Document of The World Bank

Report No: ICR564

IMPLEMENTATION, COMPLETION, AND RESULTS REPORT (IBRD-73890, IBRD-73900, IBRD-74620, IBRD-76060, IBRD-78210)

ON

LOANS

IN THE AMOUNT OF €310.2 MILLION AND US$160 MILLION (US$575 MILLION EQUIVALENT)

AND

IN THE AMOUNT OF €60 MILLION AND US$48.056 MILLION (US$125 MILLION EQUIVALENT)

TO

HALKBANKASI (HALKBANK)

AND

TURKIYE SINAI

KALKINMA BANKASI (TSKB), RESPECTIVELY

FOR AN

ACCESS TO FINANCE FOR SMALL AND MEDIUM ENTERPRISES PROJECT

March 29, 2013

Finance and Private Sectors Development Unit Turkey Country Unit Europe and Central Asia Region Sector Department

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

FINAL DRAFT

CURRENCY EQUIVALENTS

(Exchange Rate Effective February 13, 2013)

Currency Unit TL1.00 = US$0.57 US$1.00 = TL.77

FISCAL YEAR

ABBREVIATIONS AND ACRONYMS

EFIL II Second Export Finance Intermediation Loan GDP Halkbank

Gross Domestic Product Halkbankasi

IBRD International Bank For Reconstruction And Development ICR Implementation Completion Report IFI International Financial Institution IEG Independent Evaluation Group ISR Implementation Status And Results IT Information Technology KfW Kreditanstalt für Wiederaufbau, German Development Bank KOSGEB Küçük ve Orta Ölçekli İşletmeleri Geliştirme ve Destekleme İdaresi

Başkanlığı, Turkish Small and Medium Enterprises Development Organisation

M&E Monitoring And Evaluation PAD PDO

Project Appraisal Document Project Development Objective

PFI PIU

Participating Financial Institution Project Implementation Unit

SME Small And Medium Enterprise SME I TL

Access to Finance for Small and Medium Enterprises Project Turkish lira

TOBB Türkiye Odalar ve Borsalar Birliği, the Union of Chambers and Commodity Exchanges of Turkey

TSKB Turkiye Sinai Kalkinma Bankasi TUIK Türkiye İstatistik Kurumu, Turkish Statistical Institute

Vice President: Philippe H. Le Houerou Country Director: Martin Raiser

Sector Manager: Aurora Ferrari Project Team Leader: Isfandyar Zaman Khan

ICR Team Leader: Samuel Munzele Maimbo

FINAL DRAFT

TURKEY

ACCESS TO FINANCE FOR SMALL AND MEDIUM ENTERPRISES PROJECT

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives, and Design .............................................. 1 2. Key Factors Affecting Implementation and Outcomes .............................................. 4 3. Assessment of Outcomes .......................................................................................... 11 4. Assessment of Risk to Development Outcome ......................................................... 16 5. Assessment of Bank and Borrower Performance ..................................................... 17 6. Lessons Learned ....................................................................................................... 20 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 22 Annex 1. Project Costs and Financing .......................................................................... 23 Annex 2. Outputs by Component ................................................................................. 24 Annex 3. Economic and Financial Analysis ................................................................. 26 Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 29 Annex 5. Summary of Borrowers’ ICR ........................................................................ 31

FINAL DRAFT

A. Basic Information

Country: Turkey Project Name: Access to Finance for SMEs

Project ID: P082822 L/C/TF Number(s): IBRD-73890,IBRD-73900

ICR Date: 02/19/2013 ICR Type: Core ICR

Lending Instrument: FIL Borrower:

TSKB AND HALKBANK (REP OF TR GUARANTOR)

Original Total Commitment:

USD 180.21M Disbursed Amount: USD 726.63M

Revised Amount: USD 696.91M Environmental Category: F Implementing Agencies: Halkbankasi and Turkiye Sinai Kalkinma Bankasi (TSKB) Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 04/20/2005 Effectiveness: 07/26/2007

Appraisal: 04/06/2006 Restructuring(s): 12/09/2008, 11/17/2009

Approval: 06/08/2006 Mid-term Review: Closing: 04/30/2012 04/30/2012 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Low Bank Performance: Satisfactory Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Moderately Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing

Agency/Agencies: Satisfactory

Overall Bank Performance: Satisfactory Overall Borrower

Performance: Satisfactory

FINAL DRAFT

C.3 Quality at Entry and Implementation Performance Indicators Implementation

Performance Indicators QAG Assessments (if any) Rating

Potential Problem Project at any time (Yes/No):

No Quality at Entry (QEA):

Satisfactory

Problem Project at any time (Yes/No):

No Quality of Supervision (QSA):

Moderately Satisfactory

DO rating before Closing/Inactive status:

Satisfactory

D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) Banking 5 5 General finance sector 15 15 General industry and trade sector 10 10 Micro- and SME finance 70 70

Theme Code (as % of total Bank financing) Micro, Small and Medium Enterprise support 67 67 Other financial and private sector development 33 33 E. Bank Staff

Positions At ICR At Approval Vice President: Philippe H. Le Houerou Shigeo Katsu Country Director: Martin Raiser Andrew N. Vorkink Sector Manager: Lalit Raina Fernando Montes-Negret Project Team Leader: Isfandyar Zaman Khan Marialisa Motta ICR Team Leader: Samuel Munzele Maimbo ICR Primary Author: Samuel Munzele Maimbo F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The project’s main development objective is to increase Turkish SMEs’ access to medium and long-term finance. Revised Project Development Objectives (as approved by original approving authority) N/A

FINAL DRAFT

(a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

1 06/28/2007 Satisfactory Satisfactory 0.00 2 09/23/2007 Moderately Satisfactory Satisfactory 27.47 3 06/13/2008 Satisfactory Satisfactory 175.49 4 01/28/2009 Satisfactory Satisfactory 217.36 5 11/19/2009 Satisfactory Satisfactory 460.96 6 05/27/2010 Satisfactory Satisfactory 515.07 7 01/16/2011 Satisfactory Satisfactory 677.80 8 09/06/2011 Satisfactory Satisfactory 685.84 9 06/11/2012 Satisfactory Satisfactory 726.63

H. Restructuring (if any) This project was restructured several times. Before signing, both borrowers requested changes to the project; TSKB decided to act as a retail instead of a wholesale lender and Halkbank requested an increase in the loan amount to €100 million. The project was resubmitted to the World Bank Board in June 2007, and the restructured project became effective in July 2007. In December 2008, the World Bank Board of Executive Directors approved an additional loan in the amount of US$200 million equivalent (US$60 million and €109.1 million) to Halkbank. Furthermore, the Board approved an additional loan to Halkbank on November 17, 2009, in the amount of US$250 million equivalent (US$100 million and €101.1 million).

FINAL DRAFT

I. Disbursement Profile

FINAL DRAFT

1

1. Project Context, Development Objectives, and Design 1. The Access to Finance for small and medium enterprises Project for which this implementation completion report is prepared has been restructured and complemented with additional financing several times during its life. The original project approved by the World Bank in June 2006 was for two loans of €100 million for Turkiye Sinai Kalkinma Bankasi (TSKB) and €50 million for Halkbankasi (Halkbank). Before signing, both borrowers requested changes to the project; TSKB decided to act as a retail instead of a wholesale lender and Halkbank requested an increase in the loan amount to €100 million. The project was resubmitted to the World Bank Board in June 2007, and the restructured project became effective in July 2007. In December 2008, the World Bank Board of Executive Directors approved an additional loan in the amount of US$200 million equivalent (US$60 million and €109.1 million) to Halkbank. Furthermore, the Board approved an additional loan to Halkbank on November 17, 2009, in the amount of US$250 million equivalent (US$100 million and €101.1 million). All loans were provided directly to the banks concerned with a guarantee from the Treasury of the Republic of Turkey.

2. At the close of the project in April 2012, the project had fully disbursed the loan amount. The project provided access to medium-term finance to 800 small and medium enterprises (SMEs) under the original loan and the two additional financing loans. In total, more than US$700 million equivalent was disbursed to SMEs for both working-capital and investment purposes. In addition, US$180 million in reflows have gone back to SME clients.

1.1 Context at Appraisal 3. The preparation of the Access to Finance Project took place against the background of strong overall macroeconomic performance in Turkey. After a major economic crisis in 2001, Turkey’s economy recovered to experience sustained rapid growth. During the period 2002–06, the economy grew 7.5 percent per year on average, supported by sound macroeconomic policies and the consistent implementation of a strong structural reform agenda. The financial sector also recovered from the deep crisis of 2001 thanks to decisive moves by the regulatory authorities to clean up the balance sheets of the banking sector, intervene in insolvent financial institutions, and introduce tight risk management and supervisory standards during the recovery.

4. Despite the strong recovery and improved health of the financial sector, trust in the banks recovered only slowly, leading to a dearth in term funding, particularly for Small and Medium Enterprises (SMEs). SMEs were seen as higher risk clients by banks, often lacked the necessary collateral to access bank funding, and were almost entirely cut-off from longer term financing. The average maturity of bank loans was below one year, and maximum maturities of around two years for local currency and five years for foreign currency loans were reserved for top-end clients only. Hence, at the time of preparation, it was accepted knowledge that financing constraints loomed large in preventing the SME sector to grow, increase productivity and thus help Turkey improve its overall economic performance. 1 Indeed with SMEs representing 99 percent of all enterprises, 78 percent of employment and 60 percent of total exports but only around a quarter of bank credit, there was a strong rationale for targeted instruments to alleviate SME financing constraints.

1 These perceptions were validated by the Enterprise Survey conducted in 2008, which showed that the severity of the lack of access to finance as an obstacle to growth decreased with firm size.

FINAL DRAFT

2

5. Moreover, shortly after the Access to Finance Project was declared effective in June 2007, Turkey started to feel the impact of the then evolving global economic and financial crisis. Between end-2007 and November 6 2008, the Istanbul Stock Exchange fell 51 percent, and the Turkish lira depreciated by 31 percent against the U.S. dollar. Tightening liquidity and declining growth prospects forced domestic banks to dramatically curtail lending to SMEs, with some leading institutions cutting lending by as much as 50 percent, and the share of SMEs in total bank credit falling from 27 percent prior to the crisis in 2007 to 22 percent by 2009. This changing economic environment gave additional urgency to the injection of term funding resources targeted to SMEs.

6. Against this background, the Government of the Republic of Turkey (Government) requested World Bank support to SMEs in the form of a credit line intermediated by domestic commercial banks. The provision of term funding to the commercial banks specifically targeted at SMEs was expected to alleviate the financing constraint resulting from a lack of term funding on the liability side of the banks’ balance sheets, particularly at medium-and-long-term maturities, thereby promoting SME investments and growth. Second, in the medium term, the project was expected to build the capacity of participating financial institutions for credit appraisal of SMEs, thereby reducing transactions costs, improving risk management and supporting these institutions to raise funding for their SME business from other IFIs or from market resources.

7. Additionally, the project was designed to provide credit to regions with low credit activities (mostly in the east and southeast of the country). As a result, the project was to help ensure that these areas were not be left behind and that the credit and productivity gaps between more and less advanced regions would not widen. Again, it was expected that this would be achieved through bridge financing to banks for onlending to SMEs in underserved regions until the market was sufficiently developed to alleviate the need for targeted support.

8. The credit line intervention complemented a comprehensive package of Bank analytical and financial support to Turkey’s SME sector. The Bank was pivotal in establishing the Investment Advisory Council, hosted by Turkish Prime Minister Recep Tayyip Erdogan in 2004 and subsequent years. Constraints to business growth were also corroborated through a series of Investment Climate Assessments (in 2008 and 2010), and measures to support financial and private sector development were also included in Bank-financed programmatic development policy loans. In 2011, the Bank prepared a report on “Improving Conditions for SME Growth: Finance and Innovation”, which reviewed the obstacles faced by SMEs and developed comprehensive policy recommendations.2

9. The credit line also complemented existing credit facilities provided by international organizations. At the time, the credit lines provided by other international organizations between 1999 and 2006, which totaled US$2.9 billion 3, primarily targeted medium-to-large exporting firms, with an average loan size per firm of about €2–3 million and a maximum loan about of about €10–20 million. Only a few, such as the German Development Bank - Kreditanstalt für Wiederaufbau (KfW), the Union of Chambers and Commodity Exchanges of Turkey - Türkiye Odalar ve Borsalar Birliği (TOBB), and the Turkish Small and Medium Enterprises Development Organisation - Küçük ve Orta Ölçekli İşletmeleri Geliştirme ve Destekleme İdaresi Başkanlığı (KOSGEB), targeted small firms, with maximum loan sizes of about €100,0004. This project was designed to fill the gap in the

2 World Bank (2011), Report No 54691 –TR. 3 SME Loans Monitoring Report (1999-2005), Undersecretariat of Treasury 4 Small Enterprise Loan Program (SELP) of KfW (2004-2006), General Enterprise Development Program and Loan Interest Support Program of KOSGEB

FINAL DRAFT

3

middle by targeting SMEs (including nonexporting firms, with average and maximum loan sizes of €700,000 and €2.5 million, respectively).

1.2 Original Project Development Objective and Key Indicators

10. The original project development objective (PDO) was to increase Turkish SMEs’ access to medium- and long-term finance. Key indicators for measuring project outcomes were:

• Number of SMEs and SME portfolios financed under the project • Share of medium-term financing (more than 12 months) in the total SME loan

portfolio of the participating bank financing under the project. • Nonperforming loan ratios for the project • Share of the credit line disbursed in local currency under the project • Number of provinces with active SME clients financed under the project

11. In addition to those mentioned above, the project was designed to monitor three broader indicators:

• Profile of SMEs financed under the project (for example, amount of sales, number of workers, and economic sector)

• Lending technologies used by TSKB and Halkbank (for example, use of credit-scoring models or the information provided by the credit bureau to grant loans to SMEs)

• Overall increase in access to finance for the SME sector in Turkey 12. These indicators were intended to be monitored for analytical purposes only and serve as inputs in defining policies and projects aimed at further improving access to credit for SMEs in Turkey. Unfortunately, systematic collection of data on the second group of indicators did not take place. 1.3 Revised PDO (as Approved by Original Approving Authority) and Key Indicators, and Reasons/Justification 13. The PDO was not revised. 1.4 Main Beneficiaries 14. The primary beneficiaries for this project, as identified in the project appraisal document (PAD), were SMEs employing fewer than 250 people and having annual sales of less than US$20 million. All private small and medium enterprises (private ownership of more than 50 percent), irrespective of their sector, were eligible for participation. In particular, a special effort was made to ensure that the project benefited SMEs in financially underserved regions in the north, east, southeast, and center of the country, as defined by an official decree of the Government. There were no sector restrictions. However, a cap of about 30 percent of the total lending amount was applied to the tourism sector. 15. The secondary beneficiaries were the participating financial institutions, TSKB and Halkbank. While both TSKB and Halkbank were selected for their excellent management capacity, there was still room for the credit line to positively affect behavioral changes in the SME financing practices of the participating financial institutions (PFIs). Such changes, it was expected, would eventually lead to changes in the maturity of financial products offered by the PFI and less onerous collateral requirements for SMEs, as participating banks adopted

FINAL DRAFT

4

new credit assessment methods and developed a more sophisticated and targeted approach to their SME business. However, whether the banks significantly changed their credit assessment tools, lending methodologies or expanded their SME portfolio was not systematically assessed as part of the project supervision process. Nevertheless, during the design phase, TSKB shared its experience with earlier lines of credit with Halkbank. In the event, Halkbank considerably increased its access to term funding from other IFIs after the beginning of the project, an indirect indication of increased credibility resulting from the experience gained.

1.5 Original Components 16. The project was designed to finance medium-term working capital (for raw materials, for example) and investment loans (for vehicles, machinery, or equipment or civil works, for example) and leases through two banks in Turkey TSKB and Halkbank. The original loan was for €100 million for TSKB and €50 million for Halkbank. After Board approval in June 2006 and prior to effectiveness, TSKB asked to become a retail lender under the project rather than a wholesaler to PFIs and Halkbank requested an increase in the loan amount to €100 million, and the restructured project that became effective thus included to direct retail facilities targeting SME clients and an increased loan amount for Halkbank. Both banks were selected for the project on the basis of their financial soundness, and well performing credit portfolio. TSKB had a successful track record with intermediating World Bank credit lines. Halkbank too had a strong branch presence in the targeted regions and an ongoing focus on growing its SME portfolio, which strengthened its appeal as a partner bank for the project.

1.6 Revised Components 17. The Halkbank component was scaled up twice during the life of the project. After Halkbank fully disbursed its initial loan funds on December 9, 2008, the Board approved an additional loan in the amount of US$60 million and €109.1 million (US$200 million equivalent). Later, the Board approved an additional loan to Halkbank on November 17, 2009, in the amount of US$250 million equivalent (US$100 million and €101.1 million). The additional financing for Halkbank was intended to enable further expansion of the sectors covered and to broaden the coverage of the project, thus enhancing the impact by improving access to finance for SMEs. Under the two additional financing loans, US$40 million and US$75 million, respectively, were allocated for subborrowers in underserved regions.

1.7 Other Significant Changes Not applicable.

2. Key Factors Affecting Implementation and Outcomes

2.1Project Preparation, Design, and Quality at Entry 18. At the time of appraisal, Turkey had a long history with World Bank credit lines. Between 1999 and 2007 three export finance intermediation loans, or EFILs, totaling US$908 million had been approved5. The Government was also implementing credit lines with other international financial institutions and bilateral development agencies in the SME sector. This

5 EFIL I, US$300 million, 1999-2003, EFIL II, US$303 million, 2004-2007, EFIL III, US$305 million, 2005-2009

FINAL DRAFT

5

history of designing and implementing credit line projects for financing exporters and SMEs provided both the World Bank and Government counterparts with a sound base of experience for the design and development of this operation. Turkey’s experience in addition confirmed general lessons of experience developed over time in World Bank Line of Credit operations.

19. Specific lessons incorporated into the project included:

• Lines of credit are more successful in a stable macroeconomic and undistorted financial environment. This was clearly the case in Turkey after the macro economic and financial sector reforms of 2001.

• Participating financial institutions should be selected based on sound bank analysis, including externally audited financials.

• Close monitoring of the performance of the credit line portfolio and the participating banks’ overall performance is warranted to ensure sound commercial principles are being followed, including tracking of non-performing loans, capital adequacy ratios and other financial indicators. This was reflected in the performance indicators monitored under the project (section 1.2).

• Lines of credit should be based on commercial principles, avoiding interest rate subsidies or narrow sector targeting, and providing significant flexibility to participating financial institutions. Some more details on how this lesson was incorporated follows below.

20. Quality of participating financial institutions: Both TSKB and Halkbank were selected on the basis of sound bank analysis and audited financial performance data. The World Bank preparation team conducted detailed assessments of both banks. The banks were deemed to be well capitalized and profitable, with relatively small exposure to market risk. Their loan portfolios had performed well in the years leading up to the preparation of the project, and overall the banks appeared to be run in a sound manner. TSKB, the private bank, was rated by both Fitch Ratings and Moody’s and received ratings in line with the largest and best-run banks in the country. Halkbank was solely owned by the Government but was slated for privatization with a financial adviser (an investment bank) already in place to bring the bank to the market. Both assessments confirmed the management capacity of each bank and its ability to implement the operation. At the same time, the engagement with Halkbank was also seen as an opportunity to strengthen the bank’s credibility in the market and thus prepare it for accessing other IFI or syndicated funds.

22. Flexibility: The project, along with other credit lines in Turkey approved since then, had built-in design flexibility that allowed for operational adjustments as needed to ensure effective implementation. Areas of flexibility included the following:

• Currency: The World Bank’s loan to both banks was designed to start as euro fixed-spread loans with the option to convert to Turkish lira. Withdrawals could be converted into Turkish lira at any time during the life of the loans, resulting in a local currency obligation for the converted option for the converted part of the loan. To re-denominate part of the loan obligation, the World Bank Treasury could execute, with a market counterpart, a euro-TL swap and passed on the terms of the swap to the borrower. This flexible option embedded a mechanism for the banks to manage their exposure to foreign exchange risk.

• Sector: The project included no restrictions on eligible sectors. Experience has shown that sector restrictions lead to providing financing to unviable projects simply because they are in a particular sector. It was agreed that with the exception of the tourism

FINAL DRAFT

6

sector (on which a cap of 30 percent of the total amount lent to TSKB was imposed), there were to be no sector restrictions.

• Subloan lending requirements: The terms and conditions of subsidiary loans were flexible by design. Loans could be granted for both working-capital and investment purposes, and lease contracts could be denominated in any currency. Contrary to project design, there was no deliberate effort to monitor the lending technologies used by TSKB and Halkbank (for example, use of credit-scoring models or the information provided by the credit bureau to grant loans to SMEs). There was also no attempt to monitor the impact of the credit line on the maturity structure of the balance sheet of the participating banks beyond the direct impact of the bridge loan. These were missed opportunities to monitor the potential impact of the credit line on the participating financial institutions.

23. In addition, a key design decision evolved around the choice of a retail rather than wholesale approach. As originally designed and first approved in 2006, the project envisaged that TSKB would act as wholesale lender for the €100 million it managed and on-lend the World Bank funds to private banks and leasing companies. TSKB requested to change its role in the project from a wholesaler to a retailer. TSKB saw the retail model as being more attractive and wanted to develop its own retail capacity. The Bank agreed in the interest of getting the loan started, ultimately with an eye to the final SME beneficiaries. This has advantages as well as drawbacks, as outlined below. 24. Additionality and impact on SME lending conditions generally. The move to a retail model raises questions over the additionally of the Bank’s funds. Without a market test as provided for under a wholesaling structure, the Bank is unable to tell whether it truly pushes out the supply curve for SME lending at market conditions (see sustainability and lessons learned section for further discussion). Moreover, TSKB had initial difficulties in finding retail clients and other commercial banks might have been better placed in intermediating these funds. The same was not true for Halkbank, however, which had a wide branch network and good potential SME client base. 25. Leasing companies: When the project was first designed with TSKB as a wholesale lender, it was expected that some of its clients would include leasing companies. When TSKB opted to implement the project as a retail lender directly to SMEs, leasing companies were excluded from the project. The exclusion of leasing companies at this stage was a missed opportunity. Turkey has a fairly successful leasing industry, although it has been substantially impacted by the crisis. New leasing volume in 2009 amounted to $2.2 billion, which was a severe reduction from $5.3 billion and $8.3 billion in 2008 and 2007, respectively. Including leasing would have helped (1) reach smaller firms, which do not necessarily have access to bank loans but are accessible by leasing companies; and (2) promote the development of the leasing sector and thereby deepen the financial sector. Leasing companies are being reintroduced into the design of the SME 3 operation.

26. Scale up during the financial crisis: Against the background of a sudden deterioration in the economic outlook in 2008, the Government sought ways to scale up financial support to the real sector. In 2008, the Government requested and the World Bank Board approved an additional loan of US$200 million equivalent (US$60 million and €109.1 million) to Halkbank guaranteed by the Government. The flexible design of the credit line and the role of state-owned Halkbank as a retailer in SME 1 was a key design feature that allowed the project to be scaled up rapidly and provide significant funding to the SME sector at a time of great economic uncertainty and credit contraction.

FINAL DRAFT

7

2.2 Implementation 27. Administrative arrangements: The project was implemented over a period of five years, from effectiveness in July 2007 (within two months following Board approval of the restructuring paper for the August 2006 initial Board approval) to closing on April 30, 2012. Overall, the implementation arrangements worked well. Issues addressed during implementation included:

28. SME pipeline: Demand for loans from firms was strong from the beginning. Effective marketing of the program by the banks and the backlog created by the initial delay of effectiveness ensured that the project got off to a positive start. The use of a 17-page operational guideline for participating staff (branches, regional offices, appraisal departments, and loan departments) helped ensure that the loans were efficiently processed in line with the operational manual for the project. In the later stages of project implementation, however, there was some difficulty in finding creditworthy clients in the underserved regions. The SME 1 project was the precursor to a number of similar credit-line interventions in Turkey by other development partners. As with SME I, these operations were to some extent also designed to channel funds to SME sub-borrowers in underserved areas, which led to a certain degree of saturation and may have resulted in a marginal worsening of asset quality in the project portfolio.

29. Loan appraisal system and loan approval procedures: During the course of project implementation, the banks strengthened their loan appraisal and approval procedures. Halkbank integrated its appraisal system for investment loans into its appraisal system for working-capital loans. Up until then, its investment loan appraisal report was Excel based. By project end, the systems shared a common IT platform, which reduced the scope for errors. The system also improved Halkbank’s data collection capability, which in turn helped the bank move toward an internal-rating–based risk model under Basel II. While the project team encouraged a move from collateral to cash-flow based lending, this was not monitored and anecdotal evidence suggests the bulk of SME lending remains collateral based.

30. Loan pricing: At the commencement of the project, Halkbank was still using manual methods for loan evaluation and pricing, which increased the risk of over- or underpricing of loans to subborrowers. The risk was discussed during project preparation and implementation, and Halkbank introduced an automated system towards the end of the project.

31. Environmental assessment framework: During the course of project implementation, both banks’ environmental assessment framework had to be revised to align their policies and procedures with the World Bank’s safeguard policies. The revised framework (1) eliminated the screening categories and adopted World Bank and national screening classifications; (2) separated the due diligence of the firm from the assessment of the subprojects to be financed by the bank; and (3) applied the World Bank categories to subprojects. A simplified checklist version was also prepared for use with small-scale construction projects. It was further agreed that preparing an environmental management plan and conducting public consultation meetings for civil works projects—although not requested under national environmental legislation for most of the projects—would represent a proper implementation of environmental safeguard policies. The change in the environmental assessment framework mid-course was required and reflected weaknesses in the design of the original framework at appraisal. While the participating banks supported this effort, the perceived change in the “rules” after more than two thirds of the loan had been disbursed created some uncertainty among SME clients and contributed to the decline in demand for investment loans, particularly among clients in underserved areas during the final implementation period of the project.

FINAL DRAFT

8

32. Scaling up: Working with the World Bank helped TSKB and in particular Halkbank strengthen their credibility with other international financial institutions. Subsequent to the signing of SME,1 Halkbank was able to significantly scale up its SME credit line business with the EIB, AFD and CEB (see Table 1 below)6. In addition, and although direct attribution is not possible, Halkbank subsequently successfully entered the Eurobond market thereby raising funds that are expected over time to substitute for bridge funding from the IFIs (see Table 2 below).

Table 1: Halkbank SME Credit lines with IFIs (2006 – 2012)

Name of Loan Signed Amount Date of Agreement

EIB SME DEVELOPMENT GLOBAL 90.000.000 EUR 19.07.2007 EIB SMALL BUSINESSES GLOBAL LOAN 150.000.000 EUR 08.06.2009 EIB SMALL BUSINESSES GLOBAL LOAN 150.000.000 EUR 13.05.2010 EIB SME RECOVERY SUPPORT LOAN 74.820.000 EUR 26.07.2010 EIB GREATER ANATOLIA SME LOAN 50.000.000 EUR 22.10.2010 EIB LOAN FOR MIDCAPS AND SMEs 150.000.000 EUR 28.06.2012 AFD SME LOAN-1 50.000.000 EUR 13.04.2006 AFD SME LOAN-2 80.000.000 EUR 19.02.2008 AFD ENERGY 100.000.000 EUR 24.03.2011 CEB SME LOAN 100.000.000 EUR 31.10.2011 CEB SME LOAN (HALK LEASING) 50.000.000 EUR 29.05.2012 ECOBANK SME LOAN 15.000.000 USD 11.02.2009

Table 2: Halkbank Eurobond Issuances

Halkbank-List of Eurobonds Issuances

Amount Currency Origination Date Maturity Date 750.000.000 USD 19.07.2012 19.07.2017 750.000.000 USD 05.02.2013 05.02.2020

33. Procurement: As part of the regular implementation support for the project, targeted reviews were conducted to ensure that the project’s procurement and contracting processes were in line with the loan agreements and adhered to the procedures defined in the operations manuals. Overall, the reviews found that the beneficiaries undertook all procurements in accordance with established private sector or commercial practices acceptable to the Bank. There are no international competitive bidding (ICB) contracts to be reviewed. All reviewed contracts were below the commercial practice threshold specified in the loan agreement. However, there were a few ineligible expenditures that were promptly corrected. For example, one of the reviews observed that while the purchase of used equipment is not eligible for financing out of the loan in accordance with annex-8 of the PAD, some of the goods procured were secondhand. The borrowers replaced these expenditures with eligible ones.

6 EIB SME Recovery Support Loan, EIB Greater Anatolia SME Loan, AFD SME Loan 1 and 2, AFD Energy Loan and ECO Bank SME Loan did not have a Treasury Guarantee.

FINAL DRAFT

9

34. In the later stages of project implementation, Halkbank faced some difficulty in finding creditworthy clients in the underserved regions. The SME 1 project was the precursor to a number of similar credit-line interventions in Turkey, including several supported by the European Investment Bank and the European Bank for Reconstruction and Development. As with SME I, these operations to some extent were also designed to channel funds to SME sub-borrowers in underserved areas, which led to some saturation and may have resulted in a marginal worsening of asset quality in Halkbank’s project portfolio. Moreover, Halkbank reports that changes introduced into the operations manual in 2011 to clarify environmental safeguard requirements might have led to higher transaction costs and thus less demand for funding, particularly for investment purposes.

2.3 Monitoring and Evaluation Design, Implementation, and Utilization 35. The project’s monitoring and evaluation (M&E) framework for “improving Turkish access to medium-term finance” was based on proximate outcome indicators of project performance, that is, the number of SMEs and SME portfolios financed under the project; share of medium-term financing (more than 12 months) in the total SME loan portfolio financed under the project; nonperforming loan ratios for the project; share of the credit line disbursed in local currency under the project; and the number of provinces with active SME clients financed under the project.

36. The project outcome indicators were effectively monitored throughout the project. Each supervision mission aide-mémoire presented a summary of the financial performance that included amounts disbursed, number of SMEs financed, geographic distribution of loans, level of nonperforming loans if any, amount of loans disbursed in local currency, and distribution of loans between investment and working-capital purposes. Since the PDO (and most intermediate) indicators related to the borrowers’ performance in disbursing the borrowed funds, the outcome indicators were readily available and easy to monitor.

37. Other indicators of the project’s impact on the ultimate beneficiaries (SMEs sales and employment data) and on the participating banks (use of new lending technologies, expansion of SME business using own funds) were not systematically collected and reported throughout the life of the project. Instead, in 2011, the World Bank commissioned an enterprise survey by an independent firm to assess the outcomes of the World Bank-financed credit lines in Turkey (SME I & II and EFIL I-IV)7. The study was based on a survey of some 400 EFIL and SME beneficiary firms, and 200 control firms. Acknowledging the methodological limitations of endogeneity in program participation (the so-called “selection bias”), crowding-out effects, and unobserved characteristics of firms, the study concluded that overall, the EFIL and SME credit lines had a positive impact on beneficiary SMEs. In addition, using a sample of 166 clients of Halkbank in SME 1&2 which received loans between 2006 and 2009, Bank staff carried out a comparison of client performance during 2006-2008, using the 2009 clients as a control group.8 No evaluation was conducted of the impact of the credit lines on lending practices of participating banks and the extent to which SME lending was established as a core line of their business. 38. There are inherent difficulties in evaluating credit lines. Ideally, an evaluation of the impact of a credit line on the performance of SME beneficiaries would require a randomized experiment, including a control group that is similar in all respects to the target group except for access to credit. This is notoriously difficult to do since the commercial interest of the participating bank is to grant credit to all creditworthy and qualified SMEs as long as funding

7 World Bank (2011), “EFIL and SME Credit Line Project: An Assessment of Outcomes”. 8 World Bank (2011), Improving Conditions for SME Growth: Innovation and Finance.

FINAL DRAFT

10

is available. Likewise, the impact of bridge financing on the development of financial access conditions for SMEs more generally, through improved lending practices by participating banks, and through increased competition by providing firms access to a greater variety of lending products, is difficult to measure robustly. Given these methodological difficulties, the monitoring and evaluation framework was kept simple although the above reported ex post evaluations provided some additional information. The failure to collect systematically information on PFI lending technologies, as intended in the PAD, was a missed opportunity, however, given the project’s objective to improve SME access to credit. As the financial markets in Turkey further mature, more robust M&E frameworks for IFI funded lines of credit are recommended to ascertain additionality and avoid market distortions.

2.4 Safeguard and Fiduciary Compliance

39. Overall, safeguard and fiduciary compliance was satisfactory during the project period. The well-developed operational manual and experienced PIU staff helped ensure the effective implementation of safeguards and fiduciary compliance. Periodically, the World Bank team reviewed the systems established by the PIU to monitor the implementation of the project and selected samples that would be verified at the branch level. On field visits, World Bank staff met with the branch managers or the customer relationship officers in the branches, reviewed the files and documents of selected beneficiary SMEs, and visited their projects. In general, compliance was positive.

40. However, meeting the World Bank compliance standards was not without its challenges. To start with, the borrowers had to dedicate significant resources to meeting the project’s safeguard and fiduciary requirements. This effort was necessary because their pre-project loan appraisal and monitoring practices, particularly those related to safeguard and fiduciary requirements but also financial viability assessments, did not match World Bank requirements in many respects.

41. During implementation, some of the challenges that the borrowers had to overcome included the following:

• Financial management: During the January 2010 field review, the World Bank team observed that although all loans were subject to the review of the internal controllers or auditors on a continuous basis, in some cases the controllers focused on the implementation of the general loan procedures of Halkbank and sometimes omitted checking the eligibility of invoices declared in the invoice list. In other instances, branches financed ineligible invoices. In all cases, errors were corrected, and a corrective action plan was discussed and agreed to, thus minimizing the risk of future occurrence.

• Procurement: Overall, both banks followed the procurement procedures agreed to in the loan agreement and the operations manual. A few ineligible expenditures identified during procurement reviews were promptly addressed by the participating banks.

2.5 Environmental safeguards: While Turkish environmental safeguards requirements are relatively stringent, they differed from World Bank requirements, particularly for Category B projects. These projects mostly involve investment in physical expansion, for which Turkish legislation does not mandate the preparation of an environmental management plan. This “discrepancy” actually required an adjustment of the operations manual in 2011 for the purpose of clarification. Since the remaining portion of the loan at that time was earmarked for underserved areas and the local Halkbank branches had access to financing from other international financial institutions (IFIs) that did not require the same environmental safeguards—it seems that they opted to use the World Bank loan only for working-capital requirements.

2.6 Post-completion Operation/Next Phase

FINAL DRAFT

11

42. Including the SME 1 project, the World Bank has provided 11 credit lines to Turkish banks over the past 10 years, amounting to some US$4 billion in commitments. These projects have focused on providing financing to exporters (four projects, EFILs, US$1.75 billion), SMEs (two projects, US$1.2 billion), and energy sector enterprises (two projects, US$1.1 billion). The World Bank has now made direct loans to state and private banks—with the Turkish Treasury providing guarantees—which then on-lend the funds to enterprises either directly or through a subsidiary participating financial institution. In all of these projects, the main development objective has continued to be providing medium- and long-term finance to enterprises in these sectors. This objective continues to be relevant, given that the maturity structure of bank balance sheets has shifted only very gradually and SMEs continue to point to financing as a dominant constraint for their expansion. However, the role of IFIs as providing bridge financing increasingly needs to take into account the broader picture and seek to enhance the sustainability of results through parallel technical assistance activities and advisory work, through leveraging their funds with market resources and through more robust monitoring frameworks. 43. In 2012, the Government requested the World Bank to follow up with an SME credit line in the form of a US$300 million wholesale investment loan to Ziraat Bank, for intermediation through private retail banks. It was proposed that the wholesale credit line, guaranteed by the Government would be intermediated by Ziraat Bank, which in turn would on-lend funds through PFIs, which could be commercial banks or leasing companies (at the time of this implementation completion report, the preparation of this project was in progress). The new SME line reflects some of the lessons learned over the past decade: it returns to a wholesaling model to ensure additionality of resources, it suggests the incorporation of leasing companies and second tier participating financial institutions to push out the supply curve for term funding and increase competition, and it suggests leveraging Bank funds with co-financing and the more explicit use of reflows.

44. The long-term development impact of the credit lines on beneficiary SMEs and on the market for SME lending more generally is likely to be positive, even though a rigorous evaluation is missing to date. The 2011 study “EFIL and SME Credit Line Project: An Assessment of Outcomes” surveyed final borrowers, some 400 EFIL and SME beneficiaries and 200 control firms. It concluded that the credit lines were successful in targeting the medium-to-long-term working-capital and investment finance needs of exporters and SMEs. In particular, a high proportion of SMEs cited the availability of longer-term financing as the key benefit of participation and expressed overall high satisfaction with the credit lines. The recent Independent Evaluation Group (IEG) reviews of ICRs for the EFIL I, II, and III series also concurred, with rating outcomes of satisfactory, highly satisfactory, and highly satisfactory, respectively.

45. A renewed effort to evaluate the impact of SME credit lines is now under way. In 2013, the World Bank, in consultation with the authorities, commenced preparations for an impact evaluation framework that would use a combination of experimental, non-experimental and qualitative methods to understand whether and how SME III impacts outcomes at the PFI and SME level. Particularly, the IE will ask whether offering longer-term maturity funds to PFIs (i) increases the maturity of the loans provided to SMEs; (ii) changes the composition of SMEs that receive loans (e.g., new SMEs, new products to the same type of SMEs), and (iii) improves SMEs growth and performance. 3. Assessment of Outcomes

FINAL DRAFT

12

3.1 Relevance of Objectives, Design, and Implementation 46. The project proved highly relevant to Turkey’s development priorities. The project design reflected the identified financing constraints facing SMEs and through the provision of bridge financing through two participating financial institutions was able to contribute to the alleviation of such constraints for beneficiary SMEs as attested in surveys of beneficiaries.9 47. The design of SME1 and its rapid scaling up during the financial crisis provided a key tool for effective crisis response. The crisis highlighted the need for a quick disbursement instrument and the provision of counter-cyclical term funding to SMEs allowed Halkbank to maintain its pool of SME clients and support them through the cycle. Compared to other financial intermediation loans, SME1 was one of the fastest disbursing during the crisis, attesting to its robust design (see Table 3). The first additional finance for the project was fully disbursed within nine months of going into effect, and a third of the second additional finance of the same project was also disbursed within nine months after going into effect. Moreover, additional resources from other international financial institutions allowed the project’s impact to be leveraged by replicating its design. Table 3. Disbursement of Financial Intermediation Loans Approved during the Crisis

Country Loan Credit US$

Approved Date

Approval to Effectiveness

(weeks)

9 months

(%)

12 months.

(%)

To March 31, 2011

(%) Armenia Access to Finance for SMEs

50 02/04/2009 7 50.3 50.3 60.0

Bosnia Enhancing SME Access to Finance

70 12/15/2009 27 0.2 4.0 12

Croatia Export Finance 141 08/04/2009 16 15.3 37.4 62.8 Turkey SMEs Additional Financing 1

200 12/09/2008 5 90.7 100 100

Turkey SMEs Additional Financing 1

250 12/15/2010 5 32.5 32.5 77.2

Source: IEG (2012) The World Bank Group’s Response to the Global Economic Crisis, World Bank 48. Two factors contributed to the good disbursement performance of SME1 even in crisis conditions. First, the financial institutions that received the money had the experience and capacity to disburse the loans quickly and were also familiar with World Bank processes. Second, the decision to include Halkbank, a state-owned bank, as a retail lending in the project was fortuitous. State banks are more tolerant of risk during such periods compared to private banks (Global Financial Sector Development Report, 2012). As the balance sheets of private banks deteriorated and they curtailed their lending activities, many countries used state-owned banks to step up their financing to the private sector (for example, Brazil, China, and Germany). Other countries have used guarantees to encourage continued private sector lending or conditioned access to cheap central bank financing for onlending to the real sector. Over the medium-term, such direct state support to the economy will need to be wound down to avoid entrenching distortions in the allocation of financial resources. However, in the context of an unprecedented international liquidity crisis, SME1 proved an agile and robust instrument for countercyclical support.

3.2 Achievement of Project Development Objectives (see Annex 2)

9 The 2011 external evaluation included self-assessment of client SMEs which is overwhelmingly positive. World Bank (2011), Turkey: EFIL and SME Credit Line Projects. An Assessment of Outcomes.

FINAL DRAFT

13

49. Against the project development indicators selected and monitored, the project met the stated development objective of improving Turkish SMEs’ access to medium and long-term finance. In absolute terms, the PDO indicator results were impressive. By project’s end, more than US$700 million equivalent in project funds were fully disbursed to SMEs for both working-capital and investment purposes. Notwithstanding the size of the Turkish economy in general, and the size of the balance sheets of the banks through which the project was intermediated, the financial resources directed at SMEs were substantial. 50. However, outcome indicators chosen were insufficient to draw conclusions regarding the impact of the project on SME credit access more generally. The project chose to measure the impact on SME access to medium-term financing through the share of loans exceeding one year in the SME lending portfolio of the participating banks. However, all SME1 loans exceeded one-year in maturity by definition. Hence, no conclusions can be drawn on whether the project influenced the maturity structure of PFI lending to SMEs over and above the bridge financing provided.

51. Other indicators were either not measured or inappropriately specified. The target outcome of “providing local currency loans to SMEs” was not consistent with the design of the local currency swap option in the project as a risk hedging device. This was not meant to increase local currency lending per se, but rather to provide better risk management to participating banks. In the end, local loans amounting to US$18 million were made to underserved regions, with the banks taking the foreign exchange risk (that is, there was no corresponding foreign exchange swap transaction). As a general lesson, local currency lending should remain subject to the prevailing market conditions and the treasury management decisions of individual firms. Consequently, the intermediate indicator of the share of local currency loans was dropped from SME2 whilst the conversion option was retained. As mentioned earlier, indicators for the adoption of new lending technologies by PFIs were not measured, and no conclusions can be drawn regarding this intermediate indicator.

52. In view of the shortcomings of the original monitoring framework, the World Bank undertook an external evaluation of its credit line portfolio in 2011 10 . The evaluation covered 318 clients under EFIL III and SME 1&2. The sample included 201 SME 1 clients and 149 SMEs as a control group. The evaluation was unable to control for selection biases and is thus indicative only. It included both qualitative self-evaluation and quantitative comparative results. The self-assessment of SME clients suggested the credit line was broadly additional, with only a quarter of surveyed firms indicating funding in the full amount requested would have been available from other sources. Three quarters of SME clients highlighted the longer maturities provided under the credit line as a key benefit. SME 1 clients claimed to have been able to save 410 jobs as a result of access to the facility. Close to 95 percent of SME1 clients declared to be either satisfied or very satisfied with the project. Compared to the control group, SME 1 clients reported greater product and process innovation, higher capacity utilization, and higher rates of investment. Among the SME control group, far fewer enterprises access bank lending, but when they do, the maturity structure appears to be similar. This indicates that PFIs have structured their loans broadly in accordance with market conditions. There is no detailed information on collateral requirements or lending techniques employed by PFIs in the external evaluation. 53. A subsequent Bank report used a similar client base, but included a different control group to gauge the impact of the credit line on SME recipients. This report, also

10 World Bank (2011), Turkey: EFIL and SME Credit Line Projects. An Assessment of Outcomes.

FINAL DRAFT

14

completed in 2011, was based on a sample consisting of all 166 firms which received a loan from Halkbank through the SME 1&2 project between 2007 and 2009. SMEs that received a credit in 2007 and 2008 were the target group and their employment and sales performance was measured against the control group of all SME 1&2 clients that received their loan from Halkbank in 2009. While there are still multiple firm characteristics that remain uncontrolled and thus bias the results, since both groups of firms did in principle comply with the qualification criteria and were selected by Halkbank for a loan, this procedure mitigates some of the methodological problems encountered in the external evaluation. The main results are shown in Figure 1 and Table 4. 54. The evaluation hypothesized that if the program was successful, firms that received loans in 2007 and 2008 were expected to grow more quickly between 2006 and 2008 than firms that received loans in 2009. The preliminary evidence from these comparisons suggested that firms that received loans in 2007 and 2008 outperformed firms that did not receive loans until 2009 in terms of employment growth (Figure 1) but not for sales (see Table 4 for a summary of the measured effects and Annex 3 for the details of the methodology used for the evaluation). The results are evidence for the important crisis-mitigation effect of the credit line, as also confirmed by the self-evaluation of SME clients. The borrowers’ evaluation of SME1 included in Annex 4 suggests that a total of 9500 jobs were created as a result of SME1.

Table 4: Summary of Measured Effects SME 1&2 Credit Lines Effect on SME data Employment 15 employment growth and the effect is sustained

over time. Sales No significant effect found. Exports Not measured. Investments 210 percent higher investment in the year a loan

was received. Notes: Only statistically significant results are reported.

Rating: Satisfactory. 55. The project met its development objectives. It helped the Government increase the amount of medium-term financing and scale up support to the real economy fast at a time of growing global constraints on credit. The project helped client SMEs maintain a reasonable level of activity and avoid major layoffs. While the monitoring and evaluation framework,

Figure 1: Median growth rates (2006-2008), employment and sales for firms that received loans in 2007, 2008 and 2009

Source: Own calculations based upon Halkbank data. Note: Sales data are deflated by GDP deflator

13 13

18

11

7

19

02468

101214161820

Employment Growth Sales Growth

Perc

ent

2007 2008 2009

FINAL DRAFT

15

particularly with respect to measuring the impact of the project on the PFIs, was insufficient to draw robust conclusions regarding all dimensions of project outcomes, a significant effort was made towards the end of the project to measure the outcomes on final SME beneficiaries. Given the broadly positive results of this evaluation, the overall satisfactory rating is justified.

3.5 Overarching Themes, Other Outcomes, and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 56. Specific poverty, gender, and social development indicators were not collected during and after the implementation of the project. Still, although the project was not designed specifically to deal with poverty or gender issues, it is highly likely that it contributed to positive results particularly on social and poverty outcomes, given the significant importance of SMEs for employment in Turkey, and the specific effects of the credit line on employment in client firms reported above.

(b) Institutional Change and Strengthening 57. Although it is not possible to attribute credit to this specific project for the maturity structure of the financial institution, it is instructive, but not conclusive, that Halkbank’s average loan maturity increased rapidly after it strengthened its collaboration with IFIs during the project’s life. The size of the balance sheets makes specific claims in this regard overambitious but not implausible. A demonstration effect was likely in play as bank managers, especially in the bank’s branches, implemented the project and developed a greater willingness to take on loans with longer maturity. During the period of project implementation there is evidence that, for Halkbank, the average maturity of SME loans increased (see Table 4 below), the bank was able to raise syndicated loans for its business as well as issue several international bonds (as discussed in Section 2.2) In the absence of a comprehensive impact assessment, this conclusion is necessarily speculative, however.

Table 4: Average Maturity (Days): Halkbank SME Loan Portfolio Average Maturity (Days) Dates Total

Liabilities Loans Extended

to Customers 12/31/2008 90 492 12/31/2009 118 527 12/31/2010 123 607 12/31/2011 134 645 12/31/2012 138 598

58. To varying degrees, both Halkbank and TSKB strengthened some aspects of their internal procedures as a result of working with the World Bank on the project. Specifically, these changes included:

• Credit appraisal: The project helped streamline the banks’ procedures for appraising project finance for firms. Halkbank integrated its system for appraising investment loans into its rating-based system for appraising working-capital loans.

• Computerization of systems: Some of the procedures for loan processing (for example, loan pricing and repricing) were done manually. For instance, Halkbank formerly repriced its 60-month variable-rate loans manually, which led to slippages.

FINAL DRAFT

16

By establishing IT platforms for processing loans, the banks enhanced their interaction with firms and minimized their risk of errors.

• Leveraging resources: Their experience with the World Bank lines of credit made it easier for the banks to leverage additional resources from other international financial institutions. The risk management departments of the PFIs became sophisticated during the life of the project, and credit officers appreciated the advantage of longer-term funding for their clients. During the life of the project and after, the banks increased their SME portfolios with IFIs as discussed in Section 2.2. IFIs.

Other Unintended Outcomes and Impacts (positive or negative) 59. None.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not applicable. 4. Assessment of Risk to Development Outcome Rating: Low. 60. Although the amounts disbursed under this particular project are low compared to the balance sheets of the participating banks and to the overall economy of Turkey, the demonstration impact on SME finance is significant, and its effects on the participating financial institutions are sustainable. This conclusion is based on the following factors:

• Replicability: The core design of the credit lines in Turkey has not changed substantially. In subsequent credit lines (either for exports or SMEs) by the World Bank and other IFIs, some features have been tweaked to enhance performance, but at its core the basic model has been tried, and all parties have gained experience in ensuring its effectiveness.

• Demand: There is continuing demand from firms for medium-term financing. Halkbank was able to find new clients for reflows (US$180 million) during the life of the project. This feature was considered a sustainable element of this type of operation, warranting explicit inclusion in the design of the proposed SME III operation.

61. Going forward options for leveraging the development impact of projects of this type across the economy may need to be identified. While being a very effective tool in the past decade, the pace of IFI bridge financing may not be sustained in the long run. Means must be found to (i) leverage IFI resources with greater commercial funding, which is increasingly available at longer terms, and pushing such funding towards more risky market segments, (ii) increase the availability of domestic longer term savings instruments so that the competition for term funding is increased and reliance on external resources reduced, and (iii) create a sustained demand for investment financing from domestic SMEs, including increasingly small and micro firms, by improving the investment climate and levels of financial transparency. This will require policies that support a better business environment more generally. Such policies would include, but not be limited to, strengthening the legal environment for contract enforcement (creditor claims, for example) and improving the transparency of SMEs. In this regard, Turkey’s adoption of the new commercial code in 2011 is an important development.

FINAL DRAFT

17

5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately satisfactory. 62. The project design reflected a substantial level of strategic relevance at the time of project preparation. The team’s responsiveness to the request to restructure the project soon after Board approval ensured smooth subsequent implementation. However, it is also important to highlight that there was a trade-off in responding positively to the request to move to a retail lending model rather than the original wholesale model. Although the team was able to get the project moving quickly and avoid losing TSKB as a partner in the project, the team did so at the risk of agreeing to a less convincing design in terms of ensuring additionally and involving leasing companies and second tier financial institutions. In SME III, the World Bank has made the decision to return to a wholesale financing model. 63. A 2008 quality assessment review similarly concluded that the project’s overall quality of design (strategic relevance and approach, realism of project design and risks, fiduciary safeguards, and Governance and Corruption (GAC) aspects was satisfactory. The two reservations in the review were that (1) allowing TSKB to provide a retail rather than a wholesale facility reduced the potential number of financial intermediaries that could have been attracted to the project; and (2) the project failed to facilitate as much local currency lending as desirable. Despite these reservations, the review concluded that the project design was realistic and that the loan quickly became effective. Additionally, before the end of the project, local currency lending was facilitated.

64. The overall moderately satisfactory rating reflects the weaknesses in the monitoring and evaluation framework, which do not allow robust conclusions to be drawn about the impact of the credit line on access to finance conditions for SMEs beyond the immediate impact of having disbursed the loan. This is a weakness in the design that ought to be rectified in future credit line operations.

(b) Quality of Supervision Rating: Satisfactory. 65. The Bank provided thorough and effective support for the implementation of the project, meriting a satisfactory rating for the following reasons:

• The field-based presence of a financial sector specialist provided the client real-time support and allowed for greater proactivity in resolving potential problems. Similarly, the PIU very much appreciated the local presence of the fiduciary staff.

• The team led frequent implementation support missions that regularly included meetings with the staff and management of both banks involved in their projects, including bank-branch management. In total, the mission conducted at least 12 formal implementation support missions over the project’s life.

• Significantly, each implementation support mission included field visits to beneficiaries in different regions; these visits included discussions with loan recipients on both the loan process and the effects of the financing on their business.

• All missions, including the mid-term review, were on schedule, and aide-mémoires were thorough and generally candid. Generally, the nine Implementation Status and Results (ISR) Reports prepared for the project between July 2007 and June 11, 2012,

FINAL DRAFT

18

were filed regularly. The ratings for project components and project management were consistent with the performance of the project.

66. The only blemish on this strong performance was the weakness in the intermediate outcome indicators selected for the results framework. The problem associated with these outcome indicators has been discussed. Given the underlying premise that the credit line strengthened institutional interest in sustaining SME business even in the absence of a World Bank instrument, failure to collect additional data on the participating financial institutions was a missed opportunity. 67. In 2008, a Quality Assessment of the Lending Portfolio (QALP) Assessment concluded that supervision of the project to be moderately satisfactory. There are two issues. The panel felt that greater attention should have been given to exchange rate risk both for the sub-borrowers and Halkbank. In addition, lending by Halkbank (and correspondingly disbursement of the Bank loan) was expanding much faster than overall financial sector lending to SMEs, which actually contracted in 2009. Such rapid disbursement of funds in the face of slow growth in total SME lending in 2008 and actually decline in 2009 might, they argued, have indicated that the sub-loans, because of cheaper pricing, were substituting for loans from other sources. The interest rates charged by Halkbank and TSKB appear to have been substantially below rates charged by commercial banks on foreign exchange loans and only a fraction of the rates on TL denominated loans. Both these issues should have been examined in supervision and the possibility of ways to expand on-lending in local currency re-examined. 68. This ICR concludes that supervision of the project as satisfactory. This assessment differs with the QAG conclusion on both counts used to justify the QALP rating. Firstly, the fact that lending under the program was faster than overall sector lending to SME is not evidence of a substitution effect. Rather, it confirms that the Government countercyclycial actions in the face of the financial crisis were in fact working. For the substitution effect to be valid, one would have to show that overall lending to SMEs was declining because of the credit and not, as is the case here, in spite of the credit. Equally important is the behavior of the loan portfolio of the bank rather than the sector. This was a general slowdown in lending across the economy and cannot be attributed to the credit line. If any direct attribution is to be assigned the line of credit, it is that it may have contributed to mitigating the slowdown in SME lending at Halkbank. Like other banks, it’s overall SME portfolio also declined but to a lesser degree. Halkbank maintained more than 40 percent of the banking sector loan growth of TL 14.6 billion between Sep 2008 - Sep. 2009 period in which the global crisis showed its negative effect severely (see Table 5).

FINAL DRAFT

19

Table 5 SECTOR and Halkbank SME Loan Growth

Million TL

HALKBANK Sep.0

8 Sep.0

9 Diff. Diff.%

SME Loans 11.63

1 11.55

7 -74 -0,6 SME NPL 879 618 -261 -29,7 SME NPL (%) 7,03 5,07 -1,95

Million TL

SECTOR* Sep.0

8 Sep.0

9 Diff. Diff.%

SME Loans 86.82

1 81.69

4

-5.12

6 -5,9

SME NPL 3.800 6.697 2.89

7 76,2 SME NPL (%) 4,19 7,58 3,38

*BRSA monthly.

69. Secondly, the argument that there was insufficient lending in local currency is a failure of project design rather than supervision. The option to provide loans in local currency was included in the project as a hedge against currency mismatch risk. The fact that the hedge was not exercised (for whatever reason) does not suggest the project failed. The projects ‘failure in design’ was in not making this more explicit in the project appraisal document. It left the impression that local currency lending as a desirable end in its self by including in the M&E framework as a performance indicator. But this was contrary to the principal of flexibility that is essential in effective lines of credit. Local currency lending should not be subject to explicit targets. It is a risk management option that should be determined on a case by case basis in agreement between the commercial banks and the SME as they discuss and negotiate the appropriate credit and currency risks in accordance with prevailing market conditions. 70. Finally, a satisfactory supervision rating is also justified by the considerable effort extended by the Bank during the final years of implementation to collect additional data on the impact of the credit lines. Methodological difficulties with such an ex post evaluation notwithstanding; this has allowed this ICR to draw on a much richer set of data. (c) Justification of Rating for Overall World Bank Performance Rating: Satisfactory. 71. Taking into account the moderately satisfactory rating of design and the satisfactory rating of supervision, the overall rating for Bank performance is Satisfactory.

5.2 Borrower Performance (a) Government Performance Rating: Satisfactory. 72. Government performance is rated satisfactory because of the Government’s strong ownership of the project and commitment to its objectives. This has been demonstrated by its willingness to provide a guarantee to a private bank to participate in the project and its

FINAL DRAFT

20

commitment to the privatization of Halkbank, which reaffirmed its commitment to strengthening private sector provision of finance in the economy. Strong commitment from the Treasury also ensured that the credit-line instrument was leveraged with other development partners.

73. Equally important, the Government also recognized that the long-term sustainability of this and similar initiatives was affected by broader Government reforms of the financial sector. The Government has put in place measures to improve the business environment and maintain macroeconomic stability. It has also rightly resisted the urge (prevalent in difficult economic times) to meddle in the private sector with directed credit, interest rate caps for SMEs, and other often well-intended but blunt instruments. Instead, it has focused its efforts on pursuing the macroeconomic policies and structural reforms that have yielded robust economic growth.

(b) Implementing Agency Performance Rating: Satisfactory. 74. Overall, performance of the Project Implementation Unit was satisfactory. It took significant capacity to coordinate the number of individual SME loans that the project financed and to ensure compliance with fiduciary standards. The project management unit promptly discussed and addressed shortcomings in compliance identified in financial management and procurement reviews. Specifically, the experience and competence of the fiduciary staff throughout ensured the satisfactory implementation of the project. Although strained at times by the sheer volume of transactions, the fiduciary staff implemented corrective measures, including, for example, automating previously manual monitoring systems. Prudent management of disbursement is especially noteworthy.

(c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory. 75. Based on the satisfactory ratings of the Government performance and of the implementation agency, the overall rating for borrower performance is satisfactory.

6. Lessons Learned 76. Key lessons for the World Bank are:

77. Flexibility during project design and implementation is critical to successful outcomes. When a project is designed, it is not possible to envision all potential scenarios. Being able to change activities and add resources in response to changing circumstances is essential. The Bank decided to restructure project design early on in the interest of providing funding to the ultimate beneficiaries quickly, although this came at the cost of reducing the project’s potential impact on the market for term lending by reducing the range of participating banks. In retrospect, this decision was appropriate at the time and fortuitous since it created a vehicle to rapidly scale up and disburse funds to SMEs during the ensuing economic crisis. However, during more normal times, a wholesale design should be preferred and should be the rule for subsequent credit line operations.

78. Stronger attention to monitoring and evaluation is needed to demonstrate the sustainability and long-term impact of credit lines, particularly after a decade of using a broadly similar approach. The Bank missed an opportunity to strengthen the intermediate outcome indicators: other indicators could have better reflected the impact of the project on financial institutions practices and thus the sustainability of the SME lending business, once IFI funding is increasingly less additional. An evaluation framework to capture the impact of

FINAL DRAFT

21

IFI financed credit lines on the ultimate beneficiaries among SMEs, particularly those guaranteed by the Government, would also be desirable.

79. Implementation support missions work best when they include regular field visits to bank branches and beneficiaries. The implementation support missions regularly identified opportunities for strengthening the project program when Bank staff interacted with the PFI staff who were implementing the project and were closest to the beneficiaries. It was often then that Bank staff identified areas in financial management and procurement procedures that could be improved. The feedback from beneficiaries was especially instructive in evaluating the performance of development partners.

80. Credit line operations have substantial leveraging potential. During the life of the project, the simplicity of the design and the experience gained by the banks contributed to their ability to attract additional financing from other international financial institutions. Going forward, other approaches to increase leverage, such as partial credit risk guarantees (PCGs) and co-financing requirements, should also be explored. Both instruments increase the amount of funding available to SME clients for each IBRD dollar investment in the project. PCGs enable banks to raise funds from the international markets with improved terms than what would be possible by the bank on its own creditworthiness under market conditions. The structures allow the borrower to secure the much-needed financing at reasonable costs, while also minimizing transaction risk in a climate of volatility. In addition, the targeted volume is matched against the bank’s ability to support project beneficiaries quickly and efficiently. Co-financing arrangements ensure that the participating financial institution complements borrowed funds with resources from its own balance sheet. In the face of limited IBRD resources, leveraging funds through such instrument should be encouraged whenever possible. 81. Lending quotas for financing underserved regions are inefficient. As desirable as it is to ensure that traditionally underserved regions are carefully considered for such projects, the focus needs to be on providing relevant information, improving access, and giving special consideration to the loan application process rather than on imposing regional lending targets or quotas. During the last year of the project, it was clear that Halkbank was struggling to meet the geographical disbursement requirements, particularly after several other international institutions also targeted the same areas. Allowing both banks to lend to the entire country provided them with greater flexibility to place loans and increase competition, which in turn helped achieve the project’s objectives.

82. Upfront training and capacity building on World Bank fiduciary standards for environmental, procurement, and financial management is essential for efficient delivery. As a result of careful implementation support, problems in implementing the project because of fiduciary standards were identified early, and appropriate changes were made to the project implementation manual. The process resulted in capacity building for the financial institutions, which will stand both Halkbank and TSKB in good stead in future operations. As a result of this experience, a key lesson learned is the importance of spending time both before the project begins and early in its implementation to review and identify potential conflicts in fiduciary standards. Another lesson is that changes mid-way through project implementation, such as became necessary with the environmental assessment frameworks, create significant uncertainty and may thus negatively affect project implementation. Particularly in the area of environmental safeguards, the Bank has invested significant resources to build capacity and prevent similar experiences in the future.

FINAL DRAFT

22

7. Comments on Issues Raised by Borrowers, Implementing Agencies, and Partners (a) Borrowers and Implementing Agencies See Annex 5. (b) Cofinanciers None. (c) Other Partners and Stakeholders None

FINAL DRAFT

23

Annex 1. Project Costs and Financing

(a) Table A1.1: Project Cost by Component

US$ millions equivalent

Components Appraisal Estimate

(US$ millions)

Actual/Latest Estimate

(US$ millions)

Percentage of Appraisal

Total baseline cost 246.91 700.00 283.50 Physical contingencies 0.00 0.00 0.00 Price contingencies 0.00 0.00 0.00 Total project costs 246.91 700.00 283.5 Credit line 246.46 700.00 284.02 Project preparation fund 0.00 0.00 .00 Front-end fee IBRD 0.45a 0.00 .00 Total financing required 246.91 700.00 283.5 a. The amount is estimated based on the exchange rate as of signing. Table A1.2: Project Cost by Financing

Source of Funds Type of Cofinancing

Appraisal Estimate

(US$ millions)

Actual/Latest Estimate

(US$ millions)

Percentage of Appraisal

Borrower 0.00 0.00 .00 World Bank 246.91 700.00a 283.5

a. As a result of two additional financings, this amount was increased.

FINAL DRAFT

24

Annex 2. Outputs by Component TABLE A2.1: RESULTS FRAMEWORK

Project Development Objective Indicators

Indicator Name Baseline End-April 2012 End Target Number of SMEs and value of subloans made available by borrowers to SMEs under the project

(a) 0 (a) 745 (Halkbank) & 56 (TSKB) (a) 500

(b) US$0

(b) US$160 million&

€310.2 million (Halkbank) and US$48 million & €60 million

(TSKB)

(b) Full disbursement

Intermediate Results Indicators

Maturity of subloans: share of subloan value with maturity of at least 1 year 0 100% 100%

Currency of subloans: share of subloan value in local currency 0% 6% (Halkbank);

0% (TSKB) No target

Geographical coverage: Number of provinces with active SME clients (a) throughout the country; and (b) in the eastern and central regions

(a) 0 (a) 67 (Halkbank); 22 (TSKB) No target

(b) 0 (b) 44 (Halkbank); 6 (TSKB)

Loan dispersion: number of SME clients in the project (a) throughout the country and (b) in the eastern and central regions

(a) 0 (a) 745 (Halkbank); (b) 56 (TSKB) (a) 500

(b) 0 (b) 201 (Halkbank); (b) 20 (TSKB) (b) 100

Loan dispersion: number of loans financed by the project (a) throughout the country and (b) in the eastern and central regions

(a) 0 (a) 798 (Halkbank); 56 (TSKB) (a) 500

(b) 0 (b) 215 (Halkbank); 20 (TSKB) (b) 100

Project portfolio at risk - SME 0% (a) 1.8% (Halkbank); (b) 0% (TSKB) <5%

FINAL DRAFT

25

Table A2.2: Breakdown of Subloans by Sector and Loan Size, Halkbank

Amount (US$)

Share of total bank lending

(%)

Number of

Subloans

Share (%)

Sector Education 4,839,788 0.8 4 0.5 Services 5,329,561 0.9 5 0.6 Manufacturing 386,627,044 67.8 622 77.9 Construction 3,310,699 0.6 6 0.8 Mining 9,487,424 1.7 16 2.0 Health and social 31,407,436 5.5 18 2.3 Livestock and agriculture 7,411,341 1.3 9 1.1 Commerce 48,549,540 8.5 58 7.3 Tourism 72,329,208 12.7 58 7.3 Telecommunication 557,960 0.1 2 0.3 Education 4,839,788 0.8 4 0.5 Total 569,850,000 100.00 798 100.00 Loan size < US$ 250,000 24,852,151 4.3 142 17.7 US$ 250,000–1,000,000 243,210,409 42.7 489 61.3 US$ 1,000,000–2,500,000 202,904,776 35.6 133 16,7 > US$ 2,500,000 98,882,664 17.4 34 4.3 Total 569,850,000 100.00 798 100.00

Table A2.3: Breakdown of Subloans by Sector and Loan Size, TSKB

Amount

(US$) Share (%)

Number of

Subloans

Share (%)

Sector Energy 27,425,551 22 11 20

Construction 15,629,424 12 6 11 Tourism 9,848,081 8 3 5 Rubber and plastic products 11,498,214 9 5 9 Other nonmetalic mineral products 6,603,378 5 4 7 Basic metals and fabricated metal products 12,837,732 10 8 14 Marketing 3,229,835 3 1 2 Pulp, paper and paper products, publ,&printing 5,059,337 4 3 5 Food Products 5,466,959 4 3 5 Machinery and equipment n,e,c, 7,905,930 6 5 9 Logistics 8,351,031 7 3 5 Chemicals 6,015,282 5 2 4 Other 5,387,365 4 2 4 Total 125,258,118 100 56 100 Loan size < US$250,000 0 0 0 0 US$250,000–,000,000 8,285,057 7 12 21 US$1,000,000–2,500,000 32,730,409 26 19 34 > US$2,500,000 84,242,652 67 25 45 Total 125,258,118 100 56 100

FINAL DRAFT

26

Annex 3. Economic and Financial Analysis11 In the Access to Finance for SMEs Project (SME Project), a long term World Bank credit line was given to a bank with a large domestic branch presence, which enabled it to lend medium term funds directly to SMEs.

Sample description

The sample consists of all 166 firms which received a loan through the SME Access to Finance project between 2007 and 2009. Data is available from 2006-2008. The data was collected by Halk Bank. Since no data is available for 2009, the firms that received a loan in 2009 cannot yet be evaluated. Instead, since these firms qualified for the program they are a natural control group for the firms that received loans between 2007 and 2008. This comparison of changes between the two groups of firms is useful because it controls for the possibility that the observed growth in sales and employment might be due to things that are external to participation in the program. That is, without comparison to a comparator group, it would be possible that any observed growth could be due to external economic factors that encouraged growth in the overall economy rather than to the program itself.

Summary Statistics

If the program was successful, firms that received loans in 2007 and 2008 are expected to grow more quickly between 2006 and 2008 than firms that received loans in 2009. The preliminary evidence from these comparisons suggests that firms that received loans in 2007 and 2008 outperformed firms that did not receive loans until 2009 in terms of employment growth (Figure A2.1). In contrast, there is less evidence that sales grew more quickly for firms that received loans in 2007 and 2008.

Econometric methodology

11 In this annex, the estimated logarithmic coefficients are referred to as relative changes or growth rates in order to keep the text simple. However, to establish regular growth rates or regular relative changes, the coefficients should be converted with the following formula: relative change = exponential function(logarithmic coefficient)-1.

Figure A2. 2: Median growth rates (2006-2008), employment and sales for firms that received loans in 2007, 2008 and 2009

Source: Own calculations based upon Halkbank data. Note: Sales data are deflated by GDP deflator

13 13

18

11

7

19

02468

101214161820

Employment Growth Sales Growth

Perc

ent

2007 2008 2009

FINAL DRAFT

27

To test in a more systematic way whether employment and sales were greater after the loan, two-way fixed effect regressions are conducted on panel data over the period 2006 to 2008. Changes in the economic environment, which may have affected sales, employment, or exports across all firms in the sample, are controlled for using time dummies in the fixed effect regression. The individual firm-level fixed effects make it possible to control observable and unobservable firm-level characteristics that might affect program participation and exports, sales or employment. The base model is: Yit = αi + γt + βDit + εit The main variable of interest is the dummy variable, Dit, that takes the value of “1” after the firm has received the loan and the value “0” before the firm receives the loan. For firms that do not receive any loans between 2006 and 2008 (i.e., control firms that received loans in 2009) the dummy takes the value “0” for the whole period. A positive coefficient indicates that employment or sales increased after the firm participated in the program.

Results

Employment. The two-way fixed effects regression confirms the results from the simple comparison. Employment appears to be about 13 percent higher for firms that received loans after they had received the loans (see column 1 of Table A2.1). The point estimates of the parameters suggest that employment was even higher in the year after the loan was received—about 18 percent higher—than in the year of the loan—about 13 percent higher. The null hypothesis that the increase is the same in the two years, however, cannot be rejected. Sales. The econometric analysis suggests that there is no evidence that the loans resulted in increased sales at least in the short term, since all coefficients are insignificant.

Table A2. 1: Two way fixed effects regression for employment and sales Employment (natural log) Sales (natural log) Observations 421 421 421 445 445 445 Has loan 0.136** -0.010 (2.06) (-0.09) Has loan (that year) 0.055 0.135** 0.056 -0.011 (1.10) (2.05) (0.66) (-0.09) Has Loan (one year

0.182* -0.153

(1.85) (-0.89) R-squared 0.15 0.14 0.15 0.01 0.01 0.02

***,**,* indicate significance at 1, 5, and 10 percent significance levels, respectively. t-statistics in parentheses. Time dummies included. Investment and Working Capital Loans. Some of the firms received working capital loans, while others received investment loans. It is therefore possible to assess whether the different types of loans had different effects. The results suggest that investment loans might have had more positive results in terms of increased employment than working capital loans, since only the dummy for investment loan is significant (Table A2.2). For sales, none of the coefficients are significant.

FINAL DRAFT

28

Table A2. 2: Two-way fixed effects regressions for investment and working capital loans Employment (natural log) Sales (natural log) Observations 421 445 Has investment loan 0.204** 0.061 (2.55) (0.43) Has working capital loan 0.070 -0.074 (0.89) (-0.54) R-squared 0.15 0.01

***,**,* indicate significance at 1, 5, and 10 percent significance levels, respectively. t-statistics in parentheses. Time dummies included. Bank loans. Including an additional dummy indicating that the firm has a commercial bank loan in that period does not affect the results. The loans still appear to affect employment and not sales (Table A2.3).

Table A2. 3: Two-way fixed effects regression for employment and sales with control for

commercial bank loan Employment (natural log) Sales (natural log) Observations 421 445 Has loan 0.139** -0.012 (2.12) (-0.10) Has commercial bank loan 0.160 -0.034 (1.59) (-0.19) R-squared 0.15 0.01

***,**,* indicate significance at 1, 5, and 10 percent significance levels, respectively. t-statistics in parentheses. Time dummies included. Investment. There is some evidence that the loans led to increased investment, since the coefficient on the dummy variable indicating that the firm received a loan in that year is positive and statistically significant (Table A2.4). The effect appears to be temporary, since the coefficient on the dummy variable indicating that the firm had received a loan is insignificant.

Table A2. 4: Two-way fixed effects regressions for investment Investment (natural log) Observations 456 456 Has loan 0.203 (0.27) Has loan (that year) 1.130** (1.99) R-squared 0.03 0.04

***,**,* indicate significance at 1, 5, and 10 percent significance levels, respectively. t-statistics in parentheses. Time dummies included.

FINAL DRAFT

29

Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Table A4.1: Task Team Members

Names Title Unit Responsibility/ Specialty

Lending Steen Byskov Sr. Financial Sector Specialist. LCSPF Team member Rodrigo A. Chaves Sector Director LCSPR Team member Frederic Gielen Consultant ECSPS Team member Roy C. N. Gooi Principal Fin. Officer/Deriv. BDMAL Financial Products Salih Kemal Kalyoncu Sr. Procurement Specialist. ECSO2 Procurement Hala Dajani Khattar Sr. Financial Officer/Debt Cap BDMDM Financial Products Zeynep Kudatgobilik Consultant ECSPF Team member Rohit R. Mehta Senior Finance Officer LOAG1 Team member Margaret J. Miller Senior Economist DECDP Team member Marialisa Motta Sector Director LCSPF TTL Ahmet Gurhan Ozdora Sr Operations Off. ECSSD Team member Susana M. Sanchez Sr Financial Economist LCSSD Team member Marius Vismantas Country Sector Coordinator EASFP Team member Steven R. Weisbrod Consultant LCSUW Team member

Supervision/ICR Samuel Munzele Maimbo Lead Financial Sector Specialist ECSF1 Team member/TTL Steen Byskov Sr. Financial Sector Specialist LCSPF Team member/TTL Isfandyar Khan Sr. Financial Sector Specialist ECSF1 Team member/TTL Alper Oguz Financial Sector Specialsit ECSF1 Team member Ruvejda Aliefendic Consultant ECSF1 ICR team Carlos Pinerua Country Sector Coordinator EASFP ICR author Zeynep Lalik Sr. Financial Management Specialist ECSO3 Fin. Management Esra Arikan Environmental Specialist ECSEN Environment Salih Bugra Procurement Specialist ECS02 Procurement Note: TTL = task team leader;

FINAL DRAFT

30

(b) Table A4.2: Staff Time and Cost

Stage of Project Cycle Staff Time and Cost (Bank Budget Only)

No. of staff weeks US$ Thousands (including travel and consultant costs)

Lendinga FY03 21.31 FY04 0.00 FY05 341.52 FY06 206.21 FY07 8.24 FY08 - FY09 61.30 FY10 58.21

Total: 696.79 Supervision/ICR

FY06 0.43 FY07 309.48 FY08 - FY09 11.91 FY10 101.81 FY11 101.38 FY12 68.23 FY13 45.63

Total: 638.89 a. 1 Includes budget for the additional financings.

FINAL DRAFT

31

Annex 5. Summary of Borrowers’ ICR Halkbank. This report is prepared upon completion of the Access to Finance for SMEs Project, financed by the World Bank and intermediated by Halkbank. The project will be assessed according to the stated objectives, expected outcomes, the borrower’s and the Bank’s performance, and, finally, the lessons learned. Assessment of the Initial Structure The project was originally designed to provide Turkish banks with access to medium-term credit in both local and foreign currency for on-lending to SMEs. The rationale behind World Bank involvement was its access to long-term funds on favorable terms and its in-depth worldwide experience in credit-line financing. From Halkbank’s point of view, World Bank involvement through the project contributed greatly to both its financial structure and its SME lending. According to a study by the Halkbank Risk Management Department, average maturity of the total liabilities of the bank increased from 0.1401 years to 0.3475 years, thanks to its IFI funds portfolio, 36 percent of which is provided by the World Bank. In addition, during the lifetime of the project, 745 SMEs have been financed by Halkbank sources. In regard to the project’s higher-level objectives, Halkbank’s total number of SME customers increased from 332,705 to 383,190 during the implementation period. The project is estimated to have created some 8,250 jobs, thus demonstrating its contribution to development. Even though the project aimed to increase access to credit for SMEs in all regions of Turkey, it had a special mandate to reduce the interregional development disparity by allocating a certain portion of the loan facility to the priority development regions (25 percent, 20 percent, and 30 percent for the first, second, and third loan agreements, respectively). Although the targets set were quite ambitious—taking into consideration the portion of all Turkish banking sector loans to the target region and the other IFI funds flowing into the same region during the implementation period—Halkbank was able to achieve the goals as planned. However, both the greater amount of the third loan and the higher target of priority development regions caused the project to have some undisbursed funds at the closing date. However, other projects were retroactively financed at that time, and Halkbank was able to complete disbursement and achieve the target percentage before the deadline for reporting (August 31, 2012). The initial design of the project, which aimed to diversify the targeted geographical regions between Halkbank and TSKB, was later refashioned to take into account the eligibility of the SMEs. Results have shown that the changes in the original design were successful. Halkbank was able to disburse the original loan in less than a year and signed the agreement for additional financing within a year and a half. Thanks to the successful design and implementation of the project, the additional financing has also been disbursed and has achieved the same success, enabling a second additional financing agreement. Implementation Given that the project was the first after a few decades of inactivity between the World Bank and Halkbank, there was a lack of experience at the initial stages of the project. However, thanks to Halkbank’s restructuring and its network of branch banks, it was able to handle the operations well, and no significant problem occurred. The PIU has started the implementation of new monitoring mechanisms in line with the needs of the project. These mechanisms have come to the attention of the World Bank and have been mentioned in the project assessments. The changes in procurement and safeguard policies applied by the World Bank during the

FINAL DRAFT

32

implementation period, however, have raised complaints from the staff in the field. Even Halkbank has slowed down extending investment loans because of the new safeguard procedures. Nonetheless, the project has been successfully completed according to the set targets. Given the above explanations of Halkbank’s implementation and operational experiences, its focus on assigning the right staff to the right task resulted in noteworthy success. Another lesson learned during the project was that continuous training and capacity building are essential for the success of IFI loan programs in Turkey, since the banking sector in the country is still in a process of restructuring and rejuvenation. Finally, the PIU should focus coordinating the marketing, project appraisal, and loan allocation authorities of the implementing agency. TSKB 1. Assessment of the Project’s Objective, Implementation, and Operational Experience 1.1 Project’s Objective

The object of the project was to increase the access of small and medium Turkish enterprises to medium-term finance and thus contribute to their growth. By providing SMEs with access to credit through a credit line, the project aimed to help increase the sales and productivity of Turkish SMEs and decrease the credit gap between SMEs and large firms. The project consisted of the establishment and operation of a credit facility within TSKB to provide subloans and lease financing to SMEs and enable them to carry out subprojects. Evaluation of the results shows that the objectives of the operation were achieved.

1.2 Project’s Implementation The marketing of the facility was carried out by the Corporate Marketing Department from TKSB’s headquarters in Istanbul and through its offices in Ankara and Izmir. The financial crisis of 2008 and 2009 had a negative effect on the pace of the disbursement of the facility. The possibility of extending working-capital loans besides investment loans has mitigated to some extent the negative effect of the crisis.

1.3 Operational Experience The overall administration of the facility was carried out by the Project Implementation Unit set up within TSKB and headed by an executive vice president. The PIU worked closely with the Marketing Department, the World Bank’s Ankara office, and the task team leader in the World Bank responsible for the project.

2. Assessment of the Outcome of the Project against the Agreed Objectives Under the facility, TSKB approved 56 loans totaling US$48.0 million and €60.0 million. The average loan size was US$2.2 million. The loans were made according to the criteria set up in the project document with the following details:

• Disbursement to SMEs amounted to US$48.0 million and €60.0 million. • The number of SMEs financed by TSKB was 56.

FINAL DRAFT

33

• The maturity of investment loans was 74 months, with an average grace period of 17 months. Of all the loans, 17 were working-capital loans with an average maturity of 35 months and a grace period of 10 months.

• No loans were made in local currency. • Loans were given in 22 provinces in Turkey and in 6 provinces in the

underserved area where more than 17 percent (US$20.7 million) of the loan was disbursed.

• There were no nonperforming loans (category III, IV, and V) under the project. • The planned employment impact of the projects financed was 1,174.

The above results indicate that the overall objectives of the project were achieved. Distribution of loans according to sector, region, and loan-size range is presented in annex 1. The monitoring report on the project’s overall indicators is given in annex 2. Disbursement of subloans to subborrowers was completed for the U.S. dollar tranche in March 2011, and the euro tranche was almost fully disbursed by August 2011. With the final disbursements from the loan to TSKB made in September 2011 for U.S. dollars and in May 2012 for euros, fully documenting the outstanding designated account balances, the loan accounts were closed.

3. Evaluation of the borrower’s own performance during the implementation of the project, with the special emphasis on the lessons learned that may be helpful in the future

The lessons learned suggest that the criteria for the SME balance sheet should be designed to be as flexible as possible to speed up the disbursement of the facility. The beneficiaries to benefit from the facility were defined as SMEs with less than US$20 million equivalent in sales and fewer than 250 employees at the time of application to TSKB for the IBRD loan. The cap on the net sales was a major impediment to including SMEs that otherwise met the objectives of the project and were deemed suitable to receive financing under the facility.

4. Evaluation of the performance of the World Bank during the implementation of the project, including the effectiveness of their relationship, with special emphasis on lessons learned

The World Bank’s performance during the implementation was very satisfactory. During the implementation of the project, the parties (Bank staff in both Washington, D.C., and in Ankara and TSKB PIU) had a cordial relationship, and issues relating to the implementation of the project were swiftly resolved.