The World Bank FOR OFFICIAL USE ONLY · 2016. 7. 16. · document of the world bank . for official use only . report no: 59915-sl . project appraisal document . on a . proposed grant

Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 59915-SL

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED GRANT

IN THE AMOUNT OF SDR 2.6 MILLION

(US$4 MILLION EQUIVALENT)

TO THE

THE REPUBLIC OF SIERRA LEONE

FOR A

FINANCIAL SECTOR DEVELOPMENT PLAN SUPPORT PROJECT (FSDPSP)

March 11, 2011

. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective February 28, 2011)

Currency Unit = Sierra Leone Leones (SLL)

SLL 1 =USD 0.00023364 US$ 1 = SDR 0.6357077

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

AfDB African Development Bank AML/CFT Anti-Money Laundering/Combating the Financing of Terrorism BCP Basel Core Principles BSL Bank of Sierra Leone CAS Country Assistance Strategy DA Designated Account FIAS Foreign Investment Advisory Services FMP Financial Management Plan FPDFI World Bank Financial Integrity Unit FSAP Financial Sector Assessment Program FSCF Financial Sector Consultative Forum FSSC Financial Sector Steering Committee FSDP Financial Sector Development Plan FSDPSP Financial Sector Development Plan Support Project GDP Gross Domestic Product GIZ Gesellschaft fuer Internationale Zusammenarbeit HR Human Resources IDA International Development Agency IFC International Finance Corporation IMF International Monetary Fund IPAU Integrated Project Administration Unit KfW Kreditanstalt fuer Wiederaufbau M&E Monitoring and Evaluation MF Microfinance MFI Microfinance Institution MITAF Microfinance Investment and Technical Assistance Facility MoFED Ministry of Finance and Economic Development MSME Micro-, Small and Medium Enterprises MTR Mid-Term Review NASSIT National Social Security Investment Trust PAD Project Appraisal Document

PDO Project Development Objective PFM Public Financial Management

PIM Project Implementation Manual PIP Project Implementation Plan PSC Private Sector Credit RoA Return on Assets RoE Returns on Equity SDR Special Drawing Rights SLICOM Sierra Leone Insurance Commission SME Small and Medium Enterprises TA Technical Assistance UNCDF United Nations Capital Development Fund UNDP United Nations Development Program UNODC United Nations Office on Drugs and Crime US$ United States Dollar WAMZ West African Monetary Zone WDI World Development Indicators

Vice President: Obiageli Katryn Ezekwesili Country Director: Ishac Diwan Sector Director: Marilou Jane D. Uy Sector Manager: Paul Noumba Um Country Manager: Vijay Pillai Task Team Leader: Thomas Losse-Mueller

Table of Contents I. Strategic Context ..................................................................................................................... 1

A. Country Context ............................................................................................................... 1

B. Sectoral and Institutional Context .................................................................................... 1

C. Higher Level Objectives to which the Project Contributes .............................................. 6

II. Project Development Objectives............................................................................................. 7

A. PDO .................................................................................................................................. 7

1. Project Beneficiaries ..................................................................................................... 7

2. PDO Level Results Indicators ...................................................................................... 8

III. Project Description............................................................................................................... 8

A. Project components....................................................................................................... 8

B. Project Financing ........................................................................................................ 10

1. Grant ........................................................................................................................... 10

2. Project Financing Table .............................................................................................. 10

IV. Implementation .................................................................................................................. 10

A. Institutional and Implementation Arrangements ........................................................ 10

B. Results Monitoring and Evaluation ............................................................................ 11

C. Sustainability .............................................................................................................. 12

V. Key Risks .............................................................................................................................. 12

VI. Appraisal Summary ........................................................................................................... 13

A. Economic and Financial Analysis .............................................................................. 13

B. Technical .................................................................................................................... 13

C. Financial Management ............................................................................................... 14

D. Procurement ................................................................................................................ 14

E. Social (including safeguards) ..................................................................................... 15

F. Environment ............................................................................................................... 15

Annex 1: Results Framework and Monitoring.............................................................................. 16

Annex 2: Detailed Project Description ........................................................................................ 19

Annex 3: Implementation Arrangements ..................................................................................... 25

Budgeting Arrangements .............................................................................................................. 29

Accounting Arrangements ............................................................................................................ 30

External Auditing .......................................................................................................................... 30

Supervision plan............................................................................................................................ 30

Funds Flow and Disbursement Arrangements .............................................................................. 31

Annex 4 Operational Risk Assessment Framework (ORAF) ....................................................... 41

Annex 5: Implementation Support Plan ........................................................................................ 44

Annex 6: Team Composition ........................................................................................................ 46

PAD DATA SHEET

Sierra Leone

Financial Sector Development Plan Support Project (FSDPSP)

PROJECT APPRAISAL DOCUMENT

Africa Financial and Private Sector Development (AFTFP)

Date: March 11, 2011 Country Director: Ishac Diwan Sector Director: Marilou Uy Sector Manager: Paul Noumba Um Country Manager: Vijay Pillai Team Leader: Thomas Losse-Mueller Project ID: P121514 Lending Instrument: Specific Investment Loan (SIL)

Sector(s): Financial Sector Theme(s): Access to Finance, Financial Soundness, Governance and Public Sector Management EA Category: C

Project Financing Data: Proposed terms:

[ ] Loan [ ] Credit [ X] Grant [ ] Guarantee [ ] Other:

Source Total Amount (US$M) Total Project Cost:

Cofinancing: Borrower: Total Bank Financing:

IBRD IDA

New Recommitted

US$ 4.2 US$ 0.2 US$ 4.0

Borrower: Government of Sierra Leone Responsible Agency: Bank of Sierra Leone Contact Person: Ms Andrina Coker, Deputy Governor Telephone No.: +232 22 226501 Fax No.: +232 22 224764 Email: [email protected]

Estimated Disbursements (Bank FY/US$ m)

FY 2012 2013 2014 2015 2016

Annual 0.5 1.0 1.5 1.0 0.0

Cumulative 0.5 1.5 3.0 4.0 4.0

Project Implementation Period: 4 years Expected effectiveness date: July 15, 2011 Expected closing date: December 31, 2015

Does the project depart from the CAS in content or other significant respects?

○ Yes [X] No

If yes, please explain:

Does the project require any exceptions from Bank policies? Have these been approved/endorsed (as appropriate by Bank management? Is approval for any policy exception sought from the Board?

○ Yes [X] No ○ Yes ○ No ○ Yes [X] No

If yes, please explain:

Does the project meet the Regional criteria for readiness for implementation?

[X] Yes ○ No

If no, please explain:

Project Development Objective The project development objective is to strengthen the capacity of the Bank of Sierra Leone and contribute to improve efficiency in financial intermediation, safeguard financial sector stability, reduce transaction costs of money transfer and expand access to financial services.

Project description: Component 1 will support the establishment of key market infrastructure, product development and enhancement of the institutional and enabling environment to support access to financial services by households and SMEs. Component 2 will strengthen the Bank of Sierra Leone’s capacity to supervise the growing financial sector effectively, lead the financial sector reform process and develop its organizational capacity to undertake its key functions within the Sierra Leone financial sector more effectively.

Safeguard policies triggered? Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waters (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60)

○ Yes [X] No ○ Yes [X] No ○ Yes [X] No ○ Yes [X] No ○ Yes [X] No ○ Yes [X] No ○ Yes [X] No ○ Yes [X] No ○ Yes [X] No ○ Yes [X] No

Conditions and Legal Covenants: Financing Agreement Reference

Description of Condition/Covenant Date Due

Subsidiary Agreement has been executed on behalf of the Recipient and the Project Implementing Entity

By effectiveness

The Recipient has prepared and adopted, in form and substance satisfactory to the Association, the Project Implementation Manual

By effectiveness

BSL as Project Implementing Entity has recruited a financial management specialist into its accounting department.

By effectiveness

The Recipient has appointed an independent external auditor.

Four months after effectiveness

Withdrawals up to an aggregate amount not to exceed one hundred thousand Dollars (USD 100,000) equivalent may be made for payments made prior to the date of the Financing Agreement but on or after March 1, 2011 for Eligible Expenditures.

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I. Strategic Context

A. Country Context 1. Following the 2002 end of a decade-long civil war, peace has been consolidated in Sierra Leone and a democratic transition of Government has been achieved. Despite progress, particularly with economic growth and a fall in poverty, Sierra Leone’s economic recovery remains fragile. Post-conflict growth was robust but thereafter slowed to 5.5 percent in 2008 and then down to 4 percent in 20091

. The global recession challenged the economy as demand for the country’s mineral exports slowed down. The 2010 Joint Country Assistance Strategy emphasizes that there is a real risk that the progress made thus far will be undermined unless economic growth can be sustained and employment opportunities increased. The two major challenges are the development of new engines of growth to diversify away from reliance on mineral exports and maintaining productivity growth. Both challenges can only be met if efficiency in financial intermediation is increased, access to financial services is expanded, transaction costs are lowered and scarce resources are channeled to productive investments.

2. A diagnostic undertaken in 2006 has identified finance as the binding constraint for growth: a low supply of credit to the private sector, but high returns to economic activity result in a high unsatisfied demand for finance and high interest rates compared to regional peers2

. Based on the 2003/2004 Integrated Household Survey, the 2006 growth diagnostic study finds that 83 percent of respondents quote access to funding as the biggest obstacle to starting a business and that 85 percent of those who tried were unsuccessful in securing a loan. The 2006 Financial Sector Assessment Program (FSAP) finds - based on the same data set - that the majority of those households who obtained a loan (primarily from traders or informal sources), indeed, used its proceeds to invest in productive capacity.

B. Sectoral and Institutional Context 3. Financial sector development in Sierra Leone is characterized by the trade mark contradictions of post-conflict financial sector development and Government faces a dual challenge: On the one hand, the sector has – starting from very low levels – experienced significant growth in the past years, which is challenging the institutional framework charged with safeguarding this growth. On the other hand, growth in credit supply has not yet reached the majority of households and firms. Access to finance by micro, small and medium enterprises (MSMEs) and households remains a key challenge to facilitate private sector growth. There is a substantial body of empirical evidence that a deepening of financial sector development and increased access to financial services can be expected to have a high impact on growth and poverty eradication. World Bank research has reinforced the empirical evidence pointing to a strong and independent causal role of the financial sector in promoting growth3

1 Sierra Leone Joint Country Assistance Strategy, World Bank. March 2010.

.

2 Hornberger et al, Sierra Leone – Growth Diagnostics: What is holding back growth in Sierra Leone?, 2006 3 See for example: Finance for Growth: Policy Choices in a Volatile World. Policy Research Report. Washington, DC: World Bank and Oxford University Press, 2001; R. G. King and R. Levine. 1993. ―Finance and Growth: Schumpeter Might Be Right.‖ Quarterly Journal of Economics 108(3): 717–38; T. Beck, A. Demirgüç-Kunt, and R.

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Figure 1: Sierra Leone Financial Depth – Private Sector Credit (PSC)

and M2 as Percentage Gross Domestic Product (GDP

2006 2007 2008 2009 June 2010e

Congo, DR1 Liberia1 Mozam-

bique1 Low income1 SSA 1, 2

PSC/ GDP 4.5% 5.3% 7.1% 9.3% 10.3% 7.1% 12.5% 18.4% 23.5% 57.3%

M2/GDP 20.9% 21.7% 22.7% 26.3% 26.2% 12.6% 27.8% 30.3% 35.4% 37.4% Source: WDI, BSL, World Bank staff calculation 1latest available, 2 all income levels, e World Bank staff estimate Significant financial sector deepening… 4. Starting from very low levels after the conflict period, considerable financial sector deepening has taken place. Banks are mobilizing deposits (M2 steadily increased to 26.2 percent of GDP) and, more importantly, an increased share of funds is intermediated to the private sector. Private sector credit as a share of GDP has grown rapidly from below four percent just after the conflict period to 10.3 percent in June 2010 (nominal credit supply to the private sector increased by an average of 47 percent per year between 2006 and 2009). This development mirrors similar growth experiences in other post-conflict country in the region. 5. The peace dividend and economic opportunities have attracted a significant number of new entries to the banking market (in 2010, following a merger of Ecobank and ProCredit Bank, 13 commercial banks were operating in the country), many of them subsidiaries of regional, predominantly Nigerian, banks. In 2009 alone, the branch network expanded from fifty seven to seventy five branches. Active donor support resulted in significant growth in the supply of microfinance. The Microfinance Investment and Technical Assistance Facility (MITAF), which covers most of the microfinance sector, reported an increase in clients of supported institutions from 13,000 to 120,000 since 2003. The entry of international Microfinance Institutions (MFIs) like BRAC, LAPO and the acquisition of ProCredit Bank by Ecobank, a large regional bank, testify to the increasing professionalization of the microfinance sector. … puts pressure on stability. 6. However, most of the credit growth is concentrated on urban clients and limited number of established firms. There are significant concerns that these narrow market segments are already overbanked and overheating. Absolute levels of non-performing loans are on the rise (although they are declining relative to the growing asset base) and at risk to be compounded by fast credit growth. Profitability in the banking sector, which carries a high number of banks and microfinance institutions given the size of the economy, has come under pressure. Returns on assets (RoA) and equity (RoE) have decreased significantly from 2006 to 2009. Competition has reduced average interest income and margins. Commercial banks are still highly capitalized, which provides a considerable stability cushion but also increases pressures to generate return on capital and increase risk exposures.

Levine. 2007. ―Finance, Inequality and the Poor.‖ Journal of Economic Growth 12(1): 27–49. ; P. Honohan. 2004. Financial Sector Policy and the Poor: Selected Findings and Issues. Washington, DC: World Bank.

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Figure 2: Selected Banking Sector Indicators 2007 2008 2009 Bank Capital / Total Assets 17.7% 18.5% 18.8% Capital Adequacy Ratio 38.7% 43.5% 34.0% Non-Performing Loans (SLN '000) 88,442,397 102,864,309 108,963,450 as % of Total Advances 31.69% 23.39% 16.54% Interest Income/Interest Earning Assets 15.8% 15.9% 12.4% Net Interest Income/Interest Earning Assets 12.5% 12.2% 9.2% Return on Assets (RoA) 1.6% 1.2% 0.5% Return on Equity (RoE) 8.8% 6.3% 2.9%

Source: BSL, Commercial Bank Annual Reports, World Bank staff calculation 7. In addition to the stability risks resulting from financial sector growth, Sierra Leone’s post-conflict and geographical exposures to illegal activities and governance issues put high demands on the oversight capacity of the authorities. With the support of World Bank FPDFI technical assistance (TA) and United Nations Office on Drugs and Crime (UNODC), Sierra Leone has made progress in implementing AML/CFT frameworks and building oversight capacity. A Financial Intelligence Unit has been established at the BSL and begun receiving reports of suspicious transactions. However, key legislation is still not in place. Strengthening financial sector oversight capacity will be instrumental in supporting the broader governance agenda in Sierra Leone. The banking sector has potential for further growth… 8. The banking sector remains highly liquid and has further potential to expand credit to the private sector: While the share of assets directed as credit to the private sector has increased steadily to 29 percent of overall banking assets in June 2010, the Sierra Leonean banks still hold the majority of funds in liquid assets. Investments in treasury bills, foreign exchange deposits with foreign banks and reserves held with the BSL accounted for almost half of all assets (48 percent) in June 2010.

Figure 3: Banking Sector Asset Composition

Source: BSL

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…which is needed to alleviate substantial constraints in access to financial services. 9. Despite these achievements, levels of financial sector depth remain substantially below that of low-income country peers and regional averages (see Figure 1) resulting in significant constraints to access to financial services by firms and households. 10. A 2008 survey of 2500 households confirms the significant access gap4

. Overall, 56.5 percent of all surveyed households were excluded from any type of financial services (credit, savings, money transfer, insurance etc.), 30 percent were served only by informal and semi-formal financial service providers (money lenders, family, supplier credit, cooperatives) and only 13.5 percent had access to formal financial services (banks and microfinance institutions (MFIs). There is a substantial need to expand the entire range of financial services:

• Savings mobilization: Only 24 percent of urban and 8 percent of rural households reported any monetary savings in formal or informal savings products. Savings mobilization by the formal financial sector is weak. Just 8 percent of respondents saved with a bank or MFI, which corresponds to the low number of accounts held in banks and MFIs as a share of population.

• Access to Credit: 90 percent of respondents did not have a loan outstanding (63 percent never borrowed at all). Of the 10 percent that had a loan, the large majority borrowed informally (81 percent) or semi-formally (10 percent). Only 9 percent of borrowers - less than 1 percent of all respondents – had a loan from a commercial bank or MFI.

• Access to Insurance: 97.8 percent of all respondents were never insured; 65 percent were not familiar with the concept.

• Money transfer is the most widely used financial service: 31 percent of respondents sent or received money through some form of money transfer system. However, 92 percent of the households that sent money and 71 percent that received money (indicating a higher prevalence of remittances received via international money transfer operators) used informal mechanisms, which are often costly and not secure.

Growth in private sector credit has not yet reached important sectors in the economy. 11. Further steps need to be taken to facilitate access to finance by small and medium enterprises (SMEs) and households and enable banks and microfinance institutions to reach new client segments, including in rural areas. The agricultural sector, which accounts for 44 percent of GDP, is only attracting 6 percent of bank funding, while the construction sector is overweight with 17 percent of bank funding (but only 7 percent of GDP). Most bank funding goes to commerce and trading activities and does not support productive investments. The mining sector is funded primarily from abroad and local bank funding is limited to small credit lines (2 percent of bank funding).

4 Field Survey on the Microfinance Demand in Sierra Leone, EU BizClim, 2008

5

Figure 5: Sector distribution of commercial bank credit, 2002 – June 2010

Source: BSL 12. The majority of loans are short-term, frequently with less than 6 months maturity, which limits the ability of firms and households to invest in a productive capacity and housing or crop-cycle aligned borrowing in the agricultural sector. Government borrowing is restricted to treasury bonds with maturities of less than one year. There are no corporate bonds and capital market activity is limited to one stock traded on a manual capital market platform run by the BSL.

Figure 6: Financial System Assets Commercial bank loans 658,966,802,000 MFI loans 49,177,520,000 Commercial bank other assets 1,303,433,231,000

NASSIT total assets 302,636,748,000 Insurance investment assets 70,198,800,000

Source: BSL, MITAF, NASSIT, SLICOM (latest available data)

13. Given the developmental state of the sector and the predominance of the credit market the short-term focus lies on expanding commercial bank and MFI activities (see Figure 6). The pension sector, however, (dominated by the National Social Security Investment Trust (NASSIT)) and a strengthened insurance sector could provide a source of long-term savings in the medium term and the first steps to expanding the diversity of financial services should be undertaken. Priorities for financial sector development reforms 14. The Sierra Leone financial sector has the potential to grow, attract new entries and fund private sector growth. But without a strengthened operating environment to safeguard financial sector stability and without the market infrastructure and product capacity that enables financial institutions to reach beyond their limited existing client base, current levels of credit growth are not sustainable. The most immediate concerns are to enable the BSL to safeguard the positive

6

growth trend through strengthening its oversight capacity and strengthening the policy framework and key market infrastructure to allow more diversified and sustainable financial sector development to take place. Priorities are the strengthening of the BSL’s oversight capacity and the legal and regulatory framework as well as the establishment of credit information infrastructure to help the banks manage credit risk adequately. In addition, the project will lay the foundation to enable banks and microfinance institutions to use funds productively, access new market segments and expand the range of financial services available to firms and households, including money transfer services, leasing, secured lending, insurance or value chain finance. Sierra Leone Financial Sector Development Plan (FSDP) 15. The Sierra Leonean authorities have made financial sector development a key pillar of their economic development strategy. Building on the 2006 FSAP and FIRST-funded follow-up TA, the Government has developed the Sierra Leone FSDP, a comprehensive long-term strategic plan to address financial sector challenges. This FSDP was approved by Cabinet at the end of 2009. The FSDP provides for a best practice interagency and sector-wide reform governance structure, including a high-level Financial Sector Consultative Forum (FSCF), the Financial Sector Steering Committee (FSSC) and a Financial Sector Reform Secretariat, which has been established as the “FSDP Secretariat” in the BSL, to coordinate and implement this complex reform program. 16. The BSL is charged with coordinating and supporting the implementation of the FSDP and has developed a detailed implementation plan, which provides a robust foundation for implementing reforms and coordinated donor support. It constitutes the framework for activities under this project. The FSDP Secretariat has been established within BSL as part of the office of the Governor. Given the complexity and technical demands of financial sector reforms and the need for coordinated approaches by policy makers, private sector and development partners, it will be important to develop the capacity of the BSL as a champion of financial sector development. The development state of the financial sector needs a strong apex institution that formulates adequate policies to enhance access to finance, coordinates stakeholder activities and takes a pro-active leadership role in advancing sector reforms and the provision of shared infrastructure such as credit information and payment systems5

. In order to meet this challenge, the BSL has drawn up an Institutional Development Plan with the objective to increase its capacity to “formulate and implement monetary and supervisory policies to foster a sound economic and financial environment.”

C. Higher Level Objectives to which the Project Contributes 17. The most recent Joint Country Assistance Strategy (CAS) has identified Job Creation and Private Sector Development as one of four priority action areas to be developed over the period 2010-2013. Within this priority sector, the CAS identifies support to the financial sector to assist in building the private sector, improve the doing business and enabling environment and contribute to GDP growth. In particular, recent studies such as the 2007 Growth Diagnostic, the 2008 Foreign Investment Advisory Services (FIAS), and a 2008 Private Sector Diagnostic 5 Beck, T. and Honohan, P. “Making Finance Work for Africa”, 2007

7

Report, have all encouraged deepening the governance and size of the financial sector as a means to reduce poverty.6

Similarly, this proposed operation supports the CAS’s development Outcome 7 targeted at job creation and a better investment climate. The project development objective is consistent with and builds on the Government’s Poverty Reduction Strategy Paper (PRSP II) covering the period 2009-2010.

II. Project Development Objectives

A. PDO 18. The project development objective is to strengthen the capacity of the Bank of Sierra Leone and contribute to improving efficiency in financial intermediation, safeguarding financial sector stability, reducing transaction cost of money transfer and expanding access to financial services. 19. The proposed PDO derives directly from the objective of the Financial Sector Development Plan (FSDP).

1. Project Beneficiaries 20. Direct project beneficiaries are: (i) the BSL, other Government agencies and commercial banks who will benefit from capacity development; (ii) a broader set of financial institutions (banks, MFIs, insurance companies etc.) will benefit indirectly from an improved enabling environment and market infrastructure and that will allow them to operate more efficiently and broaden their market reach. 21. The ultimate beneficiaries of this project are the users of financial services, including households and MSMEs, who will use increased and stable supply of financing, savings and payment services to enhance their economic productivity by investing in a productive capacity (enterprises) or health and education (households), managing their risks better and expanding business activities because of lower transaction costs. 22. Benefit to the ultimate beneficiaries of the project will be measured through: (1) Expansion of domestic private sector credit to the private sector as a percentage of GDP (Baseline: 9.4 percent in 2009, Source: BSL)7; (2) Increase in borrowers from MFIs by gender (Baseline: 130.000 clients in 2009, Source: BSL, MFI returns monitored by Microfinance Investment and Technical Assistance Facility (MITAF)8

.

6 2006 Growth Diagnostic: What is holding back growth in Sierra Leone?, Harvard University, 2006. FIAS Informality Survey; and 2008 Ministry of Trade and Industry PSD Diagnostic Report. 7This indicator looks at the broadest measure of access to finance by the private sector (a standard measure of financial intermediation efficiency) and emphasizes the safeguarding of current positive growth trends. 8 This indicator is identical with that of the parallel KfW/UNCDF/UNDP/CORDAID-funded MITAF project, which the project will complement through its interventions at the enabling environment level and SME finance level.

8

2. PDO Level Results Indicators

23. The following four indicators measure achievement of the PDO:

• The Doing Business Depth of Credit Information Index is in line with Sub-Sahara Africa average (Baseline: No credit information infrastructure; Doing Business Depth of Credit Information Index = 0).

• 25 percent increase in outstanding MSME loan portfolio of commercial banks supported through capacity development activities of the project and stable portfolio-at-risk. (Baseline: To be established once commercial banks have been identified)

• A comprehensive payment system policy and regulatory framework has been established. (Baseline: No payment system policy and regulatory framework in place; Implementation of electronic payment system initiated).

• Compliance with Basle Core Principles (BCPs) for Banking Supervision for 10 out of 25 BCPs has improved (Baseline: BCP compliance to be established through BCP assessment by the end of end of 2011).

III. Project Description

A. Project components 24. The project will finance two major components, aimed at: i) Enhancing access to financial services; and ii) Building financial sector reform and oversight capacity of the BSL. The activities under these components derive directly from the priorities of theFSDP and the activities outlined in the corresponding project implementation plan. Component 1: Enhancing access to financial services (US$ 1.6 million) 25. This component will support activities that improve efficiency in financial intermediation, reducing transaction costs of money transfer and expand access to financial services. It complements TA and financial support to the microfinance sector provided by the Sierra Leone Microfinance Investment and Technical Assistance Facility (MITAF) funded by KfW, UNCDF, UNDP, CORDAID and the BSL, the International Finance Corporation (IFC) Doing Business Reform Action Plan, IFC TA on leasing and secured lending to support MSME finance, Investment Climate Facility TA as well as the African Development Bank (AfDB) West African Monetary Zone (WAMZ) payment system support project. 26. Specific activities include:

• Credit information infrastructure: This activity will include two phases: the first phase of the project will support the development of a basic bad debtor database operated by the BSL, which utilizes non-performing loan information reported by Sierra Leone banks. In the second phase, the development of a comprehensive credit information bureau including negative and positive credit information funded either entirely by the private

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sector or in a public-private partnership model including negative and positive credit information, adequate regulation and capacity development for BSL oversight will be supported.

• Implementation of payment systems and remittances policy framework: Activities will support the (i) drafting of required payment systems regulation and policies, (ii) training, TA and capacity development for payment system and mobile payment supervision, and (iii) the drafting of mobile payment regulation and the design of adequate oversight mechanisms

• SME/value chain finance capacity development of commercial banks: This activity will include the (i) analysis of product development needs and enabling environment constraints to support MSME finance and agricultural finance, (ii) development of sector policies and support for sector dialogue on enhancing access to financial services, (iii) pilot product development in cooperation with selected commercial banks (secured lending, leasing, value chain finance) and capacity development for selected commercial banks, and (iv) drafting of secured lending law and regulation to support MSME finance.

Component 2: Building financial sector reform and oversight capacity of the BSL (US$ 2.4 million) 27. This component will strengthen the BSL’s capacity to supervise the growing financial sector effectively, lead the financial sector reform process and develop its organizational capacity to undertake its key functions within the Sierra Leone financial sector. It complements TA support from Gesellschaft for Internationale Zusammenarbeit (GIZ) on banking supervision and reform capacity, International Monetary Fund (IMF) TA on banking supervision, legal framework and organizational development as well as the ADB WAMZ payment system support project. The component will focus on the implementation of the Institutional Development Plan of the BSL, including banking supervision, strengthening the legal environment of the financial sector and build BSL capacity to lead implementation of the FSDP. 28. The component will include the following specific activities:

• Financial Sector Legal Environment: This activity will (i) review and update the financial sector legal framework, including the Other Financial Services (Amendment) Act, Banking Act and BSL Act; (ii) support the drafting, amending and implementation of revised sector legislation, including potentially a Microfinance Law, and (iii) fund training and capacity development for the BSL legal department.

• Implementation of Institutional Development Plan: This activity will support the implementation of the BSL institutional development plan, including (i) review of Human Resources (HR) policies and practice and drafting of new HR policy, (ii) staff capacity development: assessment of staff capacity needs, skills/capacity assessment of existing staff and preparation of a staff capacity development plan as a framework for broad-based training and capacity development program, (iii) broad-based training program for BSL staff, (iv) review of functional and business process and support for business and functional process re-engineering, (v) review and development of information technology (IT) strategy and implementation plan, purchase of IT equipment

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with a focus on banking supervision, (vi) complement TA support for the implementation of the AML/CFT framework, and (vii) design and implement efficient supervisory processes, including the supervision of the microfinance sector.

• Support to the FSDP Secretariat: This activity will support (i) project management, monitoring and evaluation (M&E) and implementation capacity to enable the FSDP Secretariat to coordinate financial sector reforms under the FSDP (ii) the development of financial management and procurement capacity, and (iii) the purchase of select equipment for the FSDP Secretariat.

• Strategy and analytical support for BSL: This activity will support BSL in further developing financial sector development strategies, including but not limited to the microfinance policy framework and long-term finance, through long-term TA by an international financial sector consultant firm.

B. Project Financing

1. Grant

29. The financing instrument for this project is a Specific Investment Loan (SIL) in the form of an IDA grant of US$4 million equivalent. Standard IDA terms for Sierra Leone would apply. The SIL instrument is the most appropriate in light of the project’s scope to support TA, capacity development and the creation, rehabilitation, and maintenance of economic and institutional infrastructure in addition to financing consultant services and management and training programs. 30. The International Development Association (IDA) operation complements TA and investment projects by KfW, UNCDF/UNDP, CORDAID, GIZ, ADB, IMF, and the IFC. The team has explored options for basket funding and co-financing for the whole project. However at this time this is not feasible as complementary development partner activities are either already operational, have been postponed or their modes of delivery, as in the case of GIZ, do not allow for joint funding mechanisms.

2. Project Financing Table

IV. Implementation

A. Institutional and Implementation Arrangements

Component and/or Activity Total (US $million)

Component 1: Enhancing access to financial services

1.6

Component 2: Building financial sector reform and oversight capacity of the Bank of Sierra Leone

2.4

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31. BSL will be responsible for project implementation. Project implementation will be streamlined into the FSDP Secretariat, which is a division with the Office of the Governor of the BSL. The Head of the FSDP Secretariat reports to the Deputy Governor of the BSL. Procurement and financial management functions will be carried out by the respective functional departments within the BSL. The Head of the FSDP Secretariat, who has been appointed from within the BSL, will be responsible for day-to-day management of the project and be supported by one technical staff and one administrative staff, who will coordinate with the procurement and financial management functions. BSL is responsible for all procurement and financial management and shall ensure that it employs and retains adequate staff capacity and maintains adequate financial and procurement management arrangements at all times during the implementation of the project. For an initial period, BSL will be able to draw on back-up support by the Integrated Project Administration Unit (IPAU) in the Ministry of Finance and Economic Development (MoFED) to support procurement and financial management. The project will fund capacity development for BSL to enable it to undertake these roles under component 2. A short-term financial management consultant with World Bank financial management experience will be recruited under a project preparation facility to train BSL staff and support preparation of the Project Implementation Manual. 32. The FSDP Secretariat will be responsible for the procurement of consultants, goods and services, as well as M&E in coordination with designated persons within the BSL departments and beneficiary institutions that are implementing the activities. Wherever necessary, timely short-term TA will be sought to strengthen the team and the project will fund support through an international financial sector consultant on a retainer basis. 33. All project activities support the implementation on the FSDP and the FSDP Secretariat will report on project activities through the Governor of the BSL to the high-level FSCF and the FSSC to ensure consistency and coordination of sector reform activities within the FSDP framework.

B. Results Monitoring and Evaluation 34. M&E will be based on the agreed Results Framework. The FSDP Secretariat will be responsible for conducting M&E activities. As indicated in Annex 1, and given the nature of this project’s intervention, most intermediary project indicators are descriptive in nature. Monitoring of impact on ultimate beneficiaries will be based on data collection by BSL from commercial banks and MFI returns. PDO indicators will be monitored on the basis of Doing Business Depth of Credit information index (PDO 1), balance sheet information provided by supported commercial banks to BSL (PDO 2), descriptive measures on implementation of payment system policies (PDO 3) and a baseline and project end assessment of Basel Core Principles (BCP) compliance undertaken by GIZ in 2011 and 2014 (PDO 4). In addition, the FSDP Secretariat will set-up a M&E system for the overall implementation of the FSDP and, in cooperation with the BSL research department, report on a broad range of quantitative financial sector development indicators. 35. A quarterly monitoring table and a Project Report on progress in project implementation will be prepared by the FSDP Secretariat, approved by the Governor of BSL and then submitted

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to IDA for review. Each Project Report shall cover the period of one calendar quarter, and shall be furnished to the Association not later than forty five (45) days after the end of the period covered by such report. These reports will assess achievements against the Project Implementation Plan (PIP), a Financial Management Plan (FMP) and overall Procurement Plan that will be prepared and incorporated into the Project Implementation Manual (PIM). The FSDP Secretariat will be responsible for updating the PIP on an annual basis, taking into account experiences and the strategic focus of the project. The PIM includes, among others, guidelines on all period reporting, and monitoring arrangements. The Mid-Term Review (MTR) of the IDA-operation will be 30 months into the project. An Implementation Completion Report (ICR) will be undertaken six months after the closing of the project.

C. Sustainability

36. The project supports activities under the umbrella of the FSDP, which was approved by Cabinet in 2009 and benefits from a high degree of ownership of the BSL, the private sector and other Government agencies. Project development objectives are well-aligned with the overall Government objectives. The FSDP and the broad-based governance structure for its implementation, including the FSCF and the FSSC made-up of all relevant stakeholders, provide a robust framework for the coordination of reforms and enhance the likelihood that, once implemented, they will be sustained. Project support for building the capacity of the BSL as champion of financial sector reform and the FSDP Secretariat as a focal point for advancing the broad reform agenda is expected to further sustain reform momentum. Moreover, the private sector has documented a significant interest in advancing reforms and sharing the costs of project implementation and maintenance of shared infrastructure such as in the case of payment system infrastructure and credit information infrastructure.

V. Key Risks

37. The project implementation risk has been assessed to be High Impact/Low Likelihood (MI). 38. The project benefits from a straightforward project design and clear and streamlined implementation arrangements. BSL as implementing agency oversees most policy areas relevant to the project directly. The design is flexible to respond to reform opportunities and objectives are well aligned with those of key stakeholders. Three different key risks can be identified. Firstly, the BSL has limited implementation capacity and little experience implementing World Bank projects. This risk is mitigated through a streamlined implementation structure with the FSDP Secretariat reporting directly to the BSL Governor and Deputy Governor and back-up support to be provided by the Integrated Project Administration Unit (IPAU) in the MoFED. Secondly, the Government of Sierra Leone (GoSL) has displayed strong support for financial sector reform, but there remain potential political obstacles that might hinder the progress of these reforms. Therefore, focus of this project is on reform activities which are under the direct purview and control of BSL and which are implemented directly through the BSL. Where possible, support for policy reforms will be strengthened through the inclusion of policy actions in development policy operations. Thirdly, achievement of the PDO is, in parts, predicated on successful implementation of other donor projects, in particular the AfDB WAMZ payment

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system project, MITAF activities in the MFI sector, GIZ and IMF TA for banking supervision and IFC TA for MSME finance. The FSDP Secretariat will play a key role in monitoring the implementation of donor project and fostering active coordination of donor activities as a central broker for FSDP activities. The project will use transaction-based disbursement against full documentation and in line with the threshold as stated in the Disbursement letter. Banking and processing of eligible expenditure payments will be managed by the authorized signatories of BSL.

VI. Appraisal Summary

A. Economic and Financial Analysis 39. Given the character of this operation, a quantitative economic and financial analysis is not an appropriate tool to assess the returns of this project. There is, however, a substantial body of empirical evidence that successful financial sector reforms that result in a deepening of financial sector development and increased access to financial services can be expected to have a high impact on growth and poverty eradication. World Bank research has reinforced the empirical evidence pointing to a strong and independent causal role of the financial sector in promoting growth. More recent research has shown that well-developed financial systems are associated with faster growth in the incomes of the poor. Thus, finance helps the poor catch up with the rest of the economy as it grows. Even at the same average income, economies with deeper financial systems have fewer poor people9

. Building on the 2006 growth diagnostics, alleviating finance as a binding constraint will be crucial in achieving Sierra Leone’s development objectives.

B. Technical 40. The technical merits of the project design have been examined by Bank staff over the course of project preparation and are considered sound and in line with international standards. The design is based on analytical work undertaken by the Bank and other development partners over the past four years, including the analysis and recommendations from the joint Bank/Fund FSAP (2006), the FSDP (2009) and underpinning analytical work, the BizClim Field Survey on the Microfinance Demand in Sierra Leone (2006); 2006 Growth Diagnostic: What is holding back growth in Sierra Leone? (Harvard University, 2006), Ministry of Trade and Industry PSD Diagnostic Report (2008), MITAF Phase I Evaluation Report (UNCDF/UNDP 2009), WAMZ Payment System Development Project (African Development Project, 2008) and various IFC, IMF and KfW analytical reports. In addition, technical assessments will continue throughout the implementation period.

9 See for example: Finance for Growth: Policy Choices in a Volatile World. Policy Research Report. Washington, DC: World Bank and Oxford University Press, 2001; R. G. King and R. Levine. 1993. ―Finance and Growth: Schumpeter Might Be Right.‖ Quarterly Journal of Economics 108(3): 717–38; T. Beck, A. Demirgüç-Kunt, and R. Levine. 2007. ―Finance, Inequality and the Poor.‖ Journal of Economic Growth 12(1): 27–49. ; P. Honohan. 2004. Financial Sector Policy and the Poor: Selected Findings and Issues. Washington, DC: World Bank.

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41. The activities supported by the project derive directly from the Sierra Leone Financial Sector Development Plan and are based on tested and established methodologies and best practice of international financial sector development projects.

C. Financial Management

42. While the proposed financial management arrangements of the project satisfy the Bank’s minimum requirements under OP/BP 10.02, the overall financial management residual risk is rated ‘medium likelihood’. The project will be implemented under the auspices of the BSL. Additional qualified and experienced financial management staff will be recruited into the accounting department of BSL and in place before effectiveness. In addition, a short-term financial management consultant with experience in World Bank financial management requirements will be recruited under a project preparation facility to train BSL staff and support the initial implementation of the project, including preparation of the Project Implementation Manual.

43. The Designated Account (DA) of the project will be held with the BSL rather than through a commercial bank in Sierra Leone as is traditionally the case for other projects. The foreign exchange will be held in the BSL dollar account maintained with the Federal Reserve Bank of New York, and the equivalent Leone account will be established, locally, with the BSL. The BSL will therefore maintain a dual currency account (USD and Leones). 44. The project will submit, within 45 days of each calendar quarter, quarterly interim financial reports of the project including, at the minimum: (a) Actual and Forecast Cash Flow Statement according to Components, Sub-components and Activities; (b) Summary Statement of Expenditures according to Categories; (c) Designated Account Reconciliation Statement; (d) Physical Progress Report; and (e) Procurement Status Monitoring Report. The annual audited financial statements of the project shall be submitted to IDA within 6 months of the end of the GoSL’s’s fiscal year (i.e. by June 30 each year). The audit will be conducted by a private sector auditor, upon approval of the Auditor General, and the auditor shall be appointed within 4 months of project effectiveness. The terms of reference of the audit will be agreed at negotiations.

D. Procurement 45. A procurement assessment has been carried out and has concluded that BSL does not have adequate experience and capacity to carry out procurement activities related to the proposed project. Although the BSL has a functioning and staffed procurement department, it is not familiar with Bank procurement procedures. As a result, procurement risk is assessed as HIGH. 46. Risk mitigation measures have been discussed with BSL and agreed as follows. The FSDP Secretariat will be responsible for the procurement of goods and services. The head of the Secretariat, who has been appointed from within the BSL, will be responsible for day-to-day management of the project and will be supported by one technical staff and one administrative

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staff. They will coordinate the procurement functions which will be carried out by the respective functional departments within the BSL. BSL will operate a streamlined implementation structure with the FSDP Secretariat reporting directly to the BSL Governor and Deputy Governor. In addition, for an initial period, procurement back-up support will be provided by the IPAU in the MoFED. It is expected that BSL procurement staff will benefit from this arrangement and further develop their capacity under the Project’s institutional development plan.

E. Social (including safeguards) 47. All key stakeholders, including the private sector, are included in the FSDP governance structure. The project will explicitly support public-private dialogue and other outreach instruments to support reform ownership beyond direct project partners, including civil society.

F. Environment

48. Not applicable

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Annex 1: Results Framework and Monitoring

Sierra Leone: Financial Sector Development Plan Support Project (FSDPSP) Results Framework

Project Development Objective (PDO): The project development objective is to strengthen the capacity of the Bank of Sierra Leone and contribute to improving efficiency in financial intermediation, safeguarding financial sector stability, reducing transaction costs of money transfer and expanding access to financial services. PDO Level Results Indicators*

Cor

e Unit of Measure

Baseline Cumulative Target Values** Frequency Data Source/ Methodology

Responsibility for Data Collection

Description (indicator definition etc.) YR 1 YR 2 YR3 YR 4

Indicator One: The Doing Business Depth of Credit Information Index is in line with Sub-Sahara Africa average

DB index 0-6

2011: 0 1.5 In line with SSA Average (2011: 1.7)

Annually Doing Business Report

BSL/FSDP Secretariat

Doing Business Depth of Credit Information Index

Indicator Two: 25% increase in outstanding MSME loan portfolio of commercial banks supported through capacity development activities of the project and stable portfolio-at-risk.

X

SLN To be established once Commercial Banks to be supported are identified

10% increase 15% increase Annually Commercial Bank returns


Volume of SME loan portfolio

Indicator Three: A comprehensive payment system policy and regulatory framework has been established.

Yes / No No framework

Yes Annually BSL circulars and publications


Indicator Four: Compliance with Basle Core Principles (BCPs) for Banking Supervision for 10 out of 25 BCPs has improved

Core Principle of Effective Bank Supervision (BCPs)

To be established in 2011 through BCP assessment

Targeted measures to improve 5 BCPs implemented

Targeted measures to improve 10 BCPs implemented

10 out of 25 BCPs have improved

Annually on targeted measures; BCP assessment in Year 1 and 4

BCP assessment undertaken in cooperation with GIZ

BSL/FSDP Secretariat, BSL Banking Supervision department

Bank for International Settlement - Core Principles of Effective Bank Supervision Methodology

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INTERMEDIATE RESULTS

Intermediate Result (Component One):

Intermediate Result indicator One: Credit Information Infrastructure

YES/NO BSL bad debtor database is established

Credit Bureau design in private or public/private ownership developed

Intermediate Result indicator Two: Volume of World Bank Funding – Enabling Environment SME

X US$ 0 US$ 400K Annually PIP implementation plan


Mandatory reporting under WB core indicators

Intermediate Result indicator Three: Volume of World Bank Funding – Institutional Development SME

X

US$ 0 US$300K Annually PIP implementation plan


Mandatory reporting under WB core indicators

Intermediate Result indicator Four: Draft payment system policy prepared

Yes/No No policy in place

DRAFT policy prepared

Annually BSL circulars and publications


Intermediate Result (Component Two):

Intermediate Result indicator One: Key milestones of the BSL Institutional Development Plan (IDP) have been implemented

Yes/No Milestones achieved as per IDP timeline

Milestones achieved as per IDP timeline



Annually IDP progress report


Intermediate Result indicator Two: Revised Financial Sector Legal Framework presented to Cabinet

Yes/No Review of Financial Sector Legal Framework finalized

DRAFT financial sector legislation prepared

Revised Financial Sector Legal Framework approved by Cabinet

Annually BSL BSL/FSDP Secretariat

Intermediate Result indicator Three: Revised BSL HR policy approved by BSL board of directors

Yes/No Key deliverable identified in BSL IDP

Revised BSL HR policy approved by BSL board of directors


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Intermediate Result indicator Four: Staff capacity development plan approved by BSL board of directors


Staff capacity development plan approved by BSL board of directors


Intermediate Result indicator Five: IT strategy and implementation plan approved by BSL board of directors


IT strategy and implementation plan approved by BSL board of directors


Intermediate Result indicator Six: FSDP Secretariat established as broker and facilitator of FSDP implementation

Yes/No FSDP Secretariat established in BSL

M&E framework for FSDP implementation established

Sector Dialogue: through Regular FSCF and FSSC meetings organized by FSDP Secretariat


*Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators) **Target values should be entered for the years data will be available, not necessarily annually.

http://coreindicators/�

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Annex 2: Detailed Project Description Sierra Leone: Financial Sector Development Plan Support Project (FSDPSP)

PDO 1. The project development objective is to strengthen the capacity of the Bank of Sierra Leone and contribute to improving efficiency in financial intermediation, safeguarding financial sector stability, reducing transaction cost of money transfer and expanding access to financial services. 2. The proposed PDO derives directly from the objective of the Financial Sector Development Plan (FSDP). Project Beneficiaries 3. Direct project beneficiaries are: (i) the BSL, other Government agencies and commercial banks who will benefit from capacity development; (ii) a broader set of financial institutions (banks, microfinance institutions, insurance companies etc.) will benefit indirectly from an improved enabling environment and market infrastructure and that will allow them to operate more efficiently and broaden their market reach. 4. The ultimate beneficiaries of this project are the users of financial services, including households and MSMEs, who will use increased and stable supply of financing, savings and payment services to enhance their economic productivity by investing in productive capacity (enterprises) or health and education (households), managing their risks better and expand business activities because of lower transaction costs. 5. Benefit to the ultimate beneficiaries of the project will be measured through: (1) Expansion of domestic private sector credit to the private sector as a percentage of GDP (Baseline: 9.4 percent in 2009, Source: BSL)10. (2) Increase in borrowers from microfinance institutions by gender (Baseline: 130.000 clients in 2009, Source: BSL, MFI returns monitored by MITAF)11

.

PDO Level Results Indicators 6. The following four indicators measure achievement of the PDO:

• The Doing Business Depth of Credit Information Index is in line with Sub-Sahara Africa average (Baseline: No credit information infrastructure; Doing Business Depth of Credit Information Index = 0).

10This indicator looks at the broadest measure of access to finance by the private sector (a standard measure of financial intermediation efficiency) and emphasizes the safeguarding of current positive growth trends. 11 This indicator is identical with that of the parallel KfW/UNCDF/UNDP/CORDAID-funded MITAF project, which the project will complement through its interventions at the enabling environment level and SME finance level.

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• 25 percent increase in outstanding MSME loan portfolio of commercial banks supported through capacity development activities of the project and stable portfolio-at-risk. (Baseline: To be established once commercial banks have been identified)

• A comprehensive payment system policy and regulatory framework has been established. (Baseline: No payment system policy and regulatory framework in place; Implementation of electronic payment system initiated).

• Compliance with Basle Core Principles (BCPs) for Banking Supervision for 10 out of 25 BCPs has improved (Baseline: BCP compliance to be established through BCP assessment by the end of end of 2011).

7. The project, within its modest scope, aims to address the dual challenge facing the Sierra Leone authorities: Expanding the access to financial services by MSMEs and households to facilitate private sector growth and strengthening the institutional framework charged with safeguarding financial sector growth. 8. The activities under these components derive directly from the priorities of the Sierra Leone Financial Sector Development Plan (FSDP) and the activities outlined in the corresponding project implementation plan. These activities will build on preliminary work supported under the Project Preparation Advance. Component 1: Enhancing access to financial services (US$ 1.6 million) 9. This component will support activities that improve efficiency in financial intermediation, reducing transaction costs of money transfer and expand access to financial services. The activities are directly linked to achieving PDO indicators 1, 2 and 3. Activity 1.1: Credit information infrastructure 10. The complete lack of credit information infrastructure affects both the ability of commercial banks and MFIs in expanding their business to new client segments as well as their ability to manage the risks associated with increased credit growth. Government has prepared a credit information act which has been sent to Parliament and which provides the required legal framework for credit information sharing. The Sierra Leone financial sector lacks the scale to sustain a domestic private sector credit bureau and options need to be assessed to either host a credit information bureau on an existing offshore platform or develop a new regional solution within the WAMZ countries. In the short-run, BSL will build-up a simple bad debtor database hosted and managed within BSL. 11. This activity will include two phases: In the first phase, the project will support the development of a basic bad debtor database operated by the BSL, which utilizes non-performing loan information reported by Sierra Leone banks. Support includes consultancy services for software development, design and equipment purchases. In the second phase, the development of a comprehensive credit information bureau including negative and positive credit information funded by the private sector or in a public-private partnership model as well as adequate regulation and capacity development for the BSL oversight function will be supported. This will

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include consultant services to develop design options, implementation support, drafting of specific regulations, support for public-private dialogue, public awareness and outreach to private sector stakeholders and training. 12. This activity will complement and be implemented in cooperation with the IFC TA program. MITAF will be able to provide additional TA to support the linkage of microfinance institutions to the credit bureau. Activity 1.2: Implementation of payment systems and remittances policy framework 13. Access to money transfer services and payment system infrastructure is a key pillar of lowering transaction costs in the economy. (i) Checks and other wholesale payments are cleared manually as Sierra Leone lacks electronic national payment system infrastructure. AfDB, through its WAMZ regional payment system project, is supporting the installation of key wholesale payment systems infrastructure. The delivery of hardware needs to be supported by adequate policy and regulatory frameworks and the development of oversight capacity within BSL. (ii) To date, most retail money transfers use costly informal mechanisms. Recently established mobile money transfer systems by experienced regional operators have the potential to significantly increase access to money transfer services, especially in the rural areas, and report significant growth (one operator, Splash, has reported 40,000 clients within the first year of operation, which is the equivalent of 10 percent of total clients of the formal financial system). However, currently there is no oversight of these activities and a lack of coherent policies and regulation to provide a framework for sustainable industry development. (iii) Remittances play an important part in rebuilding post-conflict economies and the provision of efficient money transfer systems, both in terms of a competitive market for Money Transfer Operators for international remittances and mobile money transfers on ‘the last mile’ within Sierra Leone, will further facilitate the flow of funds into the economy. The development of wholesale and retail money transfer services requires a clear policy and enabling regulatory environment, which will be supported through the project: 14. Activities will include: (i) drafting required payment systems regulation and policies and (ii) supporting training, TA and capacity development for payment system and mobile payment supervision, (iii) drafting enabling mobile payment regulation and designing adequate oversight mechanisms as well as (iv) supporting the establishment of a remittances policy framework fostering competition in the money transfer operator market. 15. This activity will complement the AfDB WAMZ regional payment system project, which focuses on hardware installation. Activity 1.3: SME / value chain finance capacity development of commercial banks: 16. Further steps need to be taken to facilitate access to finance by micro, small and medium enterprises. There is a need for a coherent financial inclusion policy framework, which outlines the BSL’s vision for the development of the sector and enhances the legal and regulatory framework to enable outreach. Commercial banks need to develop adequate products to reach new client segments, including in rural areas. A key priority is to fund investments into agro-

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businesses. Commercial banks lack the product capacity and sector-specific knowledge to offer tailored products and assess risks properly. Leasing and secured lending products, which are especially helpful to facilitate MSME access to finance, are not offered and specific legal and regulatory frameworks need to be developed. 17. This activity will include the (i) analysis of product development needs and enabling environment constraints to support MSME finance and agricultural finance; (ii) development of sector policies and support for sector dialogue on enhancing access to financial services, (iii) product development in cooperation with selected commercial banks (secured lending, leasing, value chain finance) and capacity development for selected commercial banks (iv) drafting of secured lending law and regulation to support MSME finance. 18. This activity will work closely with the IFC TA program in the area of product development, secured lending and leasing and provide the analytical basis for potential project scale-up through IDA partial risk guarantees and other SME finance instruments. Component 2: Building financial sector reform and oversight capacity of the Bank of Sierra Leone (US$ 2.4 million) 19. This component will strengthen the BSL’s capacity to supervise the growing financial sector effectively, lead the financial sector reform process and develop its organizational capacity to undertake its key functions within the Sierra Leone financial sector. It complements TA support from Gesellschaft for Internationale Zusammenarbeit (GIZ) on banking supervision and reform capacity, IMF TA on banking supervision, legal framework and organizational development as well as the ADB WAMZ payment system support project. The component will focus on the implementation of the Institutional Development Plan of the BSL, strengthening the legal environment of the financial sector and build BSL capacity to lead implementation of the Financial Sector Development Plan (FSDP). 20. This component will directly support achievement of PDO indicator 4. 21. The component will include the following specific activities: Activity 2.1: Financial Sector Legal Environment: 22. The FSDP lists a broad range of issues to be addressed in strengthening the financial sector legal environment. These include: (i) the 2000 BSL Act, in order to enhance BSL’s ability to conduct monetary policy, to extend its supervisory role of the financial sector, and resolve distressed banks. (ii) the 2000 Banking Act, in order to reflect the fact that there are both deposit-taking and non-deposit-taking institutions, which will require different regulatory frameworks, and to make specific provisions for microfinance institutions, (iii) the Other Financial Services (Amendment) Act (2007) to cater for new players in the market, delineate deposit-taking activities from those covered under the Banking Act, allow trading of debt securities on the stock exchange; and trading of standardized interbank lending instruments.

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23. This activity will (i) review and update the financial sector legal framework, including the Other Financial Services (Amendment) Act, Banking Act and BSL Act (ii) support the drafting, amending and implementation of revised sector legislation, including potentially a Microfinance Law, and (iii) fund training and capacity development for the BSL legal department. 24. This activity will be closely coordinated with IMF TA in this area. To support the progress of legal reforms it is envisaged that this activity will inform policy actions under future development policy operations. Activity 2.2: Implementation of BSL Institutional Development Plan: 25. The BSL is charged with coordinating and supporting the implementation of the FSDP and has developed a detailed implementation plan, which provides a robust foundation for implementing reforms and coordinated donor support. Given the complexity and technical demands of financial sector reforms and the need for coordinated approaches by policy makers, private sector and development partners, it will be important to develop the capacity of the BSL as a champion of financial sector development. The development state of the financial sector needs a strong apex institution that formulates adequate policies to enhance access to finance, coordinates stakeholder activities and takes a pro-active leadership role in advancing sector reforms12

and the provision of shared infrastructure such as credit information and payment systems. In order to meet this challenge, the BSL has drawn up an Institutional Development Plan with the objective to increase its capacity to “formulate and implement monetary and supervisory policies to foster a sound and economic and financial environment”. A particular focus of this component is the strengthening of supervisory capacity and improved processes, including AML/CFT, banking supervision, microfinance sector supervision and the installation of IT capacity to support information flow and enhance the ability of the BSL to monitor sector developments.

26. This activity will support the implementation of the BSL institutional development plan, including (i) review of HR policies and practice and drafting of new HR policy; (ii) staff capacity development: Assessment of staff capacity needs, skills/capacity assessment of existing staff; Preparation of a staff capacity development plan as a framework for broad-based training and capacity development program, (iii) broad-based training program for BSL staff; (iv) review of functional and business process and support for business and functional process re-engineering;(v) review and development of IT strategy and implementation plan, purchase of IT equipment with a focus on banking supervision, (vi) complement TA support for the implementation of the AML/CFT framework; and (vii) design and implement efficient supervisory processes, including the supervision of the microfinance sector. Activity 2.3: Support to the FSDP Secretariat: 27. This activity will support (i) project management, M&E and implementation capacity to enable the FSDP Secretariat to coordinate financial sector reforms under the FSDP; (ii)

12 Beck, T. and Honohan, P. “Making Finance Work for Africa”, 2007

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development of financial management and procurement capacity; (iii) purchase of select equipment for FSDP Secretariat. Activity 2.4: Strategy and analytical support for BSL:

28. This activity will support BSL in further developing financial sector development strategies, including but not limited to the microfinance policy framework and long-term finance, through long-term TA by an international financial sector consultant firm.

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Annex 3: Implementation Arrangements Sierra Leone: Financial Sector Development Plan Support Project (FSDPSP)

1. Project institutional and implementation arrangements

1. BSL will be responsible for project implementation. Project implementation will be streamlined into the FSDP Secretariat, which is a division with the Office of the Governor of the BSL. The Head of the FSDP Secretariat reports to the Deputy Governor of the BSL. Procurement and financial management functions will be carried out by the respective functional departments within the BSL. The Head of the FSDP Secretariat, who has been appointed from within the BSL, will be responsible for day-to-day management of the project and be supported by one technical staff and one administrative staff, who will coordinate with the procurement and financial management functions. BSL is responsible for all procurement and financial management and shall ensure that it employs and retains adequate staff capacity and maintains adequate financial and procurement management arrangements at all times during the implementation of the project. For an initial period, BSL will be able to draw on back-up support by the Integrated Project Administration Unit (IPAU) in the MoFED to support procurement and financial management. The project will fund capacity development for BSL to enable it undertake these roles under Component 2. 2. Implementation arrangements have been designed to streamline project implementation into the FSDP Secretariat, which is coordinating the implementation of the FSDP, and increasing the efficiency of implementing the limited number of activities. The BSL has limited implementation capacity and little experience implementing World Bank projects. This risk is mitigated through a streamlined implementation structure with the FSDP Secretariat reporting directly to the BSL Governor and Deputy Governor and the ability of the BSL to draw on back-up support by the Integrated Project Administration Unit (IPAU) in the MoFED. 3. The FSDP Secretariat will be responsible for the procurement of consultants, goods and services, as well as M&E in coordination with designated persons within the BSL departments and beneficiary institutions that are implementing the activities. Wherever necessary, timely short-term TA will be sought to strengthen the team and the project will fund support through an international financial sector consultant on a retainer basis. In particular, the FSDP Secretariat will be responsible for: (i) reviewing project implementation proposals prepared by the beneficiary BSL departments and agencies; (ii) drafting TORs in cooperation with beneficiary BSL departments and other beneficiaries; (iii) overseeing project implementation activities; (iv) administering project funding and procurement processing (including the employment of consultants) and managing the project and special accounts; (v) following-up on the agreed financial and legal covenants; (vi) proposing any necessary adjustments and amendments to implementation methods; (vii) providing periodic project progress reports; and, (viii) acting as the focal point of contacts between the BSL, Government and IDA and other donors during the project implementation period. 4. The Head of the FSDP Secretariat will work with the BSL procurement unit and be responsible to ensure that all of the World Bank Guidelines for procurement of goods and

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consultant services as well as the internal review and clearance processes of the BSL are followed. The Head of the FSDP Secretariat will work with the BSL accounting department and be responsible for all aspects of financial management, including budgeting and auditing, procurement, quality assurance, monitoring and evaluation and reporting, etc. 5. All project activities support the implementation on the FSDP and the FSDP Secretariat will report on project activities through the Governor of the BSL to the high-level FSCF and the FSSC to ensure consistency and coordination of sector reform activities within the FSDP framework.

Financial Management, Disbursements and Procurement Financial Management (FM) 6. In line with the guidelines as stated in the Financial Management Manual issued by the Financial Management Sector Board on March 1, 2010, a financial management assessment for the proposed Financial Sector Development Plan Support Project (FSDPSP) was conducted by the BSL. The objective of the assessment is to determine: (a) whether the project implementing unit has adequate financial management arrangements to ensure project funds will be used for purposes intended in an efficient and economical way; (b) that the project’s financial reports will be prepared in an accurate, reliable and timely manner; and (c) how the entities’ assets will be safeguarded. The FM assessment also included a review of the (i) number and quality of financial management staff at BSL that will have fiduciary responsibilities under the project; (ii) FM organization structure of the project’s implementing unit of BSL and its impact on the internal control processes to be employed under the project; and (iii) the proposed FM systems and processes to be established in support of the implementation of the project. 7. The assessment of the FM arrangements concluded that adequate systems will be in place, by effectiveness, that satisfy the Bank’s minimum requirements under OP/BP10.02. Nevertheless, the assessment rates the FM residual risk as ‘Medium Likelihood’. Country Issues 8. The Sierra Leone fiduciary environment has undergone substantial transformation since 2006. By mid-2007, arising from the implementation of a broad and sustained program of public financial management reforms, the performance of Sierra Leone’s fiduciary arrangements, according to the PEFA PFM performance measurement framework assessment of 2007 (supported by the PER Report of 2010), were placed at par with the regional average. With the aim of widening and deepening the reforms, the GoSL established a PFM Oversight Committee, chaired by the Financial Secretary, along with five sub-committees. A National Action Plan for PFM reform was then formulated and implementation of the reform actions became more aggressively pursued with financial and TA support from a number of development partners including the Bank. The legal and institutional framework for PFM was strengthened. Key among the milestones achieved include: (a) the adoption of a new Financial Management Regulations in 2007, thus further strengthening the legal foundation for fiduciary standards - the Government Budgeting and Accountability Act (GBAA) of 2005; (b) the appointment of a

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qualified Accountant General and eight other professional accountants after a long period of low PFM human resource capacity; (c) the strengthening the capacity of the external audit function by enhancing the terms and conditions of service of the Auditor General and by new recruitment and training; (d) establishment of an internal audit function in MDAs. Resulting from a number of reforms initiated since 2007, the annual public accounts and their audit have been brought up to date after several years of backlog, and the publication of quarterly unaudited accounts became normal routine. 9. Notwithstanding substantial progress already made in a number of areas of financial governance, Sierra Leone’s overall ranking in the Transparency International tables has deteriorated from 150 in 2007 to 158 in 2008 out of 179 and 180 respectively. With the establishment of a vibrant anti-corruption institution, the Government has also taken major steps aimed at controlling corruption. Project Risk Assessment and Mitigation 10. The table below shows the results of the risk assessment for the project. The table identifies risk elements that could impact the achievement of project objectives as well as measures designed to mitigate the risks. Table A: Financial Management Risks and Mitigation Measures as they relate to financial management

Risk Risk Rating

Risk Mitigating Measures/Remarks

Residual Risk Rating

Conditions for Effectiveness/ Negotiations

Inherent Risk Country Level Weaknesses in PFM capacity; uneven levels of transparency in the effective use of public funds; weak oversight and accountability.

H

Deepened improvement in PFM capacity through the IPFMRP and complementary donor support to GoSL. Completion of roll-out of IFMIS across MDAs, and strengthened capacity of internal audit in MDAs.

S

No

Entity Level ( BSL) Lack of Bank project implementation oversight experience at BSL.

H

The proposed implementation arrangements, including the streamlining into the FSDP Secretariat as part of the office of the BSL Governor, additional staffing of the BSL accounting department and back-up support through the IPAU will reduce the impact of lack of prior experience of BSL in project implementation.

S

No

Project Level Being the first Bank

S

The recruitment of an experienced and qualified incremental FM staff to support FM at the project level, and the

M

Yes – Before

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project for BSL, lack of knowledge about IDA policies and procedures can hamper smooth implementation.

development and implementation of a Project Implementation Manual (including FM procedures) will provide the requisite knowledge base on IDA policies and procedures at the project level.

Effectiveness

Overall Inherent Risk H S Control Risk Budgeting Budget and annual work-plan preparations may be delayed and may not be comprehensive. Risk of cost overruns and adverse variations in expenditure could arise due to potential slow implementation.

M

With specialist market based staff to be recruited by the BSL into the respective BSL divisions – FM Consultant advisors etc. – and back-up support from the IPAU this risk will be mitigated. BSL already has a good budgeting procedure in place. Also, budget execution reporting through quarterly IFRs will be routinely monitored by IDA, and project budget planning and implementation will be facilitated for orderly project implementation.

L

No

Accounting Failure to, or delay in, appropriately accounting for project funds and provide full supporting documentation could result in IDA invoking its remedies and thus delay project implementation progress.

M

BSL mainstream accounting system is already computerized through the Sun Accounting system. The project implementation manual will provide a reference basis for service standards in managing the accounting function of the project.

L

No

Internal Controls Risk of non compliance to internal control processes, including the separation of duties in expenditure processing and implementation of appropriate procurement systems.

M

There are institutional systems in place to safeguard the project resources including, the Audit Committee, the staff handbook, adequate staffing plus segregation of duties. In addition, the Project Implementation manual will outline procedures for internal control that will be applied and monitored by the Internal Audit unit of BSL. Regular IDA supervision missions and reviews will also help ascertain level of compliance.

L

No

Funds Flow Delays in funds reaching third parties for effective project implementation;

S

Simplified funds flow arrangements will be documented in the Project Implementation Manual. Given the BSL role in SL financial Sector, IDA project funds will be received into a DA to be established with BSL through the BSL account held at the Federal Reserve Bank,

M

No

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Strengths and weaknesses of the Financial Management System Strengths: 11. The fiduciary environment at BSL is relatively robust, as adequate systems have since been established in the Bank. The proposed institutional and implementation arrangements whereby the FSDP Secretariat will report directly to the Deputy Governor on a day-to-day basis, and through the Governor to a FSSC and FSCF at the strategic level, will further strengthen the project’s fiduciary environment. Also, the project financial management procedures will be documented in the Project Implementation Manual and serve as the reference point for implementing the financial management aspects of the project. Weaknesses: 12. The major weakness is due to the lack of prior experience of BSL in implementing World Bank funded projects and inadequate knowledge of IDA procedures and processes. These limitations can lead to delays, errors, and instances of non compliance with eligibility criteria and other financial convents as stated in the Financing Agreement. The financial management arrangements of the project provide for incremental staffing and for initial support to be provided by the IPAU of MoFED to address these weaknesses. Budgeting Arrangements 13. The BSL, through the FSDP Secretariat under the Governor, will be responsible for preparing annual budgets and work plans based on agreed programs and components under the project. The preparation of the Annual work-plan and budget will be coordinated out by the

NY . Financial Reporting Delays in processing and submitting IFRs and other progress reports and delays in submitting annual audited financial statements resulting to IDA invoking remedies.

S

The recruitment of a qualified FM staff into the BSL Accounting Department who is already familiar with W/Bank’s reporting procedures will facilitate the preparation of the reports and statements and ensure the timely availability of draft annual financial statements for audit. Specimen reports will be discussed and agreed with the FSDP Secretariat at negotiations.

M

No

Auditing Audited financial statements and audit reports not submitted within the covenanted deadline.

M

BSL has consistently produced its Annual Financial Statements on time over the last several years. The external auditor will be appointed (as a dated covenant) within 4 months of project effectiveness.

L

Yes within 4 months of project effectiveness (Auditor Appointment)

Overall Risk Rating MI ML

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incremental FM staff that BSL will recruit and deploy before effectiveness and subjected to IDA clearance. Accounting Arrangements 14. The Head of the BSL accounting department will be responsible for the overall financial management of the project. A qualified and adequately experienced financial management staff, to be recruited, will be dedicated to supporting the financial management arrangements under the direct responsibility of the Head of the accounting department of the BSL. The Consultant will work with, support, and mentor the BSL-PMU accounting personnel on project’s FM. The FSDP Secretariat structure provides for adequate staffing with personnel that have the requisite qualifications and experiences needed for project implementation and segregation of duties and responsibilities will be ensured. The processes and procedures for receiving invoices and receipts and expenditure transaction processing will be conducted in line with the project financial management procedures to be documented in the Project Implementation Manual. Internal Control & Internal Auditing 15. Although it is not foreseen that the implementation of the project will be integrated within the direct work program of the internal audit unit of BSL, the unit will carry out bi-annual reviews of systems and procedures adopted under the project. The required level of segregation of duties with respect to financial management will be maintained and will be a focus of attention during Bank supervision missions to ensure that the internal control procedures are complied with. External Auditing 16. The Office of the Auditor General is primarily responsible for the auditing of all Government projects; however due to capacity constraints, it is usual for the Auditor General to sub-contract the audit of donor funded projects to private firms. Under the FSDP Secretariat at BSL, this arrangement will be followed subject to the Bank’s necessary procurement and technical clearance of the TOR for the engagement of the audit firms. The project auditor will be appointed within four months of project effectiveness. The audit will be completed and the audited financial statements submitted to IDA within six months of the end of GoSL’s fiscal year (i.e. on or before June 30, each year). Supervision plan 17. The FM supervision mission’s objectives will include that of ensuring that strong financial management systems are maintained for the project throughout project life. The supervision will include desk reviews of IFRs and SoEs, review of audit reports and evaluation of the efficiency of the payment processing, internal control processes, and funds flow arrangements.

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a. Disbursements

Funds Flow and Disbursement Arrangements 18. Given the special position of BSL (the country’s central bank) within the financial sector, the DA of the project will be held with the Bank rather than through a commercial bank in Sierra-Leone as is traditionally the case for other projects. The foreign exchange will be held in the BSL dollar account maintained with the Federal Reserve Bank of New York, and the equivalent Leone account will be established, locally, with the BSL. The BSL will maintain a dual currency account (USD and Leones). Banking and processing of eligible expenditure payments will be managed by the authorized signatories of BSL. The project will initially use transaction-based disbursement against full documentation (SOE) and in line with the threshold as stated in the Disbursement letter. Upon a sustained satisfactory financial management rating during implementation, the project may move from transaction-based to report-based (IFR) disbursement 19. The project will allow for one disbursement category and methods of disbursement will comprise of direct payments, reimbursements, advance, and special commitments. The Bank’s FM team will periodically assess the adequacy of financial management systems and this will form the basis of any change in disbursement methods. Additional instructions for disbursements and operating the Designated Account will be provided in a Disbursement Letter issued for this project.

20. The following table specifies the categories of Eligible Expenditures that may be financed out of the proceeds of the Financing (“Category”), the allocations of the amounts of the Financing to each Category, and the percentage of expenditures to be financed for Eligible Expenditures in each Category:

Table B: Categories of Eligible Expenditures Category Amount of the

Grant Allocated (expressed in US$

mln)

Percentage of Expenditures to be

Financed (inclusive of Taxes)

(1) Goods, Non-consulting services, Consultants’ Services, Training, and Operating Costs for Component 1 and 2

4.0 100%

TOTAL AMOUNT 4.0

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Financial Reporting Arrangements 21. The FSDP Secretariat will be responsible for generating quarterly Interim unaudited Financial Reports (IFRs) and any other financial reports as may be required during implementation. Formats of the IFRs for management reporting and for withdrawals from the grant was discussed and agreed with the FSDP Secretariat during negotiations. The financial reports will be so designed to provide relevant and timely information to the project management, any other implementing agencies, and various stakeholders involved in monitoring the project’s performance. The constituents of the quarterly IFRs that will be submitted to IDA within 45 days of each calendar quarter, shall be as follows: (a) Actual and Forecast Cash Flow Statement according to Components, Sub-components and Activities; (b) Summary Statement of Expenditures according to Categories; (c) Designated Account Reconciliation Statement; (d) Physical Progress Report; and (e) Procurement Status Monitoring Report. In respect of the project’s annual financial statements, these will be prepared by the FSDP Secretariat within three months of end of each BSL fiscal year and submitted to the project auditor for auditing. The annual financial statements will include, at a minimum, the sources and uses of project funds by project components (i.e. disbursement categories) and sub-components, applicable accounting policies, and detailed notes to the accounts.

b. Procurement

22. Procurement for the proposed Project would be carried out in accordance with the World Bank’s “Guidelines: Procurement of Goods, Works, and Non-Consulting Services under IBRD Loans and IDA Credits & Grants” dated January 2011, and “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants” by World Bank Borrowers” dated January 2011; and the provisions stipulated in the Legal Agreement. 23. Prior-Review Thresholds: Prior-review and procurement method thresholds for the project are indicated in the table below. These thresholds are for the purposes of the initial procurement plan. The thresholds will be revised periodically based on re-assessment of risks.

Table C: Thresholds for Procurement Methods and Prior Review

Type

Prior Review Thresholds Proposed (USD million)

Procurement Method Thresholds Proposed (USD million)

ICB NCB

Shopping QCBS QBS CQS Least

Cost SSS

Goods & Non-consulting Services

0.5 ≥ 0.5 < 0.5

< 0.05

Consultancy Services

0.15 for Firms, 0.05 for IC SSS: All

Default

TBD <0.15

TBD All

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24. Procurement Plan and Procurement Arrangements: Procurement Plan for the project, prepared by the BSL and presented at negotiations on March 4, 2011 has been reviewed by the Association and accepted. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Recipient and the Project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 25. Procurement of Goods & Non-consulting Services: Procurement under this category would include primarily IT equipment and software. Procurement will be done using World Bank’s latest Standard Bidding Documents for all ICB and National Standard Bidding Documents agreed with (or satisfactory to) the Association for other non-ICB procurement subject to the Exceptions below. 26. Exceptions to National Competitive Bidding Procedures: The procedures to be followed for National Competitive Bidding shall be those set forth in The Public Procurement Act, 2004, of Sierra Leone (the “Act”), subject to the following provisions:

• Procuring entities shall use appropriate standard bidding documents acceptable to the Association.

• The eligibility of bidders shall be as defined under Section I of the Guidelines Procurement under IBRD Loans and IDA Credits (the “Procurement Guidelines”); accordingly, no bidder or potential bidder shall be declared ineligible for contracts financed by the Association for reasons other than those provided in Section I of the Procurement Guidelines.

• No restrictions in respect of eligibility to participate in bidding for contracts shall be placed on the basis of nationality of the bidder and/or the origin of goods other than those imposed by primary boycotts.

• Foreign bidders shall be allowed to participate in National Competitive Bidding procedures.

• No domestic preference shall be given for domestic bidders and/or for domestically manufactured goods.

• Bidding shall not be restricted to pre-registered firms, and foreign bidders shall not be required to be registered with local authorities as a prerequisite for submitting bids.

• Foreign firms shall not be required to associate with a local partner in order to bid as a joint venture, and joint venture or consortium partners shall be jointly and severally liable for their obligations.

• Government-owned enterprises shall be eligible to participate in bidding only if they can establish that they are legally and financially autonomous, operate under commercial law and are not dependent agencies of the Borrower or Sub-Borrower. Such enterprises shall be subject to the same bid and performance security requirements as other bidders.

• Subject to these provisions, procurement shall be carried out in accordance with the “Open Competitive Bidding” procedures set forth in the Act.

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• Bidders shall be given at least thirty (30) days from the date of the invitation to bid or the date of availability of bidding documents, whichever is later, to prepare and submit bids.

• Bids shall be submitted in a single envelope. • An extension of bid validity, if justified by exceptional circumstances, may be requested

in writing from all bidders before the expiration date and for a minimum period required to complete the evaluation or award a contract, but not to exceed thirty (30) days. No further extensions shall be requested without the prior concurrence of the Association.

• All bids (or the sole bid if only one bid is received) shall not be rejected, the procurement process shall not be cancelled, and new bids shall not be solicited without the Association’s prior concurrence.

• Qualification criteria shall be applied on a pass or fail basis. • Bidders shall be given at least twenty-eight (28) days from the receipt of notification of

award to submit performance securities. • Each bidding document and contract financed out of the proceeds of the Financing shall

include provisions on matters pertaining to fraud and corruption as defined in paragraph 1.16(a) of the Procurement Guidelines. The Association will sanction a firm or an individual, at any time, in accordance with prevailing Association sanctions procedures, including by publicly declaring such firm or individual ineligible, either indefinitely or for a stated period of time: (i) to be awarded an Association-financed contract; and (ii) to be a nominated sub-contractor, consultant, manufacturer or supplier, or service provider of an otherwise eligible firm being awarded an Association-financed contract.

• In accordance with paragraph 1.16(e) of the Procurement Guidelines, each bidding document and contract financed out of the proceeds of the Financing shall provide that: (i) the bidders, suppliers, contractors and subcontractors shall permit the Association, at its request, to inspect their accounts and records relating to the bid submission and performance of the contract, and to have said accounts and records audited by auditors appointed by the Association; and (ii) the deliberate and material violation by the bidder, supplier, contractor or subcontractor of such provision may amount to an obstructive practice as defined in paragraph 1.16(a)(v) of the Procurement Guidelines.

• The Association may recognize, if requested by the Borrower, exclusion from participation as a result of debarment under the national system, provided that the debarment is for offenses involving fraud, corruption or similar misconduct, and further provided that the Association confirms that the particular debarment procedure afforded due process and the debarment decision is final.

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Table D: Procurement Arrangement and Schedule for Goods and Non-consulting Services 1 2 3 4 5 6 7 8

No. Contract (Description) Estimated Cost (US$ million)

Procurement Method P-Q

Domestic Preference (Yes/No)

Review by Bank (Prior/Post)

Expected Bid Opening Date

1

Procurement of computers/laptops and software tools for banking supervision; bad debtor database;

0.23

NCB NO NO

POST

May 31, 2011

2 One vehicle For FSDP Secretariat 0.055

SHOPPING NO NO

POST MAY 31, 2011

3

Procurement of computers/laptops and software tools for FSDP Secretariat

0.03

SHOPPING

NO NO

POST April 1, 2011

27. Selection of Consultants: The BSL may use QCBS, QBS, Selection based on Consultants’ Qualification, Fixed Budget Selection, Least Cost Selection, Single Source Selection, and Selection of Individual Consultants as appropriate, subject to approval by the Bank. Table E: Procurement Arrangement and Schedule for Consultancy Services 1 2 3 4 5 6

No. Description of Services Estimated Cost (US$ million)

Selection Method

Review by Bank (Prior/Post)

Expected Proposals Submission Date

1 Design and programming of simple Bad Debtor Database 0.05 ICS/CQS Post June 30,2011

2

Assessment and design of credit bureau options, Implementation support including capacity development in BSL and facilitation of stakeholder dialogue

0.2

QCBS Prior July 31 2011

3

Strengthening SME finance, including (i) analysis of product development needs and enabling environment constraints to support MSME finance and agricultural finance, (ii) development of sector policies and support for sector dialogue on enhancing access to financial services, (iii) product development in cooperation with selected commercial banks (secured lending, leasing, value chain finance)

0.4

QCBS Prior December 31, 2011

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and capacity development for selected commercial banks

4

Payment system implementation support, including (i) drafting of payment systems regulation and policies and (ii) training, capacity development for payment system and mobile payment supervision.

0.5

QCBS Prior

October 31,2011

5

Mobile Payments Consultancy, including (i) review of mobile payment sector, (ii) drafting of enabling mobile payment regulation and (iii) design of adequate oversight mechanisms

0.2

QCBS Prior December 31, 2011

6

Remittances policy framework: Review and drafting of a remittances policy framework fostering competition in the money transfer operator market.

0.15

QCBS Prior March 31, 2012

7

Financial Sector Legal Framework: Review and update the financial sector legal framework, including the Other Financial Services (Amendment) Act, Banking Act and BSL Act (ii) implementation support for the drafting, amending and implementation of revised sector legislation, (iii) training and capacity development for the BSL legal department.

0.25

QCBS Prior July 31, 2011

8

BSL HR Policy and staff capacity development: (i) Review of HR policies and practice and drafting of new HR policy, (ii) Assessment of staff capacity needs, skills/capacity assessment of existing staff; Preparation of a staff capacity development plan as a framework for broad-based training and capacity development program

0.3

QCBS Prior July 31, 2011

9 Review of functional and business process and support for business and functional

0.3 QCBS Prior April 30, 2012

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process re-engineering

10 Review and development of IT strategy and implementation plan

0.2 QCBS Prior August 31,

2012

11

Banking Supervision: Review and design of efficient supervisory processes and development of analytical tools

0.2

QCBS Prior August 31,2011

12 Financial sector policy and strategy consultant 0.2 QCBS Prior August

31,2011

13

Project Management support for the FSDP Secretariat and FM and procurement function

0.2

August 31,2011

14 Short term FM Consultancy to support FSDP

0.02 (Retroactive financing)

ICS PRIOR March 1, 2011

28. Risks and Mitigation Measures: Procurement risk for the project is assessed as “HIGH”, as the BSL does not have adequate experience and capacity to carry out procurement activities related to the proposed project. Although the BSL has a functioning and staffed procurement department, it is not familiar with World Bank procurement procedures. The following measures were agreed to mitigate the remaining risks:

• The FSDP Secretariat will be responsible for the procurement of goods and services. • The head of the Secretariat, who has been appointed from within the BSL, will be

responsible for day-to-day management of the project and will be supported by one technical staff and one administrative staff.

• They will coordinate the procurement functions which will be carried out by the respective functional departments within the BSL. BSL will operate a streamlined implementation structure with the FSDP Secretariat reporting directly to the BSL Governor and Deputy Governor.

• In addition, for an initial period, procurement back-up support will be provided by the Integrated Project Administration Unit (IPAU) in the MoFED.

• It is expected that BSL procurement staff will benefit from this arrangement and further develop their capacity under the Project’s institutional development plan.

29. Fraud and Corruption. All procurement entities as well as bidders and service providers, i.e., suppliers, contractors, and consultants shall observe the highest standard of ethics during the procurement and execution of contracts financed under the project in accordance with paragraphs 1.16 and 1.17 (Fraud and Corruption) of the Procurement Guidelines and paragraph 1.23 and 1.24 (Fraud and Corruption) of the Consultants Guidelines in addition to the relevant Articles of the Sierra Leone Public Procurement Act 2004 which refers to corrupt practices. Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants", dated October 15, 2006 and updated January 2011, shall apply to the project.

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2. Environmental and Social (including safeguards)

30. Environmental Category: C - Not Required 31. The Project is a TA operation financing consultants, equipment and training. No safeguard related risks have been identified based on available information.

3. Monitoring & Evaluation

32. Monitoring and evaluation will be based on the agreed Results Framework. The FSDP Secretariat will be responsible for conducting M&E activities. As indicated in Annex 1, and given the nature of this projects’ intervention, most intermediary project indicators are descriptive in nature. Monitoring of impact on ultimate beneficiaries will be based on data collection by the BSL from commercial banks and MFI returns, which is already undertaken under BSL reporting to IMF International Financial Statistics and published in BSL annual reports. PDO indicators will be monitored on the basis of Doing Business Depth of Credit information index (PDO 1), balance sheet information provided by supported commercial banks to BSL (PDO 2), descriptive measure on implementation of payment system policies (PDO 3), a baseline and project end assessment of Basel Core Principle compliance undertaken by GIZ in 2011 and 2014 (PDO 4). In addition, the FSDP Secretariat will set-up a monitoring and evaluation system for the overall implementation of the Financial Sector Development Plan and, in cooperation with the BSL research department, report on a broad range of quantitative financial sector development indicators. 33. The project, together with GIZ TA, will support the FSDP Secretariat in implementing a comprehensive monitoring and evaluation system for the implementation of the broader set of activities under the FSDP. 34. A quarterly monitoring table and a Project Report on progress in project implementation will be prepared by the FSDP Secretariat, approved by the Governor of BSL and then submitted to IDA for review. Each Project Report shall cover the period of one calendar quarter, and shall be furnished to the Association not later than forty five (45) days after the end of the period covered by such report. These reports will assess achievements against the Project Implementation Plan (PIP), a Financial Management Plan (FMP) and overall Procurement Plan that will be prepared and incorporated into the Project Implementation Manual (PIM). The FSDP Secretariat will be responsible for updating the PIP on an annual basis, taking into account experiences and the strategic focus of the project. The PIM includes, among others, guidelines on all period reporting, and monitoring arrangements. The Mid-Term Review (MTR) of the IDA-operation will be 30 months into the project. An ICR will be undertaken six months after the closing of the project.

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4. Role of Partners

35. The project design leverages and complements ongoing and planned activities of other developing partners in the sector, including (i) AfDB WAMZ payment system project, (ii) IFC TA for SME Finance and investment climate reforms, (iii) IMF TA for banking supervision, (iv) the KfW/UNCDF/UNDP/CORDAID funded Microfinance Technical Assistance Facility (MITAF) II project, which provides funding and TA to the microfinance sector and (v) the IFAD rural finance project. The project is specifically aimed at complementing these various programs with activities at the policy level and building the capacity of the BSL to lead and coordinate the various reform activities within the framework of the FSDP. 36. Project implementation will be coordinated closely with a parallel direct TA project by GIZ. GIZ will place a long-term consultant with the BSL banking supervision department, who will work closely with the project and the IMF in strengthening banking supervision processes, devising and implementing training and capacity development for banking supervision and developing an IT strategy, which will be supported through the project. In addition, GIZ will provide capacity development for the FSDP Secretariat to provide capacity development for the FSDP Secretariat focusing on change management, project management, M&E and public-private dialogue instruments. World Bank and GIZ have agreed to establish a Memorandum of Understanding on cooperation under the project. Project Activity Complementary donor activities 1.1 Credit information infrastructure IFC Doing Business Reform Action Plan TA

on credit bureau design and legal framework; MITAF support for connection of MFIs to credit bureau

1.2 Implementation of payment systems and remittances policy framework

AfDB/WAMI funded installation of national payment system hardware infrastructure; WAMI implementation support for payment system hardware installation; MITAF TA-window on mobile banking

1.3 SME / value chain finance capacity development of commercial banks

IFC Doing Business Reform Action Plan TA and Investment Climate Facility TA on property registration, contract enforcement; IFAD rural finance project; IFC TA on Leasing and Secured Lending framework; IFC investment projects; MITAF TA-window / partial grants for e.g. innovative approaches to tap rural areas, transformation of MFIs, professionalization of MFI, purchase of basic equipment, value chain financing and downscaling; MITAF loans to MFI on market-oriented rates; MITAF partial risk guarantee

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program; GIZ short-term consultants on financial inclusion policy issues

2.1 Financial Sector Legal Environment IMF TA; GIZ short-term TA and capacity development for BSL legal department; MITAF TA on microfinance legal framework and regulation

2.2 Implementation of Institutional Development Plan

IMF TA on broad range of central banking issues, GIZ TA on banking supervision (Long-term adviser in Banking Supervision department)

2.3 Support for FSDP Secretariat / 2.4 Strategy and Analytical Support for FSDP Secretariat

GIZ TA on public-private dialogue, change management, monitoring and evaluation; GIZ short-term financial sector consultants on broad range of themes

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Annex 4 Operational Risk Assessment Framework (ORAF) Negotiations and Board Package Version13

Sierra Leone: Financial Sector Development Plan Support Project (FSDPSP)

Project Development Objective(s)

The project development objective is to strengthen the capacity of the BSL and contribute to improving efficiency in financial intermediation, safeguarding financial sector stability, reducing transaction costs of money transfers and expanding access to financial services.

PDO Level Results Indicators:

1. The Doing Business Depth of Credit Information Index is in line with Sub-Sahara Africa average

2. 25 percent increase in outstanding MSME loan portfolio of commercial banks supported through capacity development activities of the project and stable portfolio-at-risk

3. A comprehensive payment system policy and regulatory framework has been established.

4. Compliance with Basle Core Principles (BCPs) for Banking Supervision for 10 out of 25 BCPs has improved

13 This is the version that should be used for Negotiations and submission for Board Approval.

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Risk Category

Risk Rating

Risk Description Proposed Mitigation Measures

Project Stakeholder Risks

MI Strong engagement of stakeholders and continued support for the FSDP required to sustain reform agenda Implementation of the FSDP and achievement of project development objectives requires robust coordination mechanisms, which is provided through the FSDP Secretariat and the FSDP governance structure.

Active support through the project and donor partners, in particular GIZ, for public-private dialogue / outreach activities as part of FSDP implementation and donor coordination through the FSDP Secretariat. The Bank is reaching out to CSOs on a regular basis. Joint MoU with GIZ as key implementation partner to be finalized once projects have been approved. A new CAS was jointly prepared by the Bank, IFC and AfDB for FY 10-13.

Implementing Agency Risks

MI Broad, complex reform undertaking of the FSDP considerably challenges BSL capacity and limited resources. Ownership and governance of project structure. Adequate internal systems, checks and balances (Audit Committee, segregation of duties) for project implementation.

Project supports strengthening of reform governance and invests in BSL capacity.

Project Risks

Design

MI Project complexity relative to capacity. Coordination between agencies might pose challenges. Project design needs to adapt to changing circumstances. Project design closely coordinated with IFC, GIZ, AfDB and KfW as key partners.

GIZ cooperation on BSL capacity development to be supported through an MoU. High design flexibility: Components and proposed activities can be implemented independently and project can respond flexibly to reform speed in various areas. Ease of restructuring should sector priorities change, high flexibility in responding to client needs

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Social and Environmental

Low There are no associated social and environmental risks associated with this TA program.

Program and Donor

MI Program Dependencies exist with respect to individual activities, in particular, with AfDB project on payment systems; MITAF project on microfinance sector; IFC TA program on SME Finance and GIZ TA for BSL and FSDP Secretariat. Partner delivery might be delayed or might not materialize.

Donor Collaboration with GIZ as key partner is facilitated through harmonized PDO and indicators, joint supervision missions. Project benefits from GIZ presence in BSL on ground. Risks are mitigated through close cooperation, alignment of all programs with FSDP and a MoU with GIZ. Donor Delivery as a risk is mitigated as IFC, AfDB projects are already on ground. GIZ programming is far advanced

Delivery Quality

Low The project builds mostly on TA – there is a risk that the best expertise may not be available. Achievement of sustainability of delivery by BSL is a key objective of the organizational strengthening of the project. Monitoring and evaluation may be overburdening. Data may be unavailable or difficult to gather. Frequent staff turnover in the implementing agencies may cause delays.

Project and GIZ will support build up of M&E framework to support measurability. Delivery quality risks of consultant services and contract management issues are mitigated by relatively good availability of quality service providers in the sector Achievement of sustainability of delivery by BSL is a key objective of the organizational strengthening of the project. M&E relies on standard surveys and assessments.

Overall Risk Rating at Preparation

Overall Risk Rating During Implementation

Comments

Low Medium-I

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Annex 5: Implementation Support Plan Sierra Leone: Financial Sector Development Plan Support Project (FSDPSP)

Time Focus Skills Needed Resource Estimate Partner Role First twelve months

• Capacity Development for FSDP Secretariat

• Establishment of project work plan

• Preparation of detailed implementation plans for activities

• Finalization of MoU with GIZ • Strengthening FM and

procurement capacity of BSL functions in cooperation with IPAU

• Development of M&E framework for FSDP implementation

• Identification of commercial bank partners for SME activities

• Technical inputs on payment system oversight

• Technical inputs of credit bureau activities

• Technical inputs on financial sector legal framework

• Technical inputs on Prudential oversight

• FM and procurement experts in country office

• Payment systems (CAIFI)

• Credit bureau bureau expert (CAIFI)

• Banking Services / Bank Industry Policy and Advice (AFTFP)

• Prudential Oversight (AFTFP/FPDPO)

• US$150K Supervision budget

GIZ and IMF TA on BSL capacity development IFC TA on SME finance and credit bureau Joint supervision missions with GIZ, IFC, KfW (MITAF), IMF and AfDB (payment systems) IPAU support for FM and procurement function

12-48 months • Technical inputs on BSL institutional development plan

• Technical inputs on SME finance

• Financial sector review and

• FM and procurement experts in country office

• Payment systems

US$150K Supervision budget per anno

GIZ and IMF TA on BSL capacity development IFC TA on SME finance and credit bureau

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implementation of broad FSDP agenda

• Technical inputs on financial sector legal framework

• Technical inputs on Prudential oversight

(CAIFI) • Credit bureau

bureau expert (CAIFI)

• Banking Services / Bank Industry Policy and Advice (AFTFP) Prudential Oversight (AFTFP/FPDPO)

• Strategy and Organizational development

Joint supervision missions with GIZ, IFC, KfW (MITAF), IMF and AfDB (payment systems)

II. Skills Mix Required Skills Needed Number of Staff Weeks Number of Trips Comments FM 3 per year in country office Procurement 4 per year in country office TTL / Bank industry policy and advice / General financial sector policy dialogue

8 per year 2 per year

Credit bureau expert 7 4 Payment System expert 10 6 SME finance expert 7 4 Prudential oversight expert

6 4

Legal expert 6 2 III. Partners Name Institution/Country Role Mary Agboli IFC IFC TA Coordinator Axel Fastenau GIZ GIZ country director Bodo Schmuelling KfW KfW program coordinator Meshack Tjirongo IMF IMF Resident Representative

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Annex 6: Team Composition

World Bank staff and consultants who worked on the project:

Name Title Unit

Thomas Losse-Mueller Task Team Leader AFTFE Zachary Kaplan Economist AFTFW Fatou Assah Insurance Specialist GCMNB Alice Zanza Payment Systems Specialist CAIFI Paul Murgatroyd Financial Sector Consultant AFTFE Tsri Apronti Procurement Specialist AFTPC Joyce Agunbiade Financial Management Specialist AFTFM

Nevena Ilieva Monitoring and Evaluation Specialist

AFTDE

Christine Makori Counsel LEGAF Evarist Baimu Sr. Counsel LEGAF Mary Agboli Operations Officer CAFWB Zeneida Hernandez Uriz Sr. Investment Promotion Officer CICRA Uli Zeisluft Principal Financial Specialist CAIFI Andrea Vasquez-Sanchez Program Assistant AFTFW Rona Cook Program Assistant AFTFE Dorothy Judkins Program Assistant AFTFE

Andrew Osei Asibey Sr. Monitoring and Evaluation Specialist

AFTDE

Luis M. Schwarz Sr. Finance Officer CTRFC