinScope. RBM percentage of the adult individuals are population that use formally banked formal financial institutions.

PDO Indicator two:

Increase in the 17 % of adult 17% 20% 20% 30% 40% Bi-annually FinScope RBM proportion of women Percentage women are within the adult formally population that is banked. formally banked.

INTERMEDIATE RESULTS Intermediate Result (Component One): Financial Sector Regulation and Supervisory Functions improved

Intermediate Result Descriptive Existing Work Plan for 1st group 2nd group Annual: Progress, RBM: Indicator One : regulatory upgrading of key of key Progress Mid-term Progres framework regulations regulation regulatio report on and End- s Key regulations and needs to be adopted and s/super- ns/super- developm project Mid- supervision manuals upgraded in first group of vision vision ent of new reports term issued to support order to key manuals manuals regulation and implementation of the 10 support the regulations/sup issued. issued s PIU and End- Note : Both PDO indicators will be used to report on the core indicator "Direct project beneficiaries (numb23 er), of which female (%)" and ensure that this indicator will be included in the ISR. Separately, the RBM will keep a track on the number of accounts reported by commercial banks. This data will be used for comparison purposes during supervision missions new financial laws which implementatio ervision Consulta project have been passed recently n of the 7 new manuals 2nd group Yr3: nt M&E reports or to be passed over the laws passed in adopted of key Mid-term assess- life of the project. the last 2 regulation review ments PIU years, in s/super- report and M&E addition to the vision assess- Speciali 3 news bills manuals ment st and a that are drafted member expected to be 3 months of passed later. after Compo project nent 1 conclusio consul- n: tant End- team: project Annual, report and Mid- assess- term ment and End- project assessments

Intermediate Result Descriptive Offsite and Diagnostic New New Analytic Analytical Semi- Progress, RBM: Indicator Two : macro- reviews of offsite system al tools tools for Annual: Mid-term Progres prudential current system for for offsite Progress and End- s, Mid- Automated tools for analysis is not systems/practi adopted macro- offsite monitor- report on project term offsite surveillance and supported by ces of off-site prudentia monitori ring and project reports and macro-prudential analysis automated surveillance New data l analysis ng and analysis implement End- designed, acquired and analytical tools and macro- collection and analysis used in -tation PIU and project implemented using prudential and publish- used in day-to- Yr3: consultan reports comprehensive analysis analysis ing of day-today work Mid-term t M&E , reliable and completed system for Stability day work review assess- timely data macro- Report Stability report and ments PIU New offsite prudential adopted Stability Report assess- M&E system analysis Report updated ment Speciali including call and Analytic updated and 3 months st and a report publishing al tools and published after member requirements, of the for publishe at least project of data Stability offsite d at least Annually conclusio Compo

management/- Report monitori Annually n: nent 1 analytical/ designed ng and End- consulta reporting tools analysis project nt team: and related used in report and Annual, business day-to- assess- Mid- processes day work ment term designed and End- project assessments

Intermediate Result Percentage No automated 10% of 20% 50% 100% Ad hoc: Progress, RBM: Indicator Three : analytical tools staff of staff of staff of staff Trainees’ Mid-term Progres are available Trained Trained Trained Trained reports on and End- s, RBM staff trained in uses and staff do training project Mid- of analytical tools and not have results and reports term regarding new regulations hands-on knowledg and experience e PIU and End- using them. applicatio Consulta project n nt M&E reports Semi- assessme Annual: nts PIU Implemen M&E tation Speciali progress st and a report member Yr3: of Mid-term Compo- review nent 1 and consulta assess- nt team: ment Annual, 3 months Mid- after term project and conclusio End- n: project End- assess-

project ments report and assessment Intermediate Result (Component Two): Financial Infrastructure improved

Intermediate Results Percentage Volume: Volume: Volume: By Annual: RBM reports on RBM: Indicator one : 159,625 By 10% 20 % Systems systems Systems performanc performance performan Transactions volume and Value: MWK Value: Value: By e reports including number ce, and value processed by new 4,253 Billion By 5% 10 % of transactions Mid-term payments systems (RTGS, Yr1: processed per and End- National Switch, MFI TPH) Baseline payment channel project survey Surveys on user reports perception of PIU M&E Yr3: payment services Spec- Mid-term ialist: report and Surveys survey

4 months after project conclusion) : End- project report and survey Intermediate Result Number Indicator Two : Proposed 6 6 members National members of National Number of participating Switch not yet of Switch members of all 3 payments operational National systems Switch

Intermediate Result Descriptive RTGS - New RTGS New New New New RTGS Quarterly: Implementation RBM Indicator Three: Existing system RTGS RTGS RTGS system in Project progress and National system runs procured system system in system in smooth implementa System Payment New RTGS, NS and MFI- in parallel implement smooth smooth operation tion performance System TPH systems in operation with multiple ed operation operation progress reports Departme consistent with system dated systems reports Independent nt: integration requirements and Current Semi- assessments of Systems interoperable (NS) version is not Annual: system implement supported by System performance ation and vendor performanc performan beyond 2011 e reports: ce reports; NS - Majority Switch Interopera National National National and Mid- Govt-owned collaborati ble, Switch in Switch in Switch in Yr3: term and Malswitch on & internatio smooth smooth smooth Mid-Term End- operates a business nal operation operation operation Review project switching model standard report and reports platform defined national assessment PIU M&E which is not switch Specialist: interoperable User procured 3-month Annual, and lacks technical and after Mid-term broad design and installed project and End- participation functional conclusion) project by financial requiremen : assess- institutions in ts specified End-project ments Malawi reports and assessment There is no Business Internati MFI MFI TPH in s centralized model for onal TPH in smooth processing MFI standard smooth operation hub processing micro- operation hub transacti defined on-tion process- User ing hub technical procured design and and functional installed requirements specified

Intermediate Result (Component Three): Financial Consumer Protection and Financial Literacy Improved Intermediate Result Descriptive The Financial Action plan 1st priority 1st priority 2nd 3rd priority Annual: Independen RBM: Indicator One : Services Act on financial regulations regulations priority regulations monitor- t annual Action includes consumer (and legal drafted; 2 nd regulation drafted ing reports monitoring plan, and Legal and regulatory some major protection provisions) priority s drafted; Yr1: reports Mid-term framework for consumer provisions on adopted, drafted regulations 3rd priority Action Action plan and End- protection prepared and consumer identifying drafted regulation plan on financial project presented to Cabinet protection, priorities for s drafted Yr3: consumer reports and gives the legal and Mid-term protection Consulta RBM regulatory review Mid-term nts: authority to reform 3-months and End- Annual regulate and after project monitori supervise project reports and ng consumer conclusio assessment reports, protection n): and Mid- issues in End- term and financial project End- services. assessmen project t assessme nts

Intermediate Result Descriptive The RBM’s CPU 1st priority 2nd priority 3rd priority 4th priority Annual: Independen RBM: Indicator Two: consumer becomes measures measures of measures measures monitorin t annual Institutio protection operational; of institutional of of g reports, monitoring nal Institutional arrangements unit (CPU) program for institutiona program are institution institutiona RBM reports strengthe for consumer protection in has been institutional l program implemented al l program annual RBM ning all financial services created (but strengthen- are program are reports annual program, implemented: not staffed) ing adopted, implemente are implemente Yr.1: reports Annual, within the identifying d. implement d Institution Program Mid-term microfinance priorities ed al for and End- and capital program strengthen- project markets unit. Yr3: ing reports Mid-term institutiona Consult- review l ant: Yr. 6 (3- framework Independ months of financial ent after consumer monitori project protection ng, and conclusio Mid-term Mid-term n): and End- and End- 28

End- project project project reports and assess- assess- assessment ments ment Trainees’ Ad hoc: reports Trainees’ reports on training results Intermediate Results Percentage Consumer Baseline Financial Consumer Financial Consume Consumer Nationwide RBM Indicator Three : rights in survey literacy rights literacy rights rights financial and financial completed to program awareness: campaign: awareness: awareness literacy MOF: Increased awareness of services is a establish including Baseline 60% of Baseline : Yr1: survey Annual, rights as financial nascent measure- implementa +10% targeted +15% Baseline Mid-term consumers among concept and a ment of tion plan population survey Independen and End- population reached by measurement consumer developed Financial reached Financial 3-month t annual project financial literacy campaign; of awareness rights literacy literacy after monitoring reports Of which women of the rights awareness campaign: campaign: project reports Consult- needs to be 30% of 100% of conclusio ants: developed targeted targeted n: Annual Annual through population population Follow-up reports of monitori Baseline reached reached survey National ng survey Taskforce reports, Financial on and Mid- No literacy Financial term and systematic campaign: Education End- financial Annual: project literacy monitorin Mid-term assess- campaign has g reports, and End- ments been and project conducted in National reports and Malawi Task- assessment force on Financial Education reports Yr3: Mid-term review 3-month

after project conclusio n): End- project assessment Intermediate Result (Component Four): Ministry of Finance Financial Sector Policy and Governance Capacity Strengthened and Framework for Long-Term Finance Developed Intermediate Results Annual: Monitoring reports, PERMU Indicator One : No explicit Policy Policy Policy Polic Monitoring PERMU annual and MOF: Descriptive state- developed implem implement y reports, PERMU reports Semi- State ownership policy in ownership and ented ed impl annual reports Independent M&E annual financial sector developed, policy has published eme Yr3: assessments reports, and published, and implemented been issued nted Mid-term review Mid-term assessment and End- 3-Month project project closing date): reports End-project M&E assessment Consultant( PIU M&E specialist): Intermediate Results Descriptive Role of the The 30 % of 60 % of 100 % Semi-annual: Trainees’ reports on FSPU and Indicator Two: MoF in FSPU FSPU staff FSPU FSPU Implementation training results and MOF: financial establis trained and staff staff reports knowledge Semi- Core functions of the FSPU sector policy hed, annual trained trained Yr 3: application annual executed by appropriately formulation staffed, business and and Mid-term review Semi-Annual, mid- reports, and trained staff and and plan targets annual annual report and term and end-project Mid-term monitoring is business met business business assessment reports and End- limited plan plan plan Yr6 (3-month Independent M&E project adopted targets targets after project assessments on reports met met conclusion): Training M&E End-project effectiveness Consultant reports and (PIU M&E assessment specialist): Mid-term and End- project training

effectivene ss assessments

Intermediate Result Descriptive Long-term Policy Policy Detailed Annual: Progress, Mid-term RBM, MoF indicator Three : financing is a framework frame- sectoral Implementation and End-project and nascent for long- work (pensions reports reports consultants Policy frameworks for the concept in term adopted and Yr 3: provision of long term Malawi and financing is insurance, Mid-term review Independent M&E financing which should no systematic developed credit report and assessments include (i) equity and analysis has guarantees assessment debt/leasing financing, (ii) been carried , and 3-months after PPP for infrastructure (iii) out on the leasing) project development of long-term subject matter studies/ conclusion): savings and investment reviews End-project report institutions (e.g. pension completed and assessment funds) developed

Annex 2: Detailed Project Description

The comprehensive financial sector reform program is comprised of five distinct components. Each component will have a designated beneficiary agency, but will be coordinated by a single project implementation team based at the RBM. Below is a detailed description of each component.

Component 1: Financial Sector Regulation and Supervision (US$ 5.32 million)

This component will assist the RBM to strengthen the regulation and supervision frameworks for banking, capital markets, microfinance, and the insurance and pension industries by financing a combination of research, diagnostic, and capacity building technical assistance activities. It builds on preparatory work (primarily diagnostics, preparation of new regulations, and in some areas also supervision manuals) undertaken with the FIRST support mentioned above; an IMF/Norges Bank program which has helped to define the RBM’s strategies in key areas; and, also, to complement an expected USAID initiative to finance back-office automation (including regulatory reporting) for MFIs. Specific activities include:

(i) Strengthening the legal and regulatory framework

• Bank supervision : a diagnostic and update of current regulations and supervision manuals to reflect the passage of the Financial Services Act; development of a regulatory framework for mobile-telephone based banking; development of regulations and supervision manuals for non-interest banking; and training and support for the adoption and implementation of the outputs of these activities. • Capital markets supervision : training in supervision of collective investment schemes; support for the selection of a surveillance system for the MSE and training for both BSD and the MSE surveillance and automation of MSE trading system; development of: a regulatory framework and supervision manuals plus training for investor protection; design of all matters related to the establishment, funding, and management of the Securities Stabilization Fund; training in implementation of new regulations covering broker/dealers, securities registration and transfers, and portfolio managers; development of a regulatory framework and supervision manuals plus training for the bond market and hedging instruments; and, design of all matters related to the establishment, funding, management, regulation and supervision of the central securities depository. • Microfinance Institutions (MFIs) and Savings and Credit Co-operatives (SACCOs) : capacity assessments of the Malawi Microfinance Network and the Malawi Union of Savings and Credit Co-operatives to assess, and subsequently develop, capacity in both institutions to assume supervisory responsibility over their respective sectors; design of a regulatory return format for licensed MFIs; training in the implementation of regulations, directives, and supervision manuals developed for the BSD by FIRST and completion of work left outstanding by FIRST.; And, design of all matters related to the establishment, funding, and management of the SACCOs Deposit Guarantee Fund (establishment of this fund is included in the Financial Cooperatives Act). • Insurance supervision : development of a resolution framework and associated regulations for insurance companies; development of a regulatory framework and supervision manuals plus training for micro-insurance and casualty products, and for insurance brokers and intermediaries; development of a regulatory framework and supervision 32

manuals plus training for supervisors in health insurance; and, a resident adviser for a period of 12 months to provide on the-job and classroom training and supervision support. • Pensions supervision : design of the regulatory and supervisory framework for the National Pension Scheme; a resident adviser for 18 months to assist the RBM and the Government to train BSD staff in the regulatory and supervisory framework; and, design of regulatory returns to be filed by pensions administrators.

(ii) Strengthening supervisory capacity

This sub-component will update skills and expand the technology available to the RBM to carry out its expanded and new supervisory responsibilities, introduced by recent and pending legislation, and for functions such as macro-prudential supervision. Specific activities include:

• Design of new or amended call reports (weekly, monthly, quarterly, and annual reports, as applicable) for: banks, MFIs and SACCOs, pension administrators, insurance companies, and stock brokers. The design of the call reports will provide data to drive the analytical tools developed under the following activities. This activity will also include design of a regular lending survey format for use by the Research and Statistics Department (RSD) in macro- level analysis. • Development of off-site analysis tools (financial models) for banking, insurance, MFIs and SACCOs, pensions, and capital markets. In the case of the banking sector, a diagnostic of existing off site analysis tools will be undertaken and modifications designed to reflect the impact of the implementation of the Financial Services Act. In the case of the other sectors, new tools will be developed to reflect both new regulations and the new availability of data as a result of development of an adequate call reporting regime. Training will be provided for BSD and NBSD staff in the use of the new/modified off-site analysis tools. • Development of macro-prudential analytical tools to automate the analysis of macroeconomic and financial sector data used in the stability report. Alongside these tools, a user-friendly web page will be designed for both the stability report and lending survey. RSD staff will be trained in the use of the analytical tools developed with some cross-training offered for BSD and Microfinance and Capital Markets Supervision Department and the Pensions and Insurance Supervision Department off-site analysts. • Building capacity of the RBM staff through on-the-job training, workshops and seminars and short-term overseas training activities and structured dissemination of training results.

Component 2: Financial Infrastructure (US$ 13.22 million) This component aims to assist 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, to finance institutional strengthening at the RBM, including a legal and regulatory review of current legislation. Specific activities will include:

(i) Strengthening the RTGS system

The project will support the replacement of the current version of the RTGS by financing:

• Updating of the user design and functional requirements for a new RTGS system, system integration requirements within RBM as well as financial institutions’ core banking applications to facilitate efficient EFT payment processing, including Government payments. Notably, in light of the Government priority to have securities currently under the RBM immediately covered (i.e. Government debt securities); one of the components of the new RTGS system will be a CSD. • Development of user design and functional specifications for the RFP for components of the new RTGS system. This will cover the securities traded on the stock exchange. This work will essentially be closely linked to the privatization of the stock exchange and its post- privatization strategic direction. • Procurement, installation and commissioning of a new RTGS. It is expected that this activity will comprise hardware, software and integration to core systems at RMB and at least 11 financial institutions. Procurement of the RTGS will only be undertaken after satisfactory assessment, validation and adoption of updated user design and functional requirements and an international RFP issued by RBM. This will include functional requirements for integrating a highly standardized direct credits and debits EFT and cheque clearing system complete with processing, control & reporting system to facilitate timely, efficient and reliable data interchange and integration to RBM and financial institutions core-banking applications. The integration of the EFT system will capture sufficient accounting or remittance detail on payment transactions consistent with best practice. • The process of replacing the RTGS system will include the migration of RTGS from MALSWITCH infrastructure to SWIFT • Building capacity of the RBM staff for successful delivery of hands-on RTGS systems operations and payment system oversight deliverables. This will involve environment analysis (technical and operational) and design of payments operational processes, performance measurements

(ii) Design, development and implementation of a National Switch

The project will finance the design, development and implementation of an interoperable central switch for payment processing. Specific activities financed will include:

• Undertaking an evaluation of the existing technological, legal and regulatory environment. • Analyzing and mapping appropriate structures to support the integration of the switch with relevant financial institution core-banking applications or switches. • Designing, and reaching consensus on the governance framework and rules, procedures and regulations, fee structure and other terms and conditions establishing the national switch. .Procuring, installing and commissioning an interoperable central switch. This activity is expected to include investment in hardware, software and integration/interface to deliver a robust (resilient and high availability infrastructure) central switching services designed for the processing of sensitive financial transaction data through a broad range of networking (switch-to-switch network and core-banking-to-switch interface), interconnecting at least 13

financial institutions directly or via other switching platforms, telecommunication companies and networks, compliant with open system concepts; supports standard industry messaging formats and a variety of channels for financial services delivery. To succeed, investment in hardware for this activity will only be undertaken on the basis of a satisfactory assessment, validation and adoption of an appropriate governance framework comprising rules, procedures and regulations, fees and other terms and conditions establishing the central switch by participating financial institutions • Updating RBM oversight responsibilities and supporting implementation of agreed actions by building capacity of the staff of the RBM for successful delivery of responsibilities Building capacity of the RBM staff

(iii) Support an MFI transaction processing hub

This component will leverage technology to improve, among other things, the processing efficiency of small-value transactions by financing the following activities:

• An assessment of MFIs to determine participants, collaboration and business model for a shared transaction processing hub providing back-office services. • Analyzing and mapping appropriate structures to support the integration of the processing hub appropriate microfinance core-banking applications, including identifying opportunities to allow for future development of downstream services such as credit referencing services, interconnection of the central switch to be established by BAM. • Designing, and reaching consensus on the governance framework and rules, procedures and regulations, fee structure and other terms and conditions establishing the processing hub. • Procuring, installing and commissioning an MFI transaction processing hub. The effective design, development and implementation of an efficient MFI transaction processing hub will comprise investment in hardware, software and integration/interface to deliver a robust (resilient and high availability infrastructure) platform that allows a consortium of MFIs to share transaction processing infrastructure (payment system connectivity, core banking application, mobile-banking integration, account opening, loan disbursements, payment processing, customer acquisition, customer complaints logging, compliance and reporting) in accordance with set governance rules and regulations; Audit trail with time stamps & access control; Integrated with analytical & reporting tools; Supports connectivity to at least 20 MFIs; Compliant with open system concepts; Supports multi channels (branch and branchless banking delivery channels). • Updating RBM oversight responsibilities and supporting implementation of agreed actions by building capacity of the staff of the RBM for successful delivery of responsibilities

(iv) Securities settlement and non-bank agency networks

This component will support the RBM in addressing the securities settlement and non-bank agency network issues currently absent in the payment systems bill such as, for settlements, immobilization and dematerialization, settlement finality and irrevocability, netting and failure to settle, and collateral arrangements; and, for branchless banking, non-bank agency licensing and registration requirements, settlement and governance related issues. Specific activities include:

• Review of all legislative drafts developed by the payment system unit at RBM in line with best practices, identify gaps and improvement priorities, particularly those relating to settlement of immobilized and dematerialized securities and legal support practices such as netting in a securities setting, amongst other issues. • Review RBM practices in payment system oversight regimes that may be relevant to a shared transaction processing hub for MFIs and national switch, and develop recommend actions for improvement. • Review RBM regulatory approaches to licensing or registration schemes for branchless banking and non-bank agency network initiatives and develop recommendations for improving regulations. This would include assessing all legislative drafts, guidelines, and circulars, and where necessary streamlining and modifying the drafts taking into account Malawi’s need to expand financial access for the poor and under-served segments of the population. • Support implementation of agreed actions by building capacity of the staff of the RBM for successful delivery of payment system operations and oversight deliverables. This will involve implementation of agreed design of RTGS operational processes, performance measurements and updated responsibilities for payment system oversight.

(v) Consumer education and promotional campaigns

The RBM will undertake consumer education and promotional campaigns to increase public and private sector understanding of payment products and services. Specific activities will include: surveying user perceptions of performance of various payment channels and instruments, and designing, developing and implementing an effective campaign using a variety of media, events and resources to promote consumer awareness of the security and benefits of electronic payment instruments across Malawi.

Furthermore and following the passage of the new Credit Reference Bureau Act, and implementation of the National Switch, as well as the MFI processing hub, the RBM has a role play in the strengthening of the financial infrastructure such as supporting awareness campaigns for the public in general about the new Act, and providing training workshops for credit and payment service providers, and MFIs and RBM staff on bureau and shared infrastructure supervision.

Component 3: Financial Consumer Protection and Financial Literacy (US$ 3.02 million)

This component will support the Government’s efforts to increase public trust in, and usage of, the financial sector by strengthening the legal and regulatory framework for financial consumer protection; enhancing the institutional arrangements for consumer protection in all financial services; and, by promoting financial literacy initiatives that will help the average person understand the risks and rewards of accessing and using financial products. Two preparatory activities will be funded by a grant from the WB Bank-Netherlands Partnership Program: the Diagnostic Review of consumer protection and financial literacy, and the baseline financial literacy survey. The Review will assess the existing legal and regulatory framework for financial consumer protection and financial literacy based on a set of international good practices developed by the World Bank. The baseline nationwide household survey of financial literacy

will use a model questionnaire developed by the World Bank, based on international standards, and already applied in four different countries.

(i) Strengthening the legal and regulatory framework for financial consumer protection

The project will support Government efforts to improve the current legal framework for consumer protection, by undertaking the following activities: • Action plan on financial consumer protection . Based on the results of the Diagnostic Review, a detailed time-bound action plan will be agreed with the authorities to provide a roadmap for improving financial consumer protection in Malawi. The action plan will identify priority measures regarding changes in laws and regulations. • Program for improving legal and regulatory framework for financial consumer protection . It is envisaged that as a result of the action plan, a specific advisory program to improve the legal and regulatory framework for consumer protection in financial services be developed. The program will cover the priority measures agreed with the Government authorities, which would likely include regulations and guidelines dealing with such issues as: unfair contract terms and business practices; Know Your Customer (KYC), affordability and suitability; selling of linked and tied products; handling of insurance claims; registration of financial service providers (including credit bureaus and debt counseling services); consumer credit; consumer protection codes of conduct for financial service providers; self-regulation for non- deposit taking MFIs; methodology for calculation of effective cost of financial services; disclosure of information on financial products for consumers

(ii) Enhancing institutional arrangements for consumer protection in all financial services

This subcomponent will finance the establishment of an operative institutional framework for financial consumer protection. It is envisaged that as a result of the Action plan, a specific Program for strengthening institutional framework of financial consumer protection will be developed, with priority measures agreed with the Government authorities. Special emphasis will be placed on:

• Establishing an adequately resourced government department/agency with the capacity to deal with consumer protection issues in the financial sector, such as implementing consumer awareness/financial education campaigns, conducting research and developing policies, investigating complaints, and ensuring compliance with financial consumer protection legislation. • Strengthening institutional capacity of non-government organizations. An effective institutional arrangement for financial consumer protection would also require active participation of financial industry associations, consumer organizations and other private institutions that would work together with the Government. • Establishing an effective mechanism for handling, analyzing, monitoring and resolving consumer complaints and disputes. Currently there are neither established procedures for handling consumer complaints within financial institutions, nor out-of-court dispute resolution mechanisms available. Potential activities would include: delineating rules for financial service providers to handle consumer complaints; developing a centralized system

to register, track and analyze complaints data; advising on the setup of an out-of-court mechanism to resolve consumer disputes.

(iii) Developing a consumer awareness / financial literacy program

This subcomponent will support the following activities:

• Financial consumer awareness campaign . It is envisaged that as part of the action plan, a financial consumer awareness campaign be developed, with priority measures agreed with the Government authorities. Specific activities might include the design of tables with comparative information of full price of financial products; community/villages road shows to explain main financial concepts; training on delivery of financial education by retail officers; financial literacy messages in mobile banking system; campaign on the new pensions system; basic brochures of financial services; inclusion of financial literacy in school curricula; campaign on managing debt and avoiding over indebtedness; and, campaigns on the insurance market. There will be close coordination with the Component 2 activities on consumer education. • Impact evaluation of financial literacy initiatives. It is envisaged that the programs identified as priority by the Government following the national financial literacy baseline survey will be rigorously evaluated during the course of their implementation to assess the true constraints hindering the demand for financial services in Malawi. The impact evaluation study under this work will seek to understand the effects of these initiatives on the trust of the financial system, usage of (formal) financial services, entrepreneurship, and changes in living standards of the participants. • Follow-up nationwide financial literacy survey . The follow-up survey will use the same questionnaire and methodology as the baseline nationwide household survey and will be conducted in the last year of the project. The survey will provide for information to measure the impact of the program. The survey should cover a representative sample of population from all regions of Malawi. The field work will be conducted by a reputable local survey firm with experience in financial sector surveys. A report presenting and analyzing the results of the survey will be prepared by a local expert consultant working with the survey firm or independently.

Component 4: Ministry of Finance Financial Sector Policy Formulation and Governance Capacity and Long-term Finance (US$ 3.39 million)

The objective of this component is to strengthen the capacity of the Ministry of Finance (MoF) to: (i) coordinate the analysis, formulation, implementation, and monitoring of financial sector policies and regulations, and (ii) oversee Government interventions in the financial sector. This component will also support the establishment of a policy framework and a legal and institutional infrastructure which facilitate the provision of long-term finance. Working closely with the Financial Sector Policy Unit (FSPU) and the Public Enterprises Reform and Monitoring Unit (PERMU) at the Ministry of Finance, and in cooperation with the RBM, the project will finance the following activities.

(i) Strengthening Government financial sector policy formulation capacity

The MoF has the overall mandate of coordinating the formulation of financial sector policies, but currently lacks the requisite financial sector policy capacity. The core functions of the FSPU within the Economic Affairs Division include: (i) recommending policy reforms; (ii) monitoring the development and stability of the financial sector; (iii) overseeing the transformation, privatization and restructuring of state-owned financial sector institutions; (iv) coordinating the development of the financial sector legislation; and, (v) ensuring that financial sector institutions are appropriately regulated and supervised. However, five months after its establishment, the unit has not become fully operational and faces serious capacity constraints. To address, these constraints, this project will finance the following activities:

• Provision of technical advisory services . This will entail the recruitment of two long-term advisors (for periods of 22 and 33 months), including one international financial sector specialist and a local legal advisor. The role of these two experts will be to help build a credible FSPU by (i) mentoring and providing on-the-job training to staff; (ii) developing a business plan for the FSU; (iii) developing a training plan; and, (iv) helping to coordinate the development of new policies and regulations. When needed, the experts will also provide advice to PERMU under an arrangement to be agreed between the FSPU and PERMU. • Staff capacity building . In addition to the on-the-job training to be delivered by the two long- term advisors, the project will provide resources to further build staff capacity through; (i) regional and international shadowing/attachment opportunities at financial sector units in countries where the MOF has demonstrated leadership in financial policy issues; and, (ii) study tours. • Specialized training will be tailored to the needs of the unit, focusing on its core areas of responsibility. Training will be designed and delivered by reputable training organizations. • Procurement of goods and equipment including a vehicle, IT and office equipment, and software. • Publication and dissemination of relevant policy work.

(ii) Strengthening the Government’s oversight capacity for state-owned financial institutions and programs

The project will help the Government to strengthen the role of the state as an owner by building the capacity of PERMU to better evaluate, monitor, and communicate the objectives of state ownership in the financial sector. Through collaboration between PERMU and the Department of Statutory Corporations, which handles administrative matters related to the appointment of members of the boards of directors of SOEs, the project will also encourage the introduction of sound corporate governance practices in SOEs. PERMU is a three person unit within the MoF responsible for the oversight of key public commercial enterprises (including SFIs) with the view to ensuring that they perform according to Government expectations. In addition, PERMU has been in charge of leading most Government initiatives in the financial sector, such as the establishment of the development bank. Specific activities proposed for this activity include:

• Review of SOEs corporate governance guidelines . The project will engage a short-term international consultant to review and benchmark (in line with international practices) the

SOEs guidelines being developed by the Institute of Directors (IoD) and the Society of Accountants of Malawi (SOCAM). The consultant will also act as a resource person during dissemination/validation workshops. • Development of an ownership policy and other guidelines . An international expert will be retained (for approx. 90 days) to facilitate the development of an ownership policy. The expert will also assist in the development of other relevant guidelines (e.g., guidelines on planning and reporting, accountability, communication and disclosure, audit, etc). • Staff capacity building , including specialized training in core areas of corporate governance and study tours to countries with strong state ownership entities. For this end, PERMU will develop a training plan. • Workshops for the dissemination and validation of new corporate governance guidelines, ownership policy, and other guidelines. These workshops will bring together executives of SFIs/SOEs and senior Government officials. Where appropriate, the general public will also participate. • Publications, including printing of the ownership policy, annual report, and the design of PERMU’s website.

(iii) Policy, legal, and regulatory framework for long term finance

Aiming at supporting the development of long-term finance in Malawi the project will support the establishment of a policy framework and a legal and institutional infrastructure which facilitate the provision of long-term finance. The policy framework will 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 will support the following consultancy services:

• Preparation of a long-term finance policy and regulatory framework and implementation support. This will entail the following: reviewing the current environment, including the demand and supply of long-term finance, market gaps, legal and regulatory framework; setting high level policy objectives and priorities for long-term finance; defining roles and responsibilities of various institutions; proposing legal and regulatory changes; and drafting a long-term finance policy paper for consideration/adoption by the Government. • Cost-benefit study of lengthening the maturity of Government debt . The lengthening of the maturity would support the development of a sovereign bond market, help the Government to mobilize funding for its infrastructure development agenda, offer long-term investment opportunities for pension funds, insurance companies, and even banks, and provide a benchmark yield curve for the development of private debt securities market. However, lengthening the maturity involves risks, including higher borrowing costs for the Government in the short-run. Indeed, a joint study by the World Bank and the IMF cautioned against a “significant lengthening” of maturities before the stock of debt is brought down. The assessment will weigh the costs and benefits of lengthening the maturity, identify capacity building needs, and, if appropriate, support the development of procedures and strategy to issue long-term Government debt and support implementation.

• Institutional review of the operations and the investment policies of pension funds and life insurance companies. The review will assess the current regulatory framework; deepen MoF’s understanding about the operations and investment policies of these key institutional investors, assess their market appetite for long-term government securities, and identify their capacity building needs. • 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) . The objective of the assessment will be to identify the impediments for capital market development with focus on the regulatory framework, market infrastructure (MSE, clearance and settlement), and investor base. This will involve the review of the MSE’s recent performance (including listings and trading in equities and bonds), its corporate governance, trading and listing systems/rules; and other relevant dimensions for improving its depth, diversity, and liquidly. • Establishment of a framework for leasing. This will include a review of the sector (legal/regulatory/tax environment, market players, size, funding, etc) and issuance of practical recommendations (legal/regulatory framework, capacity building needs, intuitional coordination, incentives, etc) for strengthening the sector, particularly stimulating competition. • Feasibility study for establishing a development bank . The study will define the parameters (public policy mandate, governance, funding, business model, regulatory framework, human resources, delivery mechanisms, monitoring, etc) within which the bank will be able to operate in an efficient and sustainable manner, and as complement to private sector lending. The study will include drafting a business plan. • Diagnostic study examining the pros and cons and the applicability of long term finance guarantee scheme. The study will assess the demand for a commercially viable, professionally and independently managed risk sharing scheme. In addition, it will assess private sector interest to invest in such a scheme and explore various options pertaining to funding, structure, management arrangements, business model (e.g. pricing) eligibility criteria for participating financial institutions, and regulatory framework.

The FSPU will coordinate the implementation of the activities above, some of which are part of its core functions. However ultimate beneficiaries will vary depending on the activity concerned.

Component 5: Implementation Support (US$3.26 million)

62. This component will support the implementation of the project by financing the establishment of a Project Implementation Unit (PIU) at the RBM, the latter being the responsible implementing institution for the project under the supervision of an oversight committee chaired by the MoF. More specifically this component will fund the following activities: (i) provision of a procurement specialist, financial management specialist, M&E specialist, project manager and support staff (secretary and driver); (ii) operational costs and

41 goods necessary for project implementation support; and, (iii) auditing actions, which will be carried out annually by independent external auditors.

63. This component will also finance the consultancy costs for administering a five-year multi-donor funded Malawi Financial Sector Deepening Trust (MFSDT) in which funds will finance innovative solutions to addressing access to finance constraints. The MFSDT will be financed through grants by development partners (initially DFID and USAID). The government’s contribution to that Trust Fund through this IDA project will be to meet the consultancy costs associated with administering the Trust Fund including the costs of procurement specialist financial management specialist, M&E specialist, a project manager and support staff.

In an effort to align the financial sector in Malawi with the nature and needs of the economy, the MFSDT will be established with the aim of supporting the development of financial markets in Malawi as a means to stimulate wealth creation and reduce poverty. Working in partnership with the financial services industry (banks and non-bank financial service providers including MFIs, SACCOs, and community based savings and credit groups), the aim of the Trust will be to significantly expand access to financial services among lower income households and smaller scale enterprises in both urban and rural areas of Malawi.

The Trust will operate as a legally independent Trust under the supervision of professional trustees, with policy guidance from a program investment committee (comprised of representatives of donors and the Government). It will be financed through a combination of basket and earmarked funds funded with grants from development partners and an IDA-financed contribution from the Government earmarked solely for the consultancy costs associated with its management.

Proposed activities of the MFSDT will focus on the macro and meso level but with some limited interventions at the micro level. The macro level covers sector-wide issues such as policy, legislation, regulation, and financial sector data-gathering including FINSCOPE and supply-side studies. The meso-level is the enabling environment, including such issues as supervision, financial sector infrastructure (Credit Reference etc) and capacity building, including human resources development; and, at the micro-level are the institutions that actually provide financial services – banks, MFIs, SACCOs, village savings and loan associations (VSLAs), and mobile telephone companies. See Annex 7 for details on the proposed MFSDT.

Annex 3: Implementation Arrangements

I. Project Administration Mechanism:

Oversight of project implementation will be provided by the Project Steering Committee (PSC) chaired by the Secretary to the Treasury at the Ministry of Finance. The Project Steering Committee has been established to provide policy guidance and inter-agency coordination for the project and will be responsible for overall project implementation and achievement of the project’s development objectives. The committee will meet every six months or when a situation so requires. This committee comprises high level public and private sector representatives from the project beneficiaries and industry associations. Specifically, the committee includes the:

• Ministry of Finance, Secretary to the Treasury (Chair) • Ministry of Industry and Trade, Principal Secretary • Ministry of Development Planning and Cooperation, Principal Secretary • Reserve Bank of Malawi, Deputy Governor – Supervision • Reserve Bank of Malawi, Deputy Governor –Economic Services • Economics Association of Malawi • Financial Market Dealers Association, President • Banking Association of Malawi, President • Insurance Association of Malawi, President • Malawi Chamber of Commerce and Industry, President • Microfinance Network, President • FSTAP Project Manager (Secretary)

A Technical Working Group (TWG) will manage and lead the implementation of the project. The TWG will be chaired by the Project Coordinator and comprise the Directors of the beneficiary departments at the RBM and MoF. Specifically, the TWG includes the following:

Financial Sector Technical Assistance Project • Project Manager (Chair)

Ministry of Finance • Economic Affairs, Director • Debt and Aid Management, Director • Public Enterprise Reform and Monitoring, Director

Reserve Bank of Malawi • Banking Supervision Department, Director • Microfinance and Capital Markets Supervision Department, Director • Pensions and Insurance Supervision Department, Director • Research and Statistics, Director • National Payment System, Director • Administration, Director • Accounting and Finance, Director

The TWG will: (i) discuss the technical and operational activities for the project; (ii) review and discuss quarterly progress reports prepared by the Project Manager; and, (iii) proactively address any technical or implementation problems affecting project progress. The TWG will at a minimum be meeting on a quarterly basis to review the progress of the project and agree on next steps but may meet as and when required to deal with technical issues. Furthermore, prior to the TWG meeting, members will be required to prepare quarterly reports on the progress of their respective departments towards meeting project objectives that will be consolidated by the project office into a report and be discussed at a quarterly. Once agreed at the TWG, the report will be discussed with the Governor and a copy will be sent to IDA and other development partners.

The implementation of the project will be led by a Project Implementation Unit that will be located at the RBM. The PIU will be headed by the Project Coordinator who will report to the Governor of the RBM. The PIU will also include a procurement specialist, a financial management team, a Monitoring and Evaluation Specialist, technical specialists (such as a financial sector advisor), and an executive assistant. The PIU will be responsible for providing guidance to beneficiaries regarding procurement, as well as monitoring and evaluation, and will provide advice on the overall thrust of financial sector reforms and cross-cutting issues.

Details of the implementation arrangements have been agreed and are elaborated in the PIM. Institutional responsibilities for coordinating and managing the project on a daily basis, providing procurement and accounting services and ensuring that all fiduciary requirements are met, will be delegated to the PIU. The capacity of the PIU will be reinforced with specialized training and additional staff (as needed) to ensure that it has the necessary skills to implement a program involving many development partners. By building capacity in the PIU, the team will be able to provide qualified fiduciary services (procurement, financial management, monitoring and evaluation and reporting).

In particular, the PIU will be responsible for: (i) reviewing project implementation proposals prepared by the beneficiary institutions; (ii) undertaking quality control for TORS once a project implementation proposal has been agreed; (iii) overseeing project implementation activities; (iv) administering project funding and procurement processing (including the employment of consultants) and managing the project and special accounts; (v) following-up on the agreed financial and legal covenants; (vi) proposing any necessary adjustments and amendments to implementation methods; (vii) providing periodic project progress reports; and, (viii) acting as the focal point of contacts between the Government, the beneficiaries and IDA and other funding donors during the project implementation period. The PIU is the unit for the implementation of Component 5.

The Project Coordinator will have the authority to bring beneficiaries together in a collaborative manner, and should therefore understand the financial sector reform process. He/she will be supported by a financial sector specialist who will be capable of assessing project priorities and needs and guide project implementation as and when required.

Implementation arrangements have been designed to delegate the maximum feasible operational responsibility to the beneficiary institutions or departments. Beneficiary agencies will be largely responsible for implementation of their respective components, under the overall guidance of the PIU and the TWG.

Each beneficiary agency will be responsible for the preparation of TORS for consultants, including the scope of work, the expected main deliverables, and the required qualifications and experience. The beneficiary will also provide technical specifications for procurement of goods. All beneficiary agencies will report to the PIU on a quarterly basis, including any modifications to procurement and/or training plans. The procurement specialist will work with beneficiaries and the Procurement Manager of RBM’s Tendering Committee to ensure that all of the World Bank Guidelines for procurement of goods and consultant services are followed; and to manage the internal review and clearance processes of the RBM. The procurement specialist will also prepare communications from the PIU Manager to the World Bank regarding the evaluations of procurement proposals. The PIU will liaise closely with the various beneficiaries within the MoF and RBM to ensure that project activities will be handled effectively, in a timely fashion, and in accordance with World Bank requirements, as well as that adequate information is provided for reporting purposes. It will monitor project implementation on a quarterly basis, review achievements, work programs and budgets. The PIU will be responsible for all aspects of financial management, including budgeting and auditing, procurement, quality assurance, monitoring and evaluation and reporting, etc.

It has been agreed that the staff of the Business Environment Strengthening Technical Assistance Project (BESTAP) Project Implementation Unit (PIU) will undertake the fiduciary responsibilities of FSTAP project until such a time that the FSTAP PIU staff have been hired and deemed ready. It is planned that no later than December 31, 2011, the FSTAP PIU will be established and operational, and the responsibilities carried out by the BESTAP PIU efficiently transferred to the FSTAP PIU. A procurement and financial assessment of the PIU will be carried out by the World Bank before the PIU can be operationalized and fiduciary responsibilities can be transferred from the BESTAP PIU to the PIU. The activities to be undertaken by the BESTAP PIU include the activities listed in the approved PPA, and those included in the FSTAP procurement plan for which the FSTAP PIU does not have the capacity to undertake. As PIU staff for the FSTAP project is hired, they will be assigned to the BESTAP PIU for orientation and hands on training until the FSTAP PIU is deemed ready to assume its offices and responsibilities.

The PIU will also be strengthened on a continuous basis through appropriate training. As needed, short-term national or international specialists to assist in the implementation of its work program will be contracted. At project closing, it is expected that the PIU would cease to exist, unless the Government decides to use the established capacity to implement a yet undefined project funded by IDA or another donor.

II. Financial Management and Disbursement Arrangements

Financial Management and Disbursement

The project will be implemented by the RBM under the supervision of the MoF. The RBM, in agreement with the Accountant General, will open a Designated Account in US Dollars and a Holding Account in Malawi Kwacha at the RBM. In addition to these, the RBM will open a project specific Operating Account in Malawi Kwacha at a qualifying commercial bank. The RBM will furnish to the World Bank quarterly unaudited interim financial reports (IFRs) not later than 45 days after the end of the quarter in form and substance satisfactory to the Bank. The RBM will submit to the Bank annual audited financial statements of the project no later than six months after the end of RBM’s fiscal year (31st December). The audit report will be accompanied by a management letter detailing the external auditor’s findings together with management responses.

Financial Management Risk Assessment and Mitigation: Financial Management arrangements for the (FSTAP) have been assessed as moderate after performing a review of the RBM’s financial management systems. The assessment included interviews with the Director of Accounting, the Management Accountant, the Head of Internal Audit, the Head of Risk Management, and the Human Resources Director among others.

Risk 9 Risk Mitigating Measures Residual Risk Rating Incorporated into Project Design Risk Inherent Risks 1 Country Level: Malawi S S Lack of capacity to implement, account Government is strengthening systems at all for and report on expenditures at all levels, including roll out of IFMIS and levels. To date International recruitment of key fiduciary staff. Accounting and International Auditing standards are yet to be adopted fully. 2 Entity Level. While the GL project is running, FM Technical S RBM has embarked on a General Assistance will be provided by the project. Ledger (GL) project to change the H There is a proposal to create an FSTAP Project accounting system. This will keep most Management Team. Also, Training on FM and of the FM staff busy and they will have Disbursement will be provided to the RBM’s limited time to dedicate to the FSTAP. Accounting staff. Also RBM has no experience implementing a World Bank funded project 3 Project Level L There are no major risks at this level L

Control Risks 4 Budgeting S The Budget will be activity based and the RBM M will be assisted by an experienced consultant in Budgeting will be driven by the work coming up with the first year’s budget. The plans and limited to funds available. budget will be agreed with the Bank and senior While RBM has a robust budgeting RBM Officials system it does not have experience in implementing WB funded projects. 5 The current MIDAS is more of a S Until the new system is place and has been S banking system than an accounting tested, the FSTAP FM will be done on Excel system. Spreadsheets 6 Internal Control and Internal Audit L RBM will need to open asset registers in L

9 H: High, S: substantial, M: Moderate, L: Low 46

Risk 9 Risk Mitigating Measures Residual Risk Rating Incorporated into Project Design Risk The RBM Internal Controls and addition to the other controls like Internal Internal Audit will be used for the Audit, segregation of duties and accounts Project reconciliations. 7 Funds Flow L L Since all the Accounts will be at RBM, there is no major risk associated with flow of funds 8 Financial S The IFR format will be agreed with RBM and M Reporting staff will be shown how to fill it out. There will be close follow up by the Bank. Prior to While this is not the case at the submission of the first three IFRs, quarterly moment, delayed IFRs or low quality meetings will be held between the Bank project IFRs are a potential risk team and the RBM to ensure that the IFRs indeed reflect the activities of the project adequately. 9 Auditing L The Audit TORs will be agreed with the Bank. L RBM itself has more stringent Audit The timing for the TORs, financial statements Report deadlines will be closely followed up to ensure deadlines are not missed. Overall FM Risk Rating S The overall FM risk is considered Substantial M but mitigated to Moderate. Residual Risk = Moderate

Strengths: The major strength of the RBM is that it is a central bank with established rules and internal controls expected of such an institution. Further, the temporary use of the (BESTAP) Project Implementation Unit (PIU) for carrying out fiduciary functions such as financial management and procurement until the FSTAP PIU staff are in place will ensure that the project starts with sound policies, procedures and practices in place.

Weakness and Action Plan: The assessed weakness of the RBM as an implementing agency is that it does not have experience implementing a World Bank funded project. As such, it is recommended that Accounting staff of the RBM attend a Financial Management and Disbursement Course on World Bank funded projects, and plan for follow-up training during the course of project implementation. The other weakness is that RBM is in the process of changing its accounting platform. The GL project, as it is called, requires the time of most of the key FM staff. It is therefore proposed that FM Technical Assistance be brought in until RBM staff is ready to dedicate time to the FSTAP.

Weakness Action Responsibility Deadline Lack of Experience in Train FM Staff in FM and Director of Human 31 March Accounting and reporting on a Disbursement in World Bank Resources 2011 Bank funded project Funded Projects RBM staff are busy with the GL Bring in FM Technical RBM Project Coordinator 31 March Project Assistance and WB Task Team Leader 2011

Implementing Entity: RBM will be the implementing entity for FSTAP with regard to financial management of the project. It is the central bank for Malawi. The RBM does not have prior experience with Bank-financed projects. Capacity building for project implementation, financial management and procurement functions will be funded by the PPA based on a capacity

assessment conducted early on during appraisal. At this stage it has been agreed that a project support team will be formed within the RBM and specialist personnel (e.g. a project coordinator, procurement specialist and an FM Specialist) may be provided as technical assistance to assist with project implementation and coordination with various stakeholders. Importantly, while the RBM is setting up the PIU, the project will use the BESTAP PIU in the interim to complete project preparation activities and commence the implementation of project component.

Budgeting: The RBM budget will be done within the central bank systems. The RBM will be assisted by an experienced consultant to come up with an Activity Based Budget. Thereafter budget will be implemented and controlled using RBM systems. The project budget will be included in the RBM budget as a single line of income as well as a single line of expenditure.

Accounting: The RBM will account for and report on funds using Excel Based spreadsheets on a cash basis. At the moment RBM needs to decide whether the FSTAP chart of Accounts will be within the main RBM’s chart of accounts or it will be a stand alone. Whatever the case, RBM will open FSTAP files for maintenance of project records. This will be done outside the central bank’s MIDAS system. The project will be accounted for on a cash basis but registers will be kept to track liabilities and assets. The RBM has adequate number of qualified accounting personnel for the purposes of the project but their time is limited for project preparation and probably the initial phase of project implementation because they have the GL project. All they require at the moment is Technical Assistance and training on World Bank financial reporting and disbursements. Considering that this project will be managed within RBM and for five years, it is proposed that the Director of Accounting ensure there is a pool of not less than 4 accounting staff familiar with the project accounts and the World Bank Guidelines for project financial management.

Internal Control and Internal Audit: In terms of authorizations, the RBM regulations will apply. The project will do quarterly Bank reconciliations which will be done and checked by separate persons by the RBM internal control department. An asset register will be maintained for the project.

RBM has a qualified and experienced Internal Audit Team. It has been agreed that the Internal Audit will at least once during every year but well before the external audit, conduct an internal audit of the project and the resultant report will be shared with the World Bank.

Funds Flow: A Designated Account in US Dollars and a Holding Account in Malawi Kwacha will be opened at the Reserve Bank of Malawi with the authorization of the Accountant General. An operating account will also be opened at a qualifying commercial bank. The expenditures will be effected through the Operating Account on reimbursement basis from the Holding account. The first advance will be released to the Designated Account on the basis of work plans agreed between the RBM and the World Bank and in accordance with the Disbursement Letter. The next advances will be provided on the basis of Interim unaudited Financial Reports (IFRs)

Disbursement

Method : Reimbursements, Advances, Direct Payments and Special Commitments as per disbursement guidelines. Eligible expenditures are documented through quarterly IFRs.

Disbursement Letter : The Bank will issue a disbursement letter as part of the Financing Agreement with the recipient. The disbursement letter will set out and summarize all disbursement arrangements and procedures under the project. The letter will have as attachments: The World Bank Disbursement Guidelines for Projects; dated May 1, 2006, sample of form 2380; sample of form to advise IDA of Authorized Signatories and their specimen signatures.

Reporting: The RBM will be responsible for submitting quarterly unaudited Interim Financial Reports no later than 45 days after the end of the accounting quarter. The IFR, to be agreed with the Bank will comprise a financial report on the source and use of funds in summary as well as in detailed expenditures by component for the quarter and cumulative since the project began and a detailed reconciliation of the Designated Account clearly showing opening and closing cash balances.

Annually, the, RBM will produce audited financial statements which will be submitted to the Bank no later than 6 months after the end of the end of the financial year.

External Audit: The Auditor General’s office in accordance with agreed Terms of Reference will be responsible for overseeing these activities. However, given resources constraints, the office may delegate this activity to commercial audit firms on a consultancy basis. The auditor will be required to express a single opinion on whether the financial statements show a true and fair view of the project’s transactions in accordance with accounting standards applied by the Society of Accountants of Malawi. In addition to the opinion, the auditor will be required to submit a management letter giving observations and comments. The RBM will submit both the audited financial statements and the management letter together with management responses to IDA no later than 6 months after the end of the financial year. The project will cover all reasonable costs related to the audits.

Taxation: The Credit will pay all reasonable taxes in terms of the legislation in Malawi i.e. the financing is 100percent inclusive of taxes. Equally, the project will deduct on behalf of the Governments all applicable withholding taxes from payments to the project’s suppliers and consultants. The project may opt to pay withholding tax on behalf of a foreign supplier or consultant but this arrangement must be clearly provided in procurement documents and taken into account at the time of evaluating suppliers’ or consultants’ bids.

Implementation Support Plan: The overall risk has been assessed as Moderate. There will be two formal supervision missions of one week each. In addition, there will be desk reviews and meetings with project FM staff.

Financial Covenants

Maintain adequate financial management system and records; prepare financial statements of operations, resources and expenditures of the project. Submit to the Bank audited financial statements not later than 6 months after the end of the project. Furnish unaudited interim financial reports (IFRs) no later than 45 days after the end of each accounting quarter.

III. Procurement

Procurement under the Project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004, revised October 2006 and May 2010; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers' dated May 2004 revised October 2006, May 2010, and the provisions stipulated in the Financing Agreement. National Competitive Bidding (NCB) will be in accordance with the Malawi Public Procurement Act which has been reviewed and found satisfactory to the Bank subject to exceptions as defined under NCB procedures. For each contract to be financed under the FA, the various procurement or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame will be agreed between the Borrower and the Bank in the Procurement Plan (PP). The PP will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Methods of Procurement

International Competitive Bidding (ICB). All procurement above the thresholds specified for NCB shall be conducted using ICB as set forth in Section II of the Guidelines for Procurement under IBRD Loans and IDA Credits (the Guidelines) of May 2004, revised October 2006 and May 2010. For ICB, the RBM may apply national preference in accordance with the Guidelines. Use of Bank standard bidding documents shall be mandatory.

Limited International Competitive Bidding: Limited International Bidding (LIB) is essentially ICB by direct invitation without open advertisement. Under the proposed Project, RBM may use LIB on agreement with the Bank under circumstances where (a) there is only a limited number of suppliers, or (b) other exceptional reasons may justify departure from full ICB procedures. Under LIB, borrower shall seek bids from a list of potential suppliers broad enough to assure competitive prices, such list to include all suppliers when there are only a limited number. Domestic preferences will not applicable in the evaluation of bids under LIB

National Competitive Bidding (NCB). NCB procedures will apply to contracts for goods estimated to cost less than the equivalent of US$500,000 for goods respectively. NCB will be carried out in accordance with the Malawi Procurement Act No. 8 of 2003. The following additional provisions shall apply under NCB procedures: (i) an explicit statement to bidders of the evaluation criteria shall be included in the bidding documents; (ii) award shall be to the lowest evaluated responsive and qualified bidder; (iii) “bracketing” or rejection of bids outside a range or “bracket” of bid values shall not be permitted; (iv) foreign bidders would not be

50 precluded for participation in National Competitive Bidding (v) Provisions of Article 164 (i) and (j), Article 80.3 and Article 80.4 (ii) of the National Procurement Regulations will not apply and (vi) artificial division of lots into small quantities or slicing of packages and set aside for small and medium enterprises will not be used.

Shopping: Shopping is a procurement method based on comparing price quotations obtained from several suppliers. A minimum of three suppliers shall be considered to assure competitive prices, and is an appropriate method for procuring non-routine readily available off-the-shelf goods or standard specification commodities or non-consulting services. Requests for quotations shall indicate the description and quantity of the goods or specifications of non-consulting services, deadline for submission of quotations, as well as desired delivery (or completion) time and place. Quotations should be submitted in sealed envelopes within the deadline and be opened by the Borrower at the same time. The evaluation of quotations shall follow the same principles as NCB. The terms of the accepted offer shall be incorporated in a purchase order or brief contract.

Direct contracting for goods: Direct contracting is contracting without competition (single source) and may be an appropriate method under the following circumstances: (i) An existing contract for goods or works, awarded in accordance with procedures acceptable to the Bank, may be extended for additional goods or works of a similar nature. The Bank shall be satisfied in such cases that no advantage could be obtained by further competition and that the prices on the extended contract are reasonable. Provisions for such an extension, if considered likely in advance, shall be included in the original contract.

(ii) Standardization of equipment or spare parts, to be compatible with existing equipment, may justify additional purchases from the original Supplier. For such purchases to be justified, the original equipment shall be suitable, the number of new items shall generally be less than the existing number, the price shall be reasonable, and the advantages of another make or source of equipment shall have been considered and rejected on grounds acceptable to the Bank.

(iii) The required equipment is proprietary and obtainable only from one source. (iv) The Contractor responsible for a process design requires the purchase of critical items from a particular Supplier as a condition of a performance guarantee.

(v) In exceptional cases, such as in response to natural disaster.

Procurement of non-consulting services . Non- consulting services are services that are not of intellectual or advisory in nature. Non-consulting services under this project will include freight and clearing services, airing of IEC messages and internet service. The procurement of non- consulting services shall be as per provisions specified above for the procurement of goods and works.

Selection of Consultants : Consulting services under the Project will include consultants for regulatory and legislative services. Except as detailed below, consulting services will be selected through competition among qualified short-listed firms based on Quality and Cost-Based Selection (QCBS). Consultants for financial audits and other repetitive services estimated to cost 51 less than US$50,000 equivalent per contract may be selected through Least Cost Selection (LCS) method. Consulting services by firms estimated to cost less than US$200,000 equivalent may be selected on the basis of Selection Based on Consultant Selection (CQS). As appropriate, other selection methods such as Fixed-Budget Selection (FBS), Quality Based Selection (QBS) may be used for selection of consulting firms. Individual consultants shall be selected on the basis of Individual Consultant Selection method (IC) as per Section V of the Consultant Guidelines.

Single Source of consultants : Single-source selection may be appropriate only if it presents a clear advantage over competition: (i) for tasks that represent a natural continuation of previous work carried out by the firm, (ii) in emergency cases, such as in response to disasters and for consulting services required during the period of time immediately following the emergency, (iii) for very small assignments, or (iv) when only one firm is qualified or has experience of exceptional worth for the assignment.

Training. The Reserve Bank of Malawi will formulate an annual training plan and budget which will be submitted to the Bank for its prior review and approval. The annual training plan will, inter alia, identify: (i) the training envisaged; (ii) the justification for the training, how it will lead to effective performance and implementation of the operation and or sector (iii) the personnel to be trained; (iv) the selection methods of institutions or individuals conducting such training; (v) the institutions which will conduct training, if already selected; (vi) the duration of proposed training; and (vii) the cost estimate of the training. Report by the trainee upon completion of training would be mandatory.

Short lists of consultants. Short-list of consultants for services estimated to cost less than US$200,000 equivalent per contract, may be comprised entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

Operating Costs. Operating costs will be procured using the Reserve Bank of Malawi administrative procedures which were reviewed and found acceptable to the Bank. Operating cost will not include salaries or top up salaries of Reserve Bank staff.

Capacity of Reserve Bank of Malawi: Procurement under the Project will be carried out by the Reserve Bank of Malawi. The capacity of Reserve Bank was assessed by the Bank in November 2010. The Reserve Bank of Malawi was established under Laws of Malawi Chapter 44:02 and is governed by the Reserve Bank Act of 1989 and it operates as an independent institution. The RBM has an Internal Procurement Committee referred to as Tendering Committee which is chaired by an appointee of the Governor. The current arrangements are that the Director, Financial Markets is the Chairperson of the Tendering Committee which has the responsibility for procurement oversight functions and the Procurement section is the secretariat to the Tendering Committee. Other members of the Tendering Committee include Director Administration, Director, Finance and Accounting and Director, Branch Management-Blantyre. The Procurement Manager is the Secretary. The Procurement Section has an establishment of five posts, comprising one Procurement Manager (Grade 12), one Procurement Supervisor (Grade10) and three Procurement Assistants all of which are filled. The Procurement Manager serves as Head of the Section and reports to the Director of Administration the Procurement Manager has a MBA in Strategic Management, Bachelor of Arts in Public Administration and a

Post Graduate Diploma in Banking Studies. . He was appointed to head the section from the human resources department where he had been working his entire career in the Reserve Bank. His knowledge and experience, in the use World Bank guidelines and procedures is limited. The assessment identified three mitigation measures (i) Recruitment of consultant procurement specialist (ii) preparation of procurement plan to identify packages, methods of procurement and their attendant procedures and (iii) training of staff.

The RBM’s Procurement Manager will be assisted by a Procurement Specialist at the PIU to manage the process of internal review and clearance of project procurement documents in accordance with RBM’s internal procedures and under the leadership of the Tendering Committee.

Based on the assessment, the capacity of RBM has been established as Moderate and risk Medium (see Risks Annex). Based on the initial assessment, the following prior review thresholds are proposed: RBM shall seek World Bank prior review in accordance with Appendix 1 of both Procurement and Consultant Guidelines for contracts above the thresholds as agreed in the procurement plan. For purposes of the initial procurement plan the Borrower shall seek Bank prior review for (i) all goods contract estimated to cost USD500, 000 equivalent or more (ii) all consultancy contracts with firms estimated to cost USD200, 000 equivalent or more and (iii) all contracts with individual consultants estimated to cost USD100, 000 equivalent or more and (iv) all direct contracting and single source selection estimated to cost USD1, 000 equivalent and above (v) annual training plan. These prior review thresholds will be reviewed annually and any revisions based on reassessment of the implementing agencies capacity will be agreed with the RBM in an updated Procurement Plan. All other contracts will be post reviewed during annual procurement post review missions

Procurement Supervision and Support : Procurement will be supported through prior and post reviews and missions. A Procurement Specialist based in the Malawi Country Office will provide the procurement support and join the Bank task team supervision mission twice a year. Post reviews will be done once a year covering 20percent of post review contracts as will be defined in the procurement plan

Environmental and Social (including safeguards)

Environmental Category : C - Not Required

The Project is a technical assistance plus banking systems investment operation in Malawi’s financial sector, and would finance consultants, equipment and training. No safeguard related risks have been identified based on available information.

Safeguard Policies Triggered by the Project Yes No TBD Environmental Assessment (OP /BP 4.01) X Natural Habitats ( OP /BP 4.04) X Pest Management ( OP 4.09 ) X Physical Cultural Resources (OP/BP 4.11) X Involuntary Resettlement ( OP /BP 4.12) X Indigenous Peoples ( OP/BP 4.10) X Forests ( OP /BP 4.36) X Safety of Dams ( OP /BP 4.37) X Projects in Disputed Areas ( OP /BP 7.60) * X Projects on International Waterways ( OP /BP 7.50) X

IV. Monitoring & Evaluation

The Project will be guided by a comprehensive results framework as agreed with the IDA and other development partners’ (see Annex 3). The IDA-financed project is only one facet of a broad program of financial sector reforms in Malawi. As such, Annex 3 was separated into two parts: Annexes 3(a) and 3(b) provide the results framework for the IDA-financed operation. Annex 3(c) provides a comprehensive mapping of the financial sector reform programs being undertaken by all development partners in Malawi. For the ICR, implementation of the IDA- financed project would be assessed on it s own merit. For the majority of the outcome and results indicators for individual components, adequate baselines and targets were established at project inception. For some indicators as specified in Annex 3, the baseline will be established and targets agreed within the first year of project implementation. It is anticipated that Annex 3(c) will be continue to be periodically discussed and revised with the development partners as the program is implemented.

Monitoring and evaluation of project activities is a key function of project management that will be carried out by the PIU on a regular basis. A quarterly monitoring table and progress reports will be prepared by the PIU, for review. These reports will assess achievements against the Project Implementation Plan (PIP), a Financial Management Plan (FMP) and overall Procurement Plan that will be prepared and incorporated into the Project Implementation Manual (PIM) prior to negotiation. The PIU will be responsible for updating the PIP on an annual basis, taking into account experiences and the strategic focus of the project. The PIM includes, among others, guidelines on all period reporting, and monitoring arrangements. The Mid-Term Review (MTR) of the IDA-operation will be 30 months into the project and will include an update of the FSAP (subject to agreement with Government) that will assess progress in the reform program and provide the basis to make changes in the project. An ICR will be undertaken six months after the closing of the project.

For the financial consumer awareness programs under Component 3, an impact evaluation will be conducted to inform the MTR about the effectiveness of these initiatives. Before and after the interventions, surveys will be commissioned to capture information through time on a set of outcomes of interest for both participants in the programs and a similar group of non- participants.

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas 54

V. Role of Partners

As discussed in Section III of the main text and the relative paragraphs on Component 5 in Annex 2, the proposed project will support the management of a multi-donor Malawi Financial Sector Deepening Trust (MFSDT) in which USAID and DFID funds will be pooled for supporting commonly agreed development objectives and activities for effecting financial deepening in Malawi, alongside the FSTAP project to be financed and supervised by the World Bank. It is estimated that USAID and DFID will contribute to the MFSDT respectively $10,000,000 and $7,000,000. The organizational structure for the oversight and operation of the trust fund will be developed later. The project’s Steering Committee and the Technical Working Group will coordinate the technical issues and actions with the trust fund management and oversight functions with Bank team’s assistance. The trust fund and the project are seen as mutually complementary to support extension of access to finance in Malawi.

Annex 4: Operational Risk Assessment Framework (ORAF)

Negotiations and Board Package Version

Project Development Objective(s)

The Project Development Objective is to increase access to finance for the currently unbanked, but bankable, population of Malawi.

PDO Level Results 1. Increase in the percentage of the adult population that use formal financial institutions Indicators: 2. Increase in the proportion of women within the adult population that is formally banked

Risk Category Risk Risk Description Proposed Mitigation Measures Rating Project Stakeholder Local financial institutions and private Meeting with the Bankers Association Risks sector investors might be reluctant to during project preparation, the team accept and/or lack of capacity to use the confirmed the interest of the private sector in new delivery channels of banking products new delivery channels. High and financial services to be Impact/Low developed/supported under the Project. During project implementation, training, Likelihood workshops and public awareness campaigns (MI) will be used to disseminate knowledge and advocate the benefits of the new delivery channels for financial deepening.

Implementing Agency High Limited resources and lack of the systems The Government has designated the Risks Impact/High and processes that are in line with Bank BESTAP project’s fiduciary function to act Likelihood guidelines for procurement and financial as the PIU for the FSTAP project until the (High) management could cause delays in project latter becomes effective.

implementation. The following features have been built into Staff skills and organizational knowledge the project implementation arrangement: a) of the RBM for project preparation and establishment of a PIU with TORs for main implementation are limited. positions (including those for procurement and financial management) acceptable to the Bank; and b) Training on Bank guidelines for key RBM staff who will work on the project.

Potential lack of collaboration and Discussions during the preparation of the coordination between the RBM and the project have confirmed the support and MoF. eagerness of the RBM for the MoF to take on its natural policy leadership role in the sector. Further, both MoF and RBM are represented on both the Steering and Technical Commitees established to facilitate collaboration and coordination. Project Risks

• Design The scope and coverage of the Project is The downside of the broad scope of the complex considering the lack of project is mitigated in design as follows: a) experience and weak institutional capacity An oversight structure of the Project of implementing agencies in this type of involving main stakeholders; b) Support to High projects. RBM’s PIU in project management; and c) Impact/Low The planned advisory services to be Likelihood provided under the Project are expected to (MI) bring in international experience and train managers and staff on the broad spectrum of subjects covered.

• Social and n.a. n.a. n.a.

Environmental

• Program and The effectiveness of the financial systems During project implementation, the use of Donor to be acquired under the Project could be the agreed coordination mechanisms among weakened if other donors supporting the donors will be closely supervised. development of related policies and High regulations fail to deliver on time good Impact/Low outputs. Likelihood (MI) The disbursement of the IDA allocation for the management of the MFSDT could be delayed if it takes a long time to establish the trust fund.

• Delivery Quality Limited capacity and resources might lead See the above listed mitigation measures for to discontinuation of the change process, capacity building and change management weak enforcement of the new policies and during project implementation. regulations, and/or low sustainability of High the results of the Project. During project implementation, consultant Impact/High support and training on the use of the results Likelihood Lack of capacity of the implementing framework for project M&E will be (High) agencies’ staff in monitoring and provided. measuring project implementation and contract management could cause delays in project implementation.

Annex 5: Implementation Support Plan

Implementation support strategy: Based on the current risk assessment of the Project, Bank support to project implementation aims to assist the Project Steering Committee and the Technical Working Group to develop the technical expertise and implementation capacity in the identification, communication and resolution of main policy/institutional/procurement/financial management issues under project implementation; in order to mitigate the identified high risks of design risk and a similar level of implementing agency capacity risk. The objective of the strategy is to ensure that a) adequate progress including that under various consulting and goods contracts has been made towards the achievement of the intermediate results and the PDO indicators; b) implementation activities are in line with the agreed-upon project implementation plans; and c) strong financial and procurement management systems are maintained for the Project throughout its life. A supervision mission will be conducted at least once every year by a Bank task team composed of technical specialists.

Implementation Support Plan : The following is the initial Implementation Support Plan which will be updated on an annual basis. The main focus in terms of support to implementation during:

Time Focus Skills Needed Resource Partner Role Estimate First 18 (i) Adequate staffing • Financial sector US$200,000 World Bank months and functioning of regulation and PIU supervision (ii) Opening and specialists maintenance of the • RTGS payments Project’s accounts systems (iii)Preparation of specialists TORs, RFPs and • Financial Bidding consumer Documents for the protection packages under the specialists First 18 Months • Government role Procurement Plan in corporate (iv) Development and governance of adoption of state-owned FIs appropriate specialists training plans • Project under each management Component specialist (v) Training of RBM • Procurement staff in Bank specialist Guidelines for • Financial procurement management

specialist 18-36 Functioning of the Ibid US$200,000 months Project Steering Committee and the Technical Working Group Coordination and Collaboration among different project implementing units/beneficiaries Completion of the identified procurement processes under the First 18 months Procurement Plan Preparation of TORs, RFPs and Bidding Documents for the rest of the packages under the Project’s overall Procurement Plan Quality and timeliness of consultants’/vendors’ initial deliverables Establishment of the MFSDT and adequate staffing and functioning of a management unit for MFSDT

36-48 Completion of all Ibid US$200,000 months procurement processes Implementation of consulting and system supply/installation contracts Quality and timeliness of consultants’/vendors’ deliverables Mid-Term Review

II. Skills Mix Required Skills Needed Number of Staff Weeks Number of Trips Comments • Financial sector regulation and 4 weeks per year for each 2 per year for each supervision specialist specialist specialists • RTGS payments systems specialists • Financial consumer protection specialists • Government role in corporate governance of state-owned FIs specialists • Project management specialist • Procurement specialist • Financial management specialist

Annex 6: Team Composition

World Bank staff and consultants who worked on the project:

Name Title Unit Samuel Munzele Maimbo Lead Financial Sector Specialist AFTFE Xiaofeng Hua Sr. Financial Sector Specialist AFTFE Brian Mtonya Sr. Private Sector Specialist AFTFE Mike Goldberg Sr. Private Sector Development Specialist LCSPF Marjorie Mpundu Sr. Counsel LEGAF Cheikh Sagna Sr. Social Scientist AFTCS Amos Abu Sr. Environmental Specialist AFTEN Riham Shendy Financial Sector Specialist AFTFE Thilasoni Benjamin Musuku Payment System Specialist AFTFE Carlos Leonardo Vicente Financial Sector Specialist FPDPO Trust Chamukuwa Chimaliro Financial Management Specialist AFTFM Steven Maclean Mhone Procurement Specialist AFTPC Jutta Ursula Kern Monitoring & Evaluation Specialist AFTDE Isabel C. Mignone-Del Carri Regional TF Coordinator AFTDE Andrew Lovegrove Consultant AFTFE Mosses Orchieng Consultant DFID Juan Carlos Izaguirre Araujo Consultant ECSPF Francisco Moraes Leitao Campos Consultant AFTPM Yeshareg Dagne Program Assistant AFTFE Annie Jere Team Assistant AFMMW Grace Ingrid Chilambo Team Assistant AFMMW

Annex 7 Procurement Packages with Methods and Time Schedule I. General

1. Project information : This current plan reflects the procurement arrangements and activities for the first 18 months after the effectiveness of the above-captioned FSTAP project. The project is to be implemented by the Reserve Bank of Malawi and the Ministry of Finance (Project ID No.: P122616).

2. Bank’s approval Date of the procurement plan : February 17, 2011

3. Date of General Procurement Notice : April 2011

4. Period covered by this procurement plan : 18 months from project effectiveness

II. Goods

1. Prior Review Threshold : Procurement Decisions subject to Prior Review in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004, revised October 2006 and May 2010; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers' dated May 2004 revised October 2006, May 2010.

Procurement Method Prior Review Contract Value Comments Threshold: US$ Threshold and/or Ceilings 1. ICB 500,000 2. NCB First two contracts between 50,000 and 500,000

3. Shopping N/A below 50,000

2. Prequalificationon . N/A

3. Proposed Procedures for CDD Components (as per paragraph. 3.17 of the Guidelines: N/A

4. Reference to Project Implementation Manual: More details on procurement are provided in the PIM (which is considered as an integral part of the project documents and cannot be amended without prior agreement from the World Bank).

5. Any Other Special Procurement Arrangements : N/A

Goods 1 2 3 4 5 6 7 8 9 Pre Review Estimated Procure qualificat Domestic by Bank Contract Cost ('000, ment ion Preference (Prior/ Expected Bid Ref No. (Description) US$) Method (Yes/No) (Yes/No) Post) Opening Date Comments Hardware and operation and application software - Data Single- RBM- warehouse, November Component 1,800 stage No No Prior G1 10 analytical tools 2012{ 1 activity ICB for off-site supervision and financial stability reporting

Hardware and Single- RBM- operation and Component 3,000 stage No No Prior March 2012 G311 application 1 activity ICB software - RTGS November Component RBM-G6 PIU vehicle (2) 102 NCB No No Post 2012 5 activity PIU office equipment (PCs, November Component RBM-G7 printers, scanner, 47 Shopping No No Post 2011. 5 activity photocopiers, furniture)

Office equipment (PCs, Laptops, Overhead November Component MOF-G2 projector, 63 NCB No No Post 2011 4 activity printers, operation and application software)

Office furniture (desks, chairs, November Component MOF-G3 61 NCB No No Post tables, fans and 2011 4 activity file cabinets)

10 Costing for RBM-G1 is indicative and will be firmed up as soon as assessment of user needs, and functionality and technical requirements is completed within 12 months after credit effectiveness. 11 Costing for RBM-G2 is indicative and will be firmed up as soon as assessment of system upgrading needs is completed within 6 months after Board approval of the Project. 64

III. Selection of Consultants

1. Prior Review Threshold : Selection decisions subject to Prior Review by Bank as stated in Appendix 1 to the Guidelines Selection and Employment of Consultants:

Selection Method Prior Review Comment Threshold 1. Firms, competitive 200,000 All contracts (QCBS, CQS, QBS, LCS, FBS) 2. Individuals, competitive 100,000 All contracts 3. Single Source All All Contracts

2. Short list comprising entirely of national consultants : Short list of consultants for services, estimated to cost less than $100,000 equivalent per contract, may comprise entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Such National competitive Procedures (NCB) shall be carried through in accordance with the Malawi Public Procurement Act and shall include: (i) an explicit statement to bidders of the evaluation criteria; (ii) award to the lowest evaluated responsive and qualified bidder; (iii) rejection of bids outside a range of bid values shall not be permitted; (iv) foreign bidders would not be precluded for participation in National Competitive Bidding (v) Registration and Classification of bidders may be used for establishing bidder qualification or preparing a list for use under price comparison procedure but not as criteria for bidding and (vi) artificial division of lots into small quantities and set aside for small and medium enterprises will not be used. No such consulting services contracts are expected under the FSTAP project.

3. Any Other Special Selection Arrangements: N/A

4. Consultancy Assignments with Selection Methods and Time Schedule

Consultants 1 2 3 4 5 6 7 Estimate Expected d Cost Review By Proposal Assignment ('000, Selection Bank Submission Ref No Description US$) Method (Prior/Post) Date Comments Advisory services - Bank supervision, RBM- Capital market 1,256 QCBS Prior January 2012 Component 1 activity C1 supervision, Insurance and Pension supervision

Design of architecture, technical solutions and implementation plan - Data RBM- warehouse/data 147 CQB Prior March 2012 Component 1 activity C2 base, offsite and macro-prudential analytical tools and reporting formats, system implementation support RTGS system - System replacement (assessments, specifications of user needs and functional and technical requirements, development of RBM- procurement 234 QCBS Prior January 2012 Component 2 activity C6 documents and system implementation support); RBM institutional strengthening; and Consumer education on payments systems Legal, regulatory and institutional framework: RBM- Assessments, 1,235 QCBS Prior May 2012 Component 3 activity C9 design and implementation support International expert/Guest speaker - for RBM- roundtables/work IC Post Component 3 activity C12 shop on action n.a. plan for legal/regulatory reform 9.7 International n.a. expert/Guest speaker - for RBM- roundtables/work IC Post Component 3 activity C13 shop on Legal/Regulatory reform 1 9.7

International expert/Guest speaker - for RBM- roundtable/works IC Post n.a. Component 3 activity C14 hop on Legal/Regulatory reform 2 9.7 International expert/Guest speaker - for RBM- roundtables/work IC Post n.a. Component 3 activity C15 shop on Legal/Regulatory reform 3 9.7 International expert/Guest speaker - for RBM- roundtables/work IC Post n.a. Component 3 activity C16 shop on Legal/Regulatory reform 4 9.7 International expert/Guest speaker - for RBM- roundtables/work IC Post n.a. Component 3 activity C17 shop on Institutional arrangements 1 9.7 International expert/Guest speaker - for RBM- roundtables/work IC Post n.a. Component 3 activity C18 shop on Institutional arrangements 2 9.7 International expert/Guest speaker - for RBM- roundtables/work IC Post n.a. Component 3 activity C19 shop on Institutional arrangements 3 9.7 International expert/Guest speaker - for RBM- roundtables/work IC Post n.a. Component 3 activity C20 shop on Institutional arrangements 4 9.7

Component 5 activity. PIU FM Contract value is estimated at RBM- Consultancy - 48 IC Prior August 2011 an annual performance basis C32 Year 1 but is renewable for 5 years up to project closure

Component 5 activity. PIU Procurement Contract value is estimated at RBM- Consultancy - 48 IC Prior August 2011 an annual performance basis C33 Year 1 but is renewable for 5 years up to project closure

August 2011 Component 5 activity. PIU M&E Contract value is estimated at RBM- Specialist - Year 40 IC Prior an annual performance basis C34 1 but is renewable for 5 years up to project closure

August 2011. Component 5 activity. Supporting Staff Contract value is estimated at RBM- (Secretary) - 13.8 IC Prior an annual performance basis C35 Year 1 but is renewable for 5 years up to project closure

Component 5 activity. Contract value is estimated at RBM- Supporting Staff 6 IC Prior August 2011. an annual performance basis C36 (Driver) - Year 1 but is renewable for 5 years up to project closure

Component 5 activity. Contract value is estimated at RBM- Annual External 20 LCS Prior January 2012. an annual performance basis C37 Audit - Year 1 but is renewable for 5 years up to project closure

PERMU - Review of SOE corporate governance guidelines; development of MOF- ownership policy 246 CQB Prior January 2012 Component 4 activity C4 and related guidelines; and design of WebPages (FSPU+PERMU ) Long-term financing - MOF- Development of 741 CQB Prior April 2012 Component 4 activity C5 policy, regulatory and institutional 68

framework. Study on long- term credit guarantee, and support of government debt management related activities Development MOF- Banking - 115 CQB Prior March 2012 Component 4 activity C6 Feasibility study

IV. Implementing Agency Capacity Building Activities with Time Schedule

No. Expected outcome /Activity Estimated Estimated Start Date Comments Description Cost in US$ Duration

1.0 Training on WB procurement Bank 3 days Within the 1 st Specifics of the guidelines for PIU Project procurement 3 months training activity Manager and RBM hub training after project including the Procurement Manager standard effectiveness estimated cost and the duration of training are to be provided by WB procurement hub 2.0 Training on WB procurement Bank 3 days Within the 1 st Specifics of the guidelines for RBM and MOF procurement 3 months training activity technical team members hub training after project including the standard effectiveness estimated cost and the duration of training are to be provided by WB procurement specialist

V. Any Other Special Procurement Arrangements : N/A

Annex 8: Malawi Financial Sector Deepening Trust (MFSDT) Organizational Structure, Responsibilities and Scope of Activities

Background:

The proposed Malawi Financial Sector Deepening Trust (MFSDT) will be established with the aim of supporting the development of financial markets in Malawi as a means to stimulate wealth creation and reduce poverty. Working in partnership with the financial services industry (banks and non-bank financial service providers including microfinance, Savings and Credit Cooperatives (SACCOs), and community based savings and credit groups), the aim of the program goal of the Trust will be to significantly expand access to financial services among lower income households and smaller scale enterprises both in urban and rural areas in Malawi.

The Trust will operate as a legally independent Trust under the supervision of professional trustees, with policy guidance from a program investment committee (comprising of representatives of donors and the Government). It will be financed through grants by development partners working with the Government of Malawi through a combination of basket and earmarked funds.

The proposed Structure:

Donors/Funders, Government Private sector DFID, World Bank Of Malawi Representatives

Project Investment Service Provider Committee

Technical Director

Finance Manager Program Manager Program Officer

Theme Leads

General

MFSDT will be legally established by way of its trust deed which legally articulates the purpose of the program and establish the legal powers and responsibilities of the trustees .

Donors and Funders

Individual funding arrangements by way of grant agreements or contracts (c) are established between the Trust and the participating donors. In accordance with the Trust deed all reporting to individual donors will be based on a common pre-determined reporting approach. As far as possible earmarking of funding will not be used in supporting The Trust. All support must be consistent with the FSD strategy paper which sets out the common strategy for the FSD program in supporting pro-poor financial sector development.

Trustees

The trustees (equivalent of directors in limited liability companies) are obliged to manage the Trust‘s assets in accordance with the terms of the trust deed and in particular the Trust fund‘s statement of purpose. The deed also defines the way in which the trustees’ responsibilities are to be discharged. Aside from the general principles set out in the trust deed, the trustees are obligated to ensure that the trust‘s investment guidelines and the policies and procedures are followed. The trustees are mandated to seek technical guidance from the Program Investment Committee (PIC) and to contract separate technical and financial management. The role of the trustees is primarily one of oversight, ensuring that the systems and processes necessary to ensure programmatic and financial integrity are followed.

Program Investment Committee (PIC)

The PIC role is to provide technical oversight of the program. This responsibility is mandated under the trust deed and provides the mechanism through which the trustees are able to establish that all the trust‘s activities are consistent with the Trust‘s purpose. The trust deed establishes an obligation on the part of the trustees to be guided by the technical opinion of the PIC. PIC opinion must be sought relating to the strategy, annual business/work plan, Trust management budget and all funding/investments proposals. Formally, ‘no objection' is required from the PIC by the trustees for the proposed strategy, business/work plan, budget and funding agreements/investments. At the outset the Trust‘s donors and funders determine the composition of the PIC with the provision that each funder is entitled to one representative on the PIC. Provision is made for a further appointment of a financial sector specialist to offer detailed technical advice to members of the PIC. This is an intermittent consultant position involving an agreed number of day’s inputs to the PIC per quarter to undertake detailed technical reviews of all submissions to the PIC. The PIC constitution formally sets out the details of the PIC‘s mandate.

Director

The Director is responsible for identification and management of the FSD Trust‘s program‘s activities under the trust in order to achieve the FSD program objectives. The Director will be supported by a deputy (plus additional staff as the requirement is identified and subject to approval by the trustees and no objection from the PIC. The technical management function will be augmented by the use of a consultant specialist contracted by the Trust and managed by the Director. The technical management staff will usually be under direct contract to the MFSDT. The Director is accountable to the trustees. The terms of the trust deed mandate the trustees to seek the opinion of the PIC on questions relating to the technical implementation of the MFSDT program. This will include the 71

evaluation of the technical performance of the Director through the PIC. Renewal of the Director‘s contract is subject to the PIC‘s no objection. The trustees have the right to terminate the Director‘s contract at reasonable notice at its discretion or immediately where the trustees believe that the Director has committed gross misconduct, fraud or negligence.

Finance manager

In order to minimize the day to day involvement of the trustees in ensuring that the terms of the Trust are met, the administration functions are separated from those of technical management. The Finance manager will work alongside the director but will be formally accountable directly to the trustees (e). Principle activities are: receiving and accounting for donor funds, establishing contracts and grant agreements between the trust and financial institutions or service providers (f), making disbursements against these agreements, managing the Trust‘s own administrative expenditure and keeping all financial records for the Trust. The Finance manager‘s terms of reference describe the responsibilities in more detail. As with the director‘s contract, the trustees will have the right to terminate the Finance manager‘s contract at reasonable notice at its discretion or immediately where the trustees believe that the manager has committed gross misconduct, fraud or negligence. Similarly the contract provides for annual renewal and require the PIC‘s annual ‘no objection’ for this renewal.

Program assistant

The role of the Program assistant is to support the establishment of the FSD office and ensure the program runs smoothly and efficiently on a daily basis, that the administrative procedures put in place serve all and to ensure that internal and external communication is effective at all levels and on a timely manner. It includes supervision of other office support staff, being a Personal Assistant to the director (and his/her deputy once appointed) and any other assigned project tasks.

MFSDT PROGRAMME MANAGEMENT CYCLE

MFSDT strategy

The strategy for the FMSDT is set out in the FSD strategy paper. All projects funded by the MFSDT must be consistent with the program set out in this paper. In accordance with the MFSDT Deed the strategy paper is subject to the no objection of the PIC. The Director has the responsibility for drafting the FSD strategy, presenting to the PIC and updating and modifying as required.

Annual business plan

The Director is responsible for drafting an annual business plan (ABP) which will set out the activities which will be undertaken to achieve the strategy and Trust purpose. It provides the framework for the Director‘s work over the year and the Director is held accountable to this plan. This is subject to technical review by the PIC and the PIC‘s no objection before it is adopted.

Quarterly PIC meetings

The PIC meets on a regular quarterly basis to provide its opinion on funding proposals and review technical progress of the MFSDT program. Otherwise it may meet on an extraordinary basis for urgent strategic decisions at the request of the Trustees or Director and subject to the availability of a quorum consisting of a simple majority of members. It is the responsibility of the Director to provide all documentation to the PIC at least 14 days in advance of the meeting. The Director or (in his absence) a designated Member will act as secretary to the PIC. Within one week of a PIC meeting the secretary will produce and circulate accurate minutes of that meeting to all Members by email. All 72

Voting Members who attended will provide comments or ―no objections ǁ on the minutes within a further one week. Other Members may also provide comments if they wish. Within a further 3 calendar days, the secretary will finalize the minutes in consultation with the Voting Members and circulate these to the Members, the Trustee, the Director and the Finance manager. Prompt finalization of the minutes is essential since the minutes provide a formal record of the opinion of the PIC and the basis for action by the

Approval of funding proposals

All funding proposals for the MFSDT Trust above the Director’s discretionary expenditure threshold of US$ 50,000 must be presented to the PIC for its opinion. The PIC may decide to offer its ‘no objection‘ to the Trustees, withhold it or withhold it pending further information and clarifications from the Director. The PIC may renders its ‘no objection’ conditional on its recommendations regarding the implementation of a proposal Where the Trustees receive the no objection of the PIC for a proposal recommended by the Director the Trustees will normally approve it. (The Trustees have an obligation at all times to protect the interests of the Trust and would withhold approval of a proposal if it was felt to present a threat to the Trust‘s interests. In such an event the Trustees would communicate the reasons for such action to the PIC and Trust management team). Where a proposal is re-submitted to the PIC following a request for further information or clarification the PIC may only either offer its ‘no objection‘ or withhold it. The proposal may not be submitted again. For small contracts or funding agreements up to the Director discretionary expenditure threshold in total value, which can be undertaken by the MFSDT Director without prior presentation to the PIC, provided that they are clearly in line with the approved annual business plan. All such funding will be reported as part of the next regular quarterly reporting on program activity to the PIC where they will be subject to ex post no objection. The aggregate level of funding to an individual institution or project provided at the Director‘s discretion without reference to the PIC must not exceed the Director‘s discretionary expenditure threshold.

Potential Scope of Activities- (Based on the Kenya model)

Level/Area Topic Annual Indicator

Strategic Objective Deepen the capacity of the • Proportion of total adult population financial sector to meet the which uses services of formal financial needs of the poor financial institutions and micro, small and • Number of accounts in the financial medium enterprise on a sector sustainable basis • Proportion of total adult population which is financially excluded • Credit extended to the private sector as a percentage of GDP • Interest rate spread between lending rate and average deposit rate Output Financial sector and related • Access oriented financial sector Macro: enabling policy strategies and policies adopted and environment for implemented by the Government finance Legal and regulatory • Bank legal and regulatory structure framework amended to encourage access • Appropriate AML/CFT framework with KYC rules which do not inhibit access • Development of appropriate regulatory structure for microfinance institutions

• Development of appropriate regulatory structure for SACCOs • Private credit registries operational and sharing data • Enabling legal and regulatory framework for development of leasing Output a)Market linkages • Proportion of financial institutions Meso: Sector wide with access to funding from within development formal financial system • Proportion of financial institutions with access to a national payments infrastructure b)Business services • Financial institutions rating of quality and availability of core business services (including training/skills, ICT, management consulting c) Information flows • Proportion of formally financial included reached by financial education/transparency initiatives • Users rating of FSD or partners commissioned studies Output a) Capacity building • Number of savings accounts held Micro: retail capacity with retail financial by FSD directly or indirectly development providers supported financial service providers • Number of credit accounts held by FSD directly or indirectly supported financial service providers • Proportion of FSD supported financial service providers meeting or exceeding planned targets b) Product/delivery • Number of people using new or development refined products or channels launched by institutions supported directly or indirectly by FSD • Number of SMEs using new or refined products or channels launched by institutions supported directly or indirectly by FSD • New or refined products launched by institutions supported directly or indirectly by FSD • New or refined delivery channels launched by institutions supported directly or indirectly by FSD

Annex 9: Project Costing Table

Net (US$) Gross (US$)

Component 1, Financial Sector Regulation and Supervision - Goods 1,844,000 2,489,000 - Of which price and physical contingencies 167,600 199,000 - Consulting services 1,874,000 2,076,000 - Training & Workshop 750,000 750,000 Component 1 Subtotal 4,468,000 5,315,000

Component 2, Financial Infrastructure - Goods 5,141,000 8,729,000 - Of which price and physical contingencies 467,000 1,799,000 - Consulting services 3,966,000 4,389,000 - Training & Workshop 100,000 100,000 Component 2 Subtotal 9,207,000 13,218,000

Component 3, Financial Consumer Protection and Financial Literacy - Consulting services 2,641,000 2,874,000 - Training & Workshop 150,000 150,000 Component 3 Subtotal 2,791,000 3,024,000

Component 4, MOF Financial Sector Policy and Governance Capacity and Long-Term Finance - Goods 166,000 194,000 - Consulting services 2,389,000 2,726,000 - Training 473,000 473,000 Component 4 Subtotal 3,028,000 3,393,000

Component 5, Implementation Support - Goods 244,000 258,000 - Of which, MFSDT Management Unit goods 101,000 108,000 - Consulting services 1,894,000 2,228,000 - Of which, MFSDT Management Unit consultants 1,147,000 1,349,000 - Training 15,000 15,000 - PIU operating expenses 763,000 763,000 - Of which, MFSDT Management Unit operating expenses 381,250 381,250 Component 5 Subtotal 2,916 ,000 3,264,000

PROJECT TOTAL COST 22,410,000 28,214,000

Annex 10: Developing Partners’ Activities in the Financial Sector and Identified Gaps

Key: Black Projects undertaken or planned independently by donors Blue Projects provisionally identified for the proposed Malawi Financial Sector Technical Assistance Credit (FSTAC) Green Projects potentially identified for the proposed Malawi Financial Sector Deepening Trust (FSDT) Updated: August 2010

Institution Unit Functional Type Objectives Potential M&E Components Source Comments or Sector Area Indicators Training Advice Hardware Software Other FSTAP FSDT

Ministry Financial FS policy & Capacity Support the Improved FS functions Resident Laptops x7 Office x9 X Unit will have 7 of Finance Sector Unit coordination building establishment management and Adviser (18 PCs x2 professional staff. of the FSU to coordination of FS months) Network improve policy. Printers x2 management of FS policy Domestic Debt Capacity Support the Extension of Debt market Debt policy IMF Unit will have 5 Debt Unit management building MOF to take maturity of Govt. operations professional staff. control of debt with Debt management of establishment of a Debt policy management Training being given Government 5 year yield curve. by AFRITAC to the debt issuance. Debt market RBM debt issuance Expansion of development. unit should be Extend volume of long expanded to include maturity of term Govt. Laptops x5 Office x6 X the DDU. Govt. debt to domestic debt. PCs x1 finance Network development Printers x1 projects.

Treasury Financial Systems Automate Reduced Use of Preparation of Servers Payments X management processing of transaction costs. system specifications. package budget (vendor PCs payments by Reduction of fraud training) Tender linking MOF and errors. evaluation. Secure directly to data link RBM. Increased use of MOF- bank accounts by RBM. firms and individuals. Systems Implement Reduced Use of Preparation of Treasury X Linkage into rollout of mobile phone transaction costs. system specifications. system mobile phone electronic (vendor interface payments (ZAP, payment of Improved speed of training). Tender others) to individuals. benefits to distribution of evaluation. individuals. benefits and Needs basic bank subsidies (e.g. for account provision Implement agriculture). Public Public X (now under discussion smart cards for education education with banks) and link agricultural Reduction of and training. campaign to new IT hub for 76

Institution Unit Functional Type Objectives Potential M&E Components Source Comments or Sector Area Indicators Training Advice Hardware Software Other FSTAP FSDT

input subsidies. benefit and other design. MFIs. fraud. Mobile to smart card Increased use of technology already bank accounts by developed to allow individuals. access to irrigation water. Smart card Increased access to payments used in credit for India for input individuals. subsidies and credit.

Creditor ability to be paid at source (from account) should improve credit quality/help establish credit. Reserve Bank Conventional Capacity Modernize & FSAP assessment. Interest rate Banking law FSVC Underway. Advisory Bank of Supervision banking building improve bank risk & stress amendments and intermittent Malawi supervision. testing. for bank IMF/Norges training through 2011. resolution. Bank Financial institution Bank merger analysis policies & school. procedures.

Basle II. Market risk.

Problem bank resolution. Stress IMF AFRITAC. testing.

Consolidated supervision.

Risk based supervision. Stress OTA testing. Align Revised Update of X regulations and supervision supervision supervision procedures. procedures practices to affected by new legislation. new legislation. Install a Review of X RBM has strong supervisory current off site internal development information analysis tools, capacity. system (SIS) to development enhance the of 77

Institution Unit Functional Type Objectives Potential M&E Components Source Comments or Sector Area Indicators Training Advice Hardware Software Other FSTAP FSDT

quality of off- specifications site for any supervision. changes to system. Mobile Capacity Establish a Roll out of at least All aspects Licensing X Lack of in-place banking building flexible risk two competing of licensing policy. examples in other regulation & based mobile financial and countries presents a supervision, framework for services networks. supervision. Competition challenge along with agent mobile-based policy. the cross-border banking banking. Establishment of Competition implications of mobile inter-operability policy Regulations. technology. Care must Ensure between operators. enforcement. be taken to develop a competition in Supervision framework which mobile services Evidence of price AML procedures. provides appropriate to reduce and service supervision. safeguards while prices, competition Cross-border simultaneously having encourage between operators supervision. sufficient flexibility to innovation, and deal with very rapid expansion of Number of mobile AML policy evolution of the coverage. services users. and technology. regulations. Competition policy needs to be incorporated. A lack of inter-operability (ability to conduct transactions between operators’ networks) may result in a quasi monopoly for the first entrant and opportunities for market abuse. Financial Anti-Money Capacity Improve AML AML Legislation & FSVC Seminar included Intelligence Laundering building practices and compliance. regulations. banks, NBFIs and Unit supervision (for FIU. both banking Preparation Electronic and NBFI) for AML supervision. exams. Supervision Crisis Capacity Development FSAP assessment. Training in Design of FIRST Underway, project Research, management building of policies, new crisis crisis concludes in 2010. Others procedures and management management internal mechanisms, mechanisms, mechanisms for policies & policies & crisis procedures. procedures. management. Research Macro- Capacity Development FSAP assessment Macro- Framework Norges prudential building of macro- prudential for macro- Bank analysis prudential Regular analysis. prudential reporting and publication of a analysis. analysis stability report. Stability functions to report. Organizational 78

Institution Unit Functional Type Objectives Potential M&E Components Source Comments or Sector Area Indicators Training Advice Hardware Software Other FSTAP FSDT

identify issues. emerging risks Use of Design of Use of Data X Links to reporting and trends in software analytical & analytical analysis required for crisis the banking tools. reporting tools tools management. system. tools. Stability report Design of preparation. stability report. Incorporation of FS data Stability into report web economic page design. analysis. Lending survey and report design.

Call report design. Non-Bank Insurance Capacity Expansion of Gross insurance All aspects Regulatory FIRST Underway, project Supervision building access to premiums/GDP of new framework. concludes in 2010. insurance regulatory services to Number of framework. Supervision Preparation of improve policyholders policies & compliance manual income procedures. and training for security. Range of products insurance company available staff would have to be self- financed. Microfinance Capacity Introduction to Number of Workshops. FSVC Underway. Advisory building MFI regulation licensed deposit- USAID and intermittent & supervision. taking MFIs. [AfDB] training through 2011. Composition of ADB Volume of and USAID training deposits in MFIs. not known. Implement the All aspects Regulations. FIRST A model used in other requirements of of new countries is t delegate the regulatory Supervision supervision to an apex Microfinance framework. procedures. microfinance Act Licensing institution. If this procedures. option is chosen, Training for Licensing Preparation of Printing of X supervision TA would MFIs to procedures. training compliance be delivered at the comply with program. manuals. apex level and training new regulations Compliance for MFIs would be and become with delivered through the licensed as regulations. apex. deposit takers. Pensions Capacity Successful Increase in total All aspects Regulatory FIRST Underway, project building implementation pension assets of new framework. concludes in 2010. of the new under regulatory mandatory management. framework. Supervision 79

Institution Unit Functional Type Objectives Potential M&E Components Source Comments or Sector Area Indicators Training Advice Hardware Software Other FSTAP FSDT

pension policies & contribution Increase in percent procedures. requirement. of population Compliance Compliance X covered by training for manual for contributory pension pension pension schemes. managers managers. and trustees. Systems Establishment Establishment and All aspects Organizational Servers Registry X of a central successful of design & and PCs. software pensions functioning of operations. staffing. Backup administrator administrator. facility. Governance arrangements.

Budget.

Financing. Capital Capacity Improvements Increase in the All aspects Regulatory FIRST Underway, project Markets building to regulation volume and value of new framework. concludes in 2010. and supervision of trading by regulatory of the capital individuals on the framework. Supervision markets MSE. policies & procedures. Increased Design of a X Government support investment in public in the form of public debt and information offerings for equities by campaign to privatization private encourage transactions would be individuals individual needed. investor participation. Research Monetary Capacity Improve Liquidity Liquidity Norges policy. building. RBM’s ability forecasting. forecasting. Bank to conduct monetary Database Database policy. design & design & analytical analytical tools. tools.

Inputs for Inputs for forecasting forecasting & & policy policy analysis analysis models. models. Treasury Debt Capacity Extension of Extension of Debt market IMF Training being given issuance & building maturity of maturity of Govt. development. by AFRITAC to the reserves Govt. debt with debt with RBM debt issuance management establishment establishment of a Public- unit should be of a 5 year 5 year yield curve. Private expanded to include yield curve. Partnerships. the MOF DDU. Expansion of Expansion of volume of long 80

Institution Unit Functional Type Objectives Potential M&E Components Source Comments or Sector Area Indicators Training Advice Hardware Software Other FSTAP FSDT

volume of long term Govt. term Govt. domestic debt. domestic debt. Improve IMF assessment of FX reserve Norges management of reserve management Bank FX reserves. management policy. Develop the practices. Counterparty WB BM would like to RBM’s risk participate in the WB capacity to assessment RAMP program for manage analysis training. counterparty risk for FX reserves. Systems Installation of a Quality of yield Use of Purchase X Requires module on central curve data. system of RTGS system. depository (vendor module. system to allow training). secondary bond trading Systems Resolve System installed Use of Purchase X Trading platform must security issues and operating, system of bolt on to the new in the current confirmed by (vendor modules. RBM general ledger FX trading external auditor. training). system. system by automating approval functions and links to settlement system. Payments Payments Policy Design of a Increase in volume Study visit to Payments Norges Final decision to be system new payments of payments Norges system Bank made by the National operations system transactions. Bank. strategy. Payments Council (RBM favors a single Reduction in Specie switch solution). RBM transaction costs. management favors a switch jointly & policies. owned with the banking industry. Annual payments Impact of an explosive system report. increase in electronic Systems Implementation Use of Preparation of Switch and Vendor X payments as a result of of a fully system specifications. associated package. the introduction of automated (vendor hardware. mobile-based payments training) Tender payments needs to be system using a evaluation. considered. central switch. Payments system Financing. Need to ensure supervision regional connectivity will have to be taken Project into account I management selecting a new 81

Institution Unit Functional Type Objectives Potential M&E Components Source Comments or Sector Area Indicators Training Advice Hardware Software Other FSTAP FSDT

system.

Domestic payments use MALSWITCH’s virtual private network (VPN). Credit Credit Systems Creation of one Volume of credit Supervision Credit bureau USAID Underway. USAID is reference information or more credit reports sold by training policy providing advice. bureau(s) bureaus bureau(s). Financing. A policy decision Educate the Number of credit needs to be made on public about files. Preparation of the number and the benefits of regulatory ownership of credit credit Number and total framework. bureaus. Making the information for amount of loans by bureau self-sustaining access to credit. banks & MFIs Design of may present a public challenge in the early information years campaign. Creation of Number of cards Use of input Input X May be required to biometric issued. devices and devices. make the credit financial readers information system identification Number and total (vendor Card work reliably. Used in cards amount of loans by training). readers. Kenya and some other banks & MFIs countries lacking reliable national identification cards.

Cards, equipment, and some training costs may have to be subsidized for MFIs. Deposit System Capacity Creation of a Survey of FSVC insurance stability building functioning market fund deposit participants insurance system to DI Policy paper. Finalize DI WB policy & strategy

. DI Fund model Servers Premium X operations. design. and PCs. model & payout Financing. software

Organization and staffing.

DI operations. 82

Institution Unit Functional Type Objectives Potential M&E Components Source Comments or Sector Area Indicators Training Advice Hardware Software Other FSTAP FSDT

Design of public information campaign Consumer Financial Capacity Implement new Consumer Consumer X National Task force protection literacy building legislation compliance reports protection on Consumer creating (RBM). regulations. Protection has been consumer Regulations Case Servers Case file X formed. RBM would rights ad and case management. and PCs. manager like to delegate protection for management. consumer protection the financial Enforcement. functions to the sector. Consumer Consumers compliance Design of Association. A supervision. public mechanism for information reporting apparent Enforcement. campaign. enforcement cases to the RBM for action Use of case would have to be put management in place. system (vendor training). Use of Improve Capacity Better align RBM Norges RBM RBM use of building RBMs governance & Bank resources human Capacity organizational organization. capital building. structure and decision Evaluation & making with its compensation functions. system.

Modernize HR practices to better attract and retain qualified staff. Improve Move RBM Reduction in cost Budgeting Norges financial from a largely per transaction. system. Bank management manual and processing Reduction in error General ledger efficiency. system to rate. system automation. specifications review & tender advice.

Transaction automation. Access to MFIs Operations Systems Establish a Number of Policy on MFI WB Systems from both Finance centralized licensed deposit- operations IBM and Rabobank back office to taking MFIs. support. may be available. IBM automate MFI offers a stand-alone operations Volume & value of service center solution 83

Institution Unit Functional Type Objectives Potential M&E Components Source Comments or Sector Area Indicators Training Advice Hardware Software Other FSTAP FSDT

deposits & loans in (fee per transaction Improve the MFIs. Use of new Preparation of X model); Rabobank’s transparency & IT services specifications. approach may be more accountability Number of MFI (vendor aligned with an apex of MFIs members. training) Tender institution model (also evaluation. using a fee per Expand the Number of MFI New product transaction model). range of MFI products offered. training for products. MFIs (savings & Increase MFI lending operating products) efficiency & profitability. Coordination Capacity Develop Capacity Sourcing IT FIMA MMFN consists of 21 building MMFN as the building for funds services HiVOS member MFIs with coordinating MMFN to MFIs >600 thousand body for MFIs. members. Capacity Advocacy for building for MMFN receives the MFI sector. MFIs budget support from donors. Provision of TA to member FIMA provides credit MFIs. lines direct to 4 MMFN members.

FIMA Financial Capacity Develop a Increase in number Framework FIMA The Bankers literacy building national of bank and MFI design Association is framework for accounts held by participating and has consumer individuals and formed a literacy. SMEs. subcommittee on financial literacy. Public Increase in credit Public Design of X Should be co-funded information to individuals and information public by the Bankers campaigns to SMEs and information Association. increase education and education literacy campaign campaigns.

Design of SME education financial programs for training SMEs & entrepreneurs

Movable Creditor Capacity Implement Increase in credit All aspects Secured All. All. USAID USAID has decided to Property rights building automated to individuals and of registry transactions proceed with Registry movable SMEs. operation. law. supporting the property establishment of the registry Increase in volume Design and registry as a result of of leasing operation of completion of the transactions. registry. draft of the secured 84

Institution Unit Functional Type Objectives Potential M&E Components Source Comments or Sector Area Indicators Training Advice Hardware Software Other FSTAP FSDT

transactions law. Banks Agricultural Capacity Training for Increased volume Lending USAID Project under lending building bankers in of agricultural techniques. consideration. agricultural loans from banks. lending. SME Capacity Training for Increased volume Lending Consultations FSVC Lending building bankers in & amount of SME techniques. with 4 banks. SME lending loans Mobile- Financial Systems Expand Number of mobile Policy design X The most marginal are based access coverage of services users. for incentives also most likely to be financial mobile-based to network excluded from mobile services financial FINSCOPE access operators to networks. A providers services to the data. provide combination of tax remaining additional incentives with mast 40percent of coverage. construction subsidies Malawi without could be considered as coverage a means to extent coverage to areas which cannot justify commercial investment in network coverage. MF & MSME Capacity Increase the Volume of MSME Governance, WB RBM indicates that RBM finance building flow of funds credit. policies & the intention is for the to MSMEs & strategies for Government to take a entrepreneurs MSME credit the minority stake by creating a default rates. Development (c20percent) in the Malawi Bank. Development Bank, Development Development bank with commercial Bank. financial partners investing the performance. remainder. FINMARK Data Assessment of FINSCOPE DFID Trust demand side survey. access FSTAC RBM Operations Capacity Establish a WB financial Procurement WB FM WB In line with building project management & procedures. software. Government policy, management procurement separate PIUs are not unit within the supervision Financial to be established. RBM to reports. management. execute procurement, project management, & financial management functions for FSTAC.

Annex 11: Malawi at a Glance

Malawi at a glance 2/25/10

Sub- Key Development Indicators Saharan Low M alawi Africa income Age distribution, 2008 (2008) Male Female

Population, mid-year (millions) 14.3 818 973 75 -79 Surface area (thousand sq. km) 118 24,242 19,310 60-64 Population growth (%) 2.6 2.5 2.1 Urban population (% of total population) 19 36 29 45 -49 30-34 GNI (Atlas method, US$ billions) 4.2 885 510 15 -19 GNI per capita (Atlas method, US$) 290 1,082 524 GNI per capita (PPP, international $) 830 1,991 1,407 0-4

10 5 0 5 10 GDP growth (%) 9.7 5.0 6.4 percent of total population GDP per capita growth (%) 6.9 2.5 4.2

(most recent estimate, 2003–2008)

Poverty headcount ratio at $1.25 a day (PPP, %) 74 51 .. Under-5 mortality rate (per 1,000) Poverty headcount ratio at $2.00 a day (PPP, %) 90 73 .. Life expectancy at birth (years) 48 52 59 Infant mortality (per 1,000 live births) 71 89 78 250

Child malnutrition (% of children under 5) 18 27 28 200

Adult literacy, male (% of ages 15 and older) 79 71 72 150 Adult literacy, female (% of ages 15 and older) 65 54 55 100 Gross primary enrollment, male (% of age group) 114 103 102 Gross primary enrollment, female (% of age group) 119 93 95 50

Access to an improved water source (% of population) 76 58 67 0 Access to improved sanitation facilities (% of population) 60 31 38 1990 1995 2000 2007

Malawi Sub-Saharan Africa

Net Aid Flows 1980 1990 2000 2008 a

(US$ millions) Net ODA and official aid 141 500 446 735 Growth of GDP and GDP per capita (%) Top 3 donors (in 2007): United Kingdom 25 51 97 134 20 United States 3 21 59 79 European Commission 21 45 49 75 10

Aid (% of GNI) 12.4 27.2 26.1 20.6 0 Aid per capita (US$) 23 53 38 53 -10

Long-Term Economic Trends -20 95 05 Consumer prices (annual % change) 11.8 11.8 35.4 8.7 GDP implicit deflator (annual % change) 15.8 10.7 30.5 8.9 GDP GDP per capita Exchange rate (annual average, local per US$) 0.8 2.7 59.5 140.5 Terms of trade index (2000 = 100) .. 145 100 109 1980–90 1990–2000 2000–08 (average annual growth %) Population, mid-year (millions) 6.2 9.4 11.6 14.3 4.2 2.1 2.6 GDP (US$ millions) 1,238 1,881 1,744 4,269 2.5 3.7 4.2 (% of GDP) Agriculture 43.7 45.0 39.5 34.3 2.0 8.6 1.1 Industry 22.5 28.9 17.9 20.6 2.9 2.0 5.1 M anufacturing 13.7 19.5 12.9 14.2 3.6 0.5 3.6 Services 33.7 26.1 42.5 45.1 3.3 1.6 4.3

Household final consumption expenditure 69.9 71.5 81.6 63.4 2.2 6.5 -1.4 General gov't final consumption expenditure 19.3 15.1 14.6 13.1 6.3 -4.4 5.6 Gross capital formation 24.7 23.0 13.6 26.5 -2.8 -8.4 24.5

Exports of goods and services 24.8 23.8 25.6 22.6 2.5 4.0 -9.6 Imports of goods and services 38.8 33.4 35.3 25.5 -0.3 -1.1 1.0 Gross savings .. 13.6 2.2 29.6

Note: Figures in italics are for years other than those specified. 2008 data are preliminary. .. indicates data are not available. a. Aid data are for 2007.

Development Economics, Development Data Group (DECDG).